Toronto, Montreal, Calgary, Vancouver — the hustling, bustling downtown cores of Canada’s largest urban centres sound like good bets for hotel investment. In theory, there are always those who will need big-city lodging for one reason or another. But, are these large markets the best locales for hoteliers looking for new development in 2013?

“There’s not much going on in those cities, because there’s no fundamental reason why you would build additional hotels in those cities. It’s already done,” says Philippe Gadbois, SVP, Sales and Marketing for Montreal-based Atlific Hotels & Resorts. “The occupancy in those cities is struggling, and the rates achieved are nowhere near where they need to be to [turn a profit.]”

Gadbois cites Toronto as an example. Over the last several years, the city has seen an influx of high-end luxury properties, such as the Ritz-Carlton, The Trump International Hotel & Tower, The Shangri-La, and, more recently, the re-launch of the Four Seasons. Vancouver suffers from the same oversupply as Toronto, says Gadbois. And, while there is activity in downtown Montreal and Calgary — with a new Courtyard by Marriott in downtown Montreal and a Renaissance by Marriott opening in Calgary — he feels large metropolitan areas aren’t ideal areas of focus for hoteliers.

David Larone, director of Toronto-based PKF Canada, concedes that Canada’s large urban centres undoubtedly have a great deal of supply at the moment. But, he believes there’s room for more, as long as hoteliers are smart about it. “In most of the large urban markets, whether it’s downtown Toronto or Montreal, Calgary or Vancouver, if you were to build a 300- or 400-room asset on a one-off basis, it’s not a big challenge for that market to absorb it from a demand perspective. The challenge is, can you make the economics work?” asks Larone. “If you look at those luxury assets that have just opened in Toronto, people are saying, ‘Look at all the supply that’s coming in,’ but you’re really talking about just 1,000 new rooms over three-and-a-half years.” In a large market such as Toronto, he contends, that’s not really a huge number.

Still, because of the prohibitive costs to build in these cities, and the relative difficulty to charge higher room rates in the current economic climate, a hotel project has to make economic sense to be feasible. “It’s a matter of the cost to build and the price you can get per room,” says Larone. At the same time, it’s important to consider the types of hotels people want to stay at these days. “They’ve been looking for, and continue to look for, something that’s about personal experience, design and service,” says Larone, noting boutique hotels fit this demand well. And, because “boutique” properties are often smaller and feature less superfluous space, they tend to be less expensive to construct. “It’s a little easier to build and to find a piece of property to allow that development in an urban core,” says Larone. “They tend to be some of our RevPAR leaders in those [large urban] markets.” 

Irwin Prince, president and COO of Toronto-based Days Inns, Canada, concurs. He says it’s extremely expensive to build from the ground up in large cities, especially if you’re not a luxury brand that can demand rates of $300 or more per night. “The cost of land makes it almost prohibitive for an economy-based brand to build new [in such markets].” But that doesn’t mean Days Inn isn’t looking at major urban markets. “We are looking at Toronto, Montreal, Calgary and Vancouver, all in the downtown cores — but, for conversions,” he says, as opposed to the more expensive new builds.
Like Larone, Prince is confident these cities can absorb the traffic. In fact, he believes there’s a desire for more economy-based properties in large urban centres. “If someone wants to be in the heart of a particular city, but doesn’t have the budget to stay at the Four Seasons, then staying at a Days Inn or a Days Hotel in the city centre is a perfect opportunity for them to experience the city but spend their money on the experience as opposed to the hotel room.” He says Days Inns is “percolating” a few such projects, although the only one he is willing to divulge is a conversion project in Toronto slated to be branded a Studio 6, one of the brands franchised by Realstar, franchisor of the Days Inn brand in Canada.

Steve Giblin, president and CEO of Vancouver-based SilverBirch Hotels and Resorts, sees opportunities in every Canadian market, big and small. “There is a lot of aging product throughout Canada. And, in the recession years, there has been a lack of capital investment in many existing hotels, so I think there is opportunity everywhere.” SilverBirch is currently focusing on eastern expansion, to balance the company’s heavier concentration in the west. “We’ve got four or five projects identified in Toronto, two or three in Ottawa, and we’re looking for more sites in the east,” he explains, dismissing the notion Toronto is oversaturated. “Toronto has a fair number of new hotels, but it’s also expanding rapidly. It’s one of the bigger cities in North America,” says Giblin.

