While 2020 started out like any other year for the Canadian accommodation market, everything changed quickly when, on March 11, 2020, the World Health Organization declared the Novel Coronavirus (COVID-19) a “Global Pandemic.” The response, globally, was quick and the impacts on the global accommodation industry were immediate. In Canada, on March 18, 2020, the Federal government implemented a ban on the entry to Canada of foreign nationals from all countries, except the United States. At the same time, it was announced that the Canada-U.S. border would be closed to all non-essential travel. As a result, national occupancy plummeted from historic highs to less than 20 per cent virtually overnight. The impact was felt across the country in virtually every market and every asset type.
Since the outset, CBRE Hotels has been actively monitoring market performance and leveraging the Trends databases, which date back to the 1930s in the U.S. and 50 years in Canada, and has provided an initial forecast for the Canadian recovery.
National Market Impact
As noted, the accommodation market in Canada has been significantly impacted by COVID-19. Domestic and international travel in nearly every demand segment has completely stopped or been pared down to absolute minimum levels. In many markets, this unprecedented collapse of demand has resulted in hotel operators closing their properties. Through the end of the first quarter, Revenue Per Available Room (RevPAR) was off 18 per cent, largely driven by the significant declines in occupancy in the month of March, as results to the end of February were flat to 2019. The true impact of the pandemic was realized in Q2, when demand fell 49 points and RevPAR declined by a staggering 82 per cent nationally. Overall, results to the end of June 2020 show the accommodation market in Canada to be off 52 per cent in RevPAR relative to the same half-year period in 2019. The quantum of this decline is far greater than any other decline resulting from a major event in the recent past — perhaps ever.
A review of weekly data from STR shows industry performance bottomed out in late March and hovered at sub-10-per-cent occupancy levels through the month of April.
Since that time, there’s been week-over-week improvement in both national occupancy and RevPAR, although performance is still at levels well below 2019. Around the middle of June, as provinces began their phased re-openings, national case counts showed a meaningful downward trend. And, as summer weather arrived, many markets across the country saw occupancy levels improve, with regional leisure-travel demand re-starting as people showed an interest and willingness to “get away.”
Regional Market Impact
The COVID-19 pandemic has hit the Canadian accommodation industry hard and the data indicates there’s been little variance in occupancy performance regionally.
Through the early weeks of the pandemic, there was really no difference in RevPAR performance by region as travel was halted and, in most provinces, people were asked to only leave their homes for essential activities. There was little to no demand in many markets and a large number of hotels across the country were closed.
Since the middle of May, there have been some shifts in regional performance. The western region has seen a strong growth curve driven by occupancy and Average Daily Rate (ADR) in British Columbia. Central Canada has slower, albeit steady, RevPAR growth, while the Prairies and Atlantic regions have seen very modest and slow growth.
Provincial Market Impact
As we look at the impacts at a provincial level for the first two quarters of 2020, in general, no province was spared, with RevPAR declines in the range of 72 per cent to 88 per cent.
One notable exception was the Northwest Territories, which posted a RevPAR decline of only 44 per cent in Q2. This is being driven by the fact the province reported ADRs in May and June that were almost 10-per-cent higher than the same months the previous year. The ADR strength has helped to buoy the RevPAR in this territory.
urning to the weekly occupancy performance by province, since the start of the pandemic, the trendline has generally been similar, regardless of the province. It should be noted there was no data reported for P.E.I. between the weeks of March 28, 2020 and June 27, 2020, likely due to an insufficient sample size.
Over the review period, British Columbia has led the country in terms of occupancy, while the Atlantic provinces have shown the weakest performance — although this dynamic is a matter of degrees. This overall trend is consistent with the performance of these provinces typically, albeit on a much lower base.
Major Markets Impact
In the three major Canadian markets, there were some differences early on, with Vancouver and Toronto seeing steep declines over the two weeks following the declaration of the pandemic, while Montreal saw a more gradual decline over a four-week period.
The three major markets have really seen very little improvement in occupancy performance since the low point in April. In these markets, there are significant concentrations of large, full-service hotels with a reliance on large/city-wide meetings and conference demand, as well as international corporate and leisure demand. With these sources of demand effectively at zero, many properties in the major markets have been, or remain, closed.
