Colliers releases ‘Q4 2023 INNvestment Canada Hotel Report’

Colliers’ latest “INNvestment Canada Hotel Report” contains preliminary transaction highlights as well as a special feature from Laura Baxter, director of hospitality analytics, Canada at CoStar Group covering hotel performance in Q4 2023 and the most salient trends shaping 2024.

2023 year in review

Canadian hotel investment activity totalled approximately $320 million in the fourth quarter, pushing the year-end total to over $1.65 billion based on Colliers Hotels’ preliminary sales data. Investment activity remained resilient year-over-year with established and new entrants to the sector eyeing hotels as investment vehicles in a quest for cash flow while facing headwinds from interest rates and inflationary pressures. While not a stand-out year for overall volume, 2023 marked a new record for national average price per key metrics which approached $180,000 with nearly 90 per cent of volume attributed to acquisitions for ongoing hotel use.

CoStar operating market update: Q4 2023 recap

• Despite a likely contraction in the broader economy, RevPAR continued its record-breaking streak in Q4 2023, achieving the highest level ever achieved in any Q4 on record.
• Strong topline performance assisted hoteliers in absorbing rising costs throughout the P&L as inflation and higher wages continued to put pressure on profit margins.
• Hotels in Canada solidified their reputation as an inflation hedge with ADR growth well in advance of inflation in Q4. Rate growth across all segments continued.
• Group rates showed robust growth in the year’s final quarter, making the segment more lucrative. Group demand is one of the last indicators to return to pre-pandemic levels but also improved in Q4.
• Transient occupancy remained elevated against the benchmark year, driven by people prioritizing fun by attending concerts and events and combining leisure with business travel more often. However, the metric posted a year-over-year decline in November and December, the first contraction since the segment started to drive the recovery in early 2021.
• This could be the start of a trend, particularly in the transient leisure segment, as people reel in spending on discretionary items, like travel and hotel stays. Transient rate growth made up for the decline in occupancy, keeping year-over-year RevPAR growth in positive territory.
• Nationally, weekday occupancy exceeded levels achieved before the pandemic because of solid business travel demand. Meanwhile, urban weekday occupancy remained below pre-pandemic levels, with the most prominent shortfall in Downtown Toronto. It remains to be seen when a full recovery will occur as large corporations are right-sizing their travel budgets.

2024 Outlook

In 2024, topline growth will be more muted. With costs throughout the P&L still rising, hoteliers will be laser-focused on managing margins to preserve profits.

Overall, the negative impact on hotel performance caused by the economic downturn is expected to be short-lived and less severe than previous recessions due to limited supply-side pressure.

The number of new rooms delivered is expected to be 16 per cent ahead of 2023 but roughly 45 per cent below the previous peak in 2018, keeping supply-side pressure to a minimum. This is being amplified by hotels coming out of inventory to be converted to various types of residential to help remedy the ongoing housing shortage.

Although the full impact of new regulations on the short-term rental sector remains to be seen, the likely impact will provide an upside to the demand forecast, facilitating occupancy and rate growth.

International inbound overnights to Canada are expected to continue recovering in 2024 and may partly compensate for any potential softness in domestic hotel demand caused by the economic slowdown. This is particularly true from the U.S. outbound market, which tends to travel closer to home during election years.

Download the full report.