AVISON YOUNG

Canada Hotel Market

2021 Review and 2022 Outlook

Key impact factors

Staffing

Government support factors

Lender's perspective

COVID-19 status

Staffing

Some hoteliers found themselves turning down business when occupancy levels started to rise in 2021 as staff shortages became a major issue. Pre-pandemic, the Accommodation and Food Services sector accounted for 6.4% of the Canadian Labour force. In 2021, this percentage fell to 5.1%. Employment in Accommodation and Food Services fell 20.8% from 2019 to 2021 – the greatest decline of any sector, according to Statistics Canada. Hotel owners report that staff either moved to other industries with more secure employment, or that it made more financial sense for some workers to continue collecting government aid. The public and private sectors must find ways to address the issue of staff shortages. On December 17, 2021, the Minister of Employment, Workforce Development and Disability Inclusion announced up to $67 million in funding to support Canada’s tourism and hospitality sector through the Sectoral Initiatives Program (SIP). Budget 2021 committed $1.8 billion over three years through several new initiatives that could help create almost 500,000 new job and training opportunities for workers over the coming years. The Government of Canada had earlier committed to creating more than 1 million jobs, restoring employment to pre-pandemic levels. Until the hospitality industry is allowed to operate without the restrictions of COVID-19 protocols, this will likely be a lingering issue.

Labour force % change

(Source: Statistics Canada)

Government support programs

Several government support programs are being offered to the hospitality sector, such as the Tourism and Hospitality Recovery Program (THRP), which can be applied for by organizations with more than 50% of eligible revenue coming from one or more of the tourism, hospitality, arts, entertainