HVS Hotel Industry Outlook: 2023 has set new benchmarks for the Canadian hotel industry

Canada

According to Carrie Russell, AACI, MAI, RIBC, ISHC, senior managing partner - Vancouver, and Monique Rosszell, AACI, MRICS, senior managing partner - Toronto and Montreal—the year 2023 has set new benchmarks for the Canadian hotel industry. After reaching a RevPAR peak in 2022, the market RevPAR is on pace to grow another 15 per cent in 2023, driven by strong growth in both occupancy and ADR. The leisure segment noted the benefit of increased transborder and international visitation, while the domestic market continues to provide a key base of demand.

The major metropolitan areas, including Toronto, Montreal, and Vancouver, also drove a large portion of the gains in 2023 as a result of strong meeting and group demand, much of it pent up from prior-year cancellations. These major markets are also seeing an improvement in commercial/corporate demand, especially in the fall. While demand is not back to historical highs, the return of key corporate accounts is beneficial, as a decline in the domestic leisure market is possible given the softening economic conditions and expectation of a recession.

Transaction activity was strong in the first half of 2023, with some notable full-service trades in Toronto and Montreal; however, the pace of activity slowed in Q3. We expect that overall transaction volume will be $1.5 billion CAD for the year, which is slightly below 2022 and the forecasted $2.0 billion CAD in trades.

The outlook for 2024 is cautious. Economic forecasts for the country indicate minimal GDP growth, with an anticipated slowdown in the first half of the year. Inflation is expected to fall back to the target level of 2.5 per cent, and while the interest rate outlook is still uncertain, interest rate hikes appear to have peaked. The interest rate has the potential to decrease modestly beginning in the late spring or early summer. We expect RevPAR growth in the range of 2.0 per cent to 4.0 per cent. With the record-setting RevPAR figures in recent years, the tightening of short-term-rental restrictions, and the anticipation of interest rate declines, the pipeline for development is expanding. On the transaction side, several larger deals are expected to close early in 2024, which should result in a comparable volume to 2022 and 2023.

United States

According to Rod Clough, MAI, president - Americas, occupancy is closing out the year near 63 per cent (vs. 66 per cent in 2019) and ADR rising just under 5 per cent to roughly $155 USD. Group room nights continued to show substantial growth, helping fill the gap left by some pullback in the domestic leisure segment.

While hotel operations were going strong, a different story played out in the transactions market, as the sector experienced a low not seen since 2020. The federal funds rate started 2022 at less than 1 per cent and, by late summer of 2023, topped out at 5.25 per cent to 5.5 per cent. As a result, transaction volume during the year declined by roughly 35 per cent from 2022 levels.

We expect RevPAR to increase in 2024, albeit at a lower rate than that experienced in 2023. More sellers are likely to bring hotels to market in 2024 as debt maturities are reached, PIP delays are exhausted, unavoidable defaults occur, or, conversely, successful post-pandemic business plans are completed. In the case of the latter, owners may become ready to sell high-cash-flowing hotels in order to move onto other opportunities at this point in the cycle. With fewer buyers in the market and financing more difficult to come by, hotels are receiving fewer offers.

We expect a more active year of transactions ahead and a relatively stable hotel operating environment.

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