Property-Type Market Impact
Looking to how the various asset types have fared through these challenging times, we see, without a doubt, the “winner” has been limited-service hotels. While the impact to these properties in Q1 was similar to full service, in Q2 these properties saw higher occupancy levels and less ADR erosion.
On the flip side, full-service hotels have seen the greatest impact, with the most significant declines in RevPAR in both Q1 and Q2. These hotels are often located in urban cores and have a high proportion of demand generated by the most-impacted segments — major corporate, international leisure and all types of medium-to-large or city-wide meeting/conference. Resort hotels fared better in Q1 because, particularly for ski-located properties, this period tends to be a period of strength. These properties saw similar declines in RevPAR to full-service hotels in Q2 as they service similar heavily impacted segments and travel was considered non-essential in all except very specific circumstances in most parts of the county.
Turning to what has happened in more recent weeks, the performance is what most would view as the “expected” results. Limited-service hotel RevPAR is slowing, trending back towards the $70 mark, at just shy of $60 in the most recent week. The full-service hotels are showing slow positive growth, but there is a long way to go before RevPAR is at levels comparable to the end of February, which will still be a long way from where it should be at this time of the year.
The resort properties have seen a V-shaped rebound, with RevPAR surpassing end-of-February RevPAR as of the week of August 8. Resorts saw large gains in performance beginning towards the end of June when, in many places, re-openings had progressed to a point where people began to feel more comfortable with local tourist travel. As summer began, many people looked to resorts as a way to get away, albeit regionally, without boarding a plane. Resort performance is still well below where it should be at this point in the year, but has been the biggest beneficiary to date of provincial re-openings.
The Impact of Historic Events
Before considering what the potential recovery may look like for the Canadian accommodation market, it’s worth re-visiting the industry’s recovery from previous demand shocks. In this case, CBRE has looked back over the last 20 or so years to the post-9/11 recovery, the SARS epidemic and, most recently, the Great Financial Crisis (GFC).
In general, CBRE’s data suggests the industry has seen demand (occupied room night) recovery approximately 12 to 18 months post an event. The recovery of occupancy may not follow this trend depending on what level of supply growth occurs over the same period.
Typically, new supply already under construction proceeds to completion regardless of demand conditions. As such, it usually takes some time for the supply growth to react to the change in market-demand dynamics.
CBRE’s data indicates the trend has been for ADR recovery to lag the demand recovery. In general, it has taken an additional 12 to18 months for ADR to recover after the occupied-room nights have recovered to the previous peak. As a result of the lag in ADR, in general, it’s taken a total of three to four years for RevPAR to recover to pre-impact levels.
While the top-line recovery has generally taken three to four years, CBRE’s data indicates there is additional lag before Adjusted Net Operating Income (ANOI) or profitability recovers. Following both 9/11 and the GFC, the Canadian accommodation industry did not see bottom-line profitability return to previous peak levels until between six and seven years post the event – or an additional two to three years after top-line recovery.
The 2020-2021 Outlook
CBRE released its initial industry outlook for the Canadian accommodation industry in May of this year, with expectations of a three-to-four-year recovery from a top-line perspective. With both demand and ADR levels declining significantly this year, RevPAR was forecast to be down by approximately 50 per cent in 2020. Given how performance has progressed through July and the early weeks of August, it would seem the 2020 RevPAR expectation is likely to miss to the downside.
Our projections for industry recovery and our outlook for 2021 and 2022 assume there will be a vaccine in place by the latter part of the year, that there continues to be an orderly lifting of travel restrictions and there will be strong economic recovery in 2021. While 2021 will be a year of recovery, the expectation is that the industry will still be operating below 60-per-cent occupancy, with ADR up 10 per cent from 2020 levels, but five-per-cent below 2019 ADR. As a result, 2021 RevPAR levels will still be 20-per-cent below 2019 levels. Regardless of where 2020 finishes, the expectations for 2021 and 2022 remain unchanged at this point.
The industry finished 2018 and 2019 at more than $15,000 per room in profits — historic highs. However, with revenues at less than 50 per cent of 2019 levels, it will be difficult for a property operating on a year-round basis to do much more than break even in 2020 before debt service.
CBRE’s expectation is that 2020 represents a year of virtually no operating profit for the industry. Even with strong growth in 2021, operating profits will still be 45-per-cent below 2019 levels and are expected to grow from there.
The Monthly Outlook (2020-2022)
In order to better understand the recovery timeline, CBRE has mapped out the national monthly occupancy levels and RevPAR relative to the 2019 monthly performance.
Even with easing of restrictions, the balance of 2020 will still be a long way off 2019 levels and, while the gap will shrink in 2021, it will be 2022 — with the prospects of a vaccine and economic recovery — before the industry starts to get back to historic levels from a demand and occupancy perspective.
The current forecast reflects an expected lag in the ADR recovery — similar to what has occurred during previous recoveries. As the occupancy and ADR trend lines combine, the RevPAR gap follows the same trajectory, getting back to 2019 levels in the latter part of 2022.
Finally, CBRE has mapped out monthly hotel operations through the end of 2021. With strong adjustments to the operating model, the potential exists to generate some modest operating profit over the next 12 months, but it will likely be the summer of 2021 before there’s some true sustainability in operations .
With the lockdown and border closures in mid-March, the impact on the industry was immediate. Occupancy on a national basis, declined to well below 20 per cent – and into the single digits for the hotels that remained open in the urban cores of some cities. At one point it was estimated that as much as 20 per cent of the Canadian hotel inventory was closed. Early on, most operators expected to be closed for one month, two at most, and re-opening by the end of May or June. There was still a limited amount of demand in the market at this point in time, driven by things such as crew and special purpose (i.e. medical workers, non-COVID-19 hospital patients, et cetera) business. The biggest benefactors of these demand sources have been limited-service and extended-stay hotels.
The realization of the severity of the situation lead to government initiatives to support workers. Programs such as the Canada Emergency Response Benefit (CERB) and Canada Emergency Wage Subsidy (CEWS) were put in place relatively quickly. These programs were seen as running quickly and were planned to run for a period of four months to the end of June. Similarly, lenders were quick to act, putting deferrals on interest payments and, in some cases, principal and interest for 90 days or generally to the end of June. In both cases, it became clear that relief was going to be required for a longer period of time and most programs were extended to the end of the summer. In the case of the CEWS, it’s been extended to the end of 2020.
There have not been any formal announcements on behalf of the lending community in terms of how deferrals or relief will look going forward, but by the end of June it was apparent to all participants that the relief efforts would be needed for an extended period of time – at least until the end of 2020. It’s now becoming clearer that, on an aggregate basis, the industry will be hard-pressed to cover principal and interest payments much before the summer of 2021. The timelines will, of course, vary depending on asset type and location. Owners, operators and lenders are all looking very closely at the operating model, the depth of balance sheets and possible relief measures and programs to assess how each asset can be maintained until the prospect of sustainable cash flows will be achieved. The most likely timeline will be well into summer of 2021. There are many moving parts in this scenario. Over and above the owner’s ability to fund and support even a skeleton operation will be the health-and-safety protocols to protect staff and customers and, of course, the necessity of instilling confidence in the consumer to want to visit our hotels. It’s expected that, until a vaccine is available, demand growth will come from domestic leisure and corporate demand — potentially with small groups returning, provided the appropriate social distancing can be facilitated. It’s expected that as additional demand segments return and expand, the focused-service assets will benefit.
No one really knows what things will look like coming out of the summer of 2021. The CBRE outlook going forward is for a vaccine to be in place and distributed by the fourth quarter of 2021. This timeline for the development, manufacture and distribution is unprecedented in history. The reality is that the industry needs to plan for an operating environment where we are living with the virus for an extended period of time. The expectation is that the last segments to return will be medium-to-large and city-wide meeting/conference, along with international leisure, tour and large social catering. The delay in the rebound of these segments is likely to impact the recovery timing of full-service and resort properties.
It’s also likely many aspects of hotel operations we’ve taken for granted for many years will change — at least on a temporary basis and, in some instances, permanently — going forward. Guestroom cleaning protocols have changed, the breakfast buffet may never be the same and there’s been an acceleration of contactless guest check in. Perhaps most significant are the changes that have and will need to be made pertaining to meeting/conference and social catering.
Based on the information available at this point, and considering the information reviewed from the CBRE databases, it will likely be 2023 or 2024 before the industry recovers to 2019 RevPAR levels and six to seven years for bottom line to recover.
By CBRE Hotels Valuation & Advisory Services