And, as he points out, although the smaller markets with resource-based economies are thriving at the moment, they may cool off one day — whereas big cities will always draw travellers. “Vancouver and Toronto are major cities that will always be fairly strong because of multiple drivers,” he says.

So, does size really matter? When it comes to lodging markets outside of Canada’s large urban centres, it seems it’s less about the size of the city and more about the drivers that lure travellers to those markets.

In the west, cities with resource-based economies such as Regina or Saskatoon, Fort McMurray, Alta., or Edmonton have, in recent years, been a target for hoteliers who want to take advantage of the large-volume, business travel to these economically booming locales.

“Saskatoon is a hot market, Edmonton’s a hot market, Fort McMurray is a hot market,” says Giblin. “But these markets are mercurial; they go up, and they go down. So you have to be prepared, and I’d say many people who are looking at those markets are only looking at the upside. They haven’t been through a down cycle yet,” says Giblin. “There’s been great attraction in recent years, but it’s usually a four- or five-year cycle of high demand, and then you have to get through the lower-demand times.” As Giblin points out, if there is only one or two resources (such as oil or potash) responsible for the success of a particular economy, there will likely be times when that economy dips. “When you don’t have balanced economic drivers and it’s single-sourced, you have to be prepared for ups and downs,” he says.

In the east, Halifax and St. John’s, N.L. are hot markets. “We’re building in Halifax, we’re building in St. John’s; we see good opportunities in the east,” says Giblin. “Like many markets in Canada, there are a lot of aging hotels [in Halifax and St. John’s], and people always like new properties. It’s under-branded as well — so, for us, with the Marriott and Hilton brands, there are a lot of good opportunities there.”

PKF’s Larone adds that some of northern Ontario’s resource towns — secondary and tertiary markets primarily — are also seeing new product. “Timmins has had two new hotels open in the past year. And, that’s a market that hadn’t seen any hotel rooms in 20 years,” he says. “It’s the same as what we’re seeing happening all over Western Canada. There are communities that hadn’t seen a new hotel room in many, many years, but then, because of the resource activity, they’ve had new product built.”

Suburban markets are also experiencing good growth at the moment. This is especially true in airport areas. “There’s huge development in Calgary but in the suburbs, near the airport,” says Gadbois. “There’s a fundamental reason for that: access to the traditional supply of hotels in Calgary airport, which are on the south side, has been cut off. So you can’t get there easily anymore. They’ve closed Barlow Trail, which was the north-south access into the airport, to build a new runway, so what used to take five minutes now takes 20,” he explains. “That’s spurred developers to build hotels on the north side of the airport.” Winnipeg is seeing similar activity in the suburbs. “All around the airport in Winnipeg, there’s a huge influx, about 1,000 new rooms in five or six new projects.” Halifax is also seeing some high-profile airport development (an Alt Hotel by Groupe Germain, for example, is set to open this spring).

Larone believes suburban development is financially smart. “Richmond, B.C., Calgary Airport, Edmonton South, Winnipeg Airport, Montreal Airport South Shore, the 905 district near Toronto, Dartmouth near Halifax — [we’re seeing a lot of activity in] those types of suburban markets where you can go in and buy land at a reasonable price, and you’re simply dealing with slab on grade construction. It’s a fairly simple structure to build, relatively simple operating model, and it’s predominately rooms only with some limited service,” he says.

Indeed, it seems that outside of the large urban centres, limited-service really is the primary type of development. “In any of the markets on this list, from Halifax to Fort Mac … I don’t think these markets are looking for spas and high-end restaurants,” says Prince. “The beauty of limited-service is you can achieve about the same rate in small markets as you can in big markets,” adds Atlific’s Gadbois, noting it’s cheaper to build in smaller markets. “So it makes it much easier to turn a profit.”
But, it’s important to remember that when something appears so “hot” that numerous companies are prompted to build there in a short period of time, you risk oversupply, which can be more damaging in smaller markets than in larger markets. “When a market is showing strong occupancy on a sustained basis, often times, rather than simply having one or two hotels coming into the market, you’ll have six or seven hotels coming in,” says Prince. “All the feasibility studies will show positive, and everyone will start construction within a couple of years of each other, and then what you have in a very short period of time is an oversupply situation that takes years for demand to catch up. This ultimately can end up hurting everyone in the market.”


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