According to Colliers Canada’s 2022 Canadian Hotel Investment Report, hotel transaction activity is back as pandemic-related uncertainty and travel restrictions ease up.
In 2021, lodging owners continued to adapt both investment and operational strategies. The report anticipates a strong investment trajectory amid less-than-ideal conditions, with investment volumes set to match the five year average.
The report also states that new regulations and legislation will shape the investment landscape and decision-making process, but generally the relaxing of public health and travel restrictions will help build confidence and provide a lift in operating performance.
There is resilient pent-up demand for travel, particularly for leisure, and hybrid leisure/business travel, says the report: “We believe a robust rebound as spring approaches is inevitable, with the exception of larger full-service hotels as group and convention travel demand is expected to lag in recovery. Larger urban hotels should rebound meaningfully over the next 12 plus months.”
The investment market has shifted to growth mode as investors take a long-term view of the sector. The report suggests that “catch-up” capital will fuel the market with sellers and buyers rotating in and out for various motives, including those cycling out from “Covid fatigue”. “We also expect some multi-unit owners to rotate out of certain hotels that are non-core to their investment thesis.”
Colliers Canada also expects overall financing conditions will continue to improve over the next few years: “In the last cycle we witnessed a gradual and steady expansion in the number of hotel lenders, and flexibility on terms as we rode through the cycle. We expect a generally quicker rebound following the 2007 global financial crisis, although it will take time for lender confidence to return to levels we saw in 2017-2019.”
Several benchmark trades from 2021 offer evidence of a return to 2019 valuations, and public market activity in the United States also points to a return to normalization with valuations of hotels and lodging companies surpassing pre-Covid levels in many cases.
Eager buy-side capital looking for discounted deals have been disappointed for the most part. Liquidity provided by the federal government and support through forbearance terms by lenders largely abated the need to sell, and as a result there was very limited distress.
Decisions on proceeding with new projects have been deferred for two years and construction costs are significantly higher today than pre-Covid, says Colliers Canada.
“With inflation rearing its head, in most cases acquisitions pencil out meaningfully below new construction costs, and on a price per room basis, we will continue to see acquisition pricing barriers broken as we progress through the next several years.”