[video transcription]
Hello, I’m Laura Baxter, Director of Hospitality Analytics at CoStar Group. Let’s take a look at what’s on CoStar’s radar in Canada’s hospitality industry.
Since July, RevPAR growth has been in double-digit territory compared to 2019. Rates continue to drive performance while occupancy has been alternating between marginal growth and decline over the same timeframe.
Limited-service hotels are driving improvements with demand ahead of 2019, while demand in full-service hotels remains below. This has been a trend throughout the pandemic with some full-service hotels adopting a more profitable business model by driving rate at the expense of occupancy. The slower return of higher-end corporate has also been contributing to the shortfall.
With a recession becoming more of a certainty and individuals and companies getting ready to navigate the slowdown, expect trading down to re-enforce this trend.
Let’s dig into the new forecast. This version includes the assumption that Canada enters a moderate recession with GDP contracting by 1.3 percent in 2023. So, the forecast has been revised slightly downward. Expect year-on-year growth to pull back substantially in 2023 compared to this year but remain in positive territory.
In previous recessions, demand contracted anywhere from 6% in the 12 months after the start of the financial crisis, to 0.2% in 2015. So not all recessions are created the same. This time around, Canada’s hotels are expected to weather the storm better with demand in 2023 forecast to be in line with the 2019 benchmark.
We expect the slowdown in hospitality will take longer to materialize than other sectors that opened earlier as there is still more recovery to be had. Notably, group and international demand are expected to contribute more to the business mix in 2023 than this year.
In nominal terms, the overall recovery pattern remains the same as the previous forecast with ADR and RevPAR exceeding the 2019 benchmark this year. What has changed is the CPI forecast for 2023. In real terms, the ADR recovery index will contract slightly in 2023 and will push out the overall real RevPAR recovery by about four years.
Over the past two years, around three thousand rooms have come out of inventory in our urban centers to be repurposed as residential. So, if demand softens next year, fewer rooms to sell each night will also help to sustain key metric performance. Also, with the limited number of new project starts in 2020 and 2021, room deliveries in 2023 are expected to be down 45% compared to the peak in 2018, limiting supply-side pressure.
Without much development activity happening, acquisitions should be the way for investors to enter Canada’s hotel sector. But owners have had a limited appetite to sell with operating performance soaring. Transaction volume in Canada’s major urban centers is down around 70% in the first eleven months of 2022 compared to 2021.
Curtis Gallagher, Principal and Canadian Hospitality Lead at Avison Young, is joining me to add his thoughts about why volume has been so low.
“There has been a lot of uncertainty about what a forward operating period will look like, particularly in terms of corporate demand. As well, there has also been a significant disconnect on value from a buy/sell perspective.”
And what is your outlook for 2023?
“As a more normalized trailing 12 period materializes, buyers, sellers and lenders will have more confidence in a property’s future performance provided liquidity is enhanced by a greater number of participating lenders. We expect investment activity to pick up.”
Do you think there could be any distress?
“Some, but not significant. We’ve gone through a financial crisis, now a medical crisis and there has been very little distress. I think there will be more pressure to solve for higher interest rates on loan maturities that come due in 2023 & 2024, and there will be a requirement to potentially fill some gaps in the capital structure.”
Thanks Curtis, appreciate you sharing your outlook with us. I’ll keep tracking activity and be back with another update soon. If you have any questions, please feel free to email me at lbaxter@costar.com. Thanks so much for watching and take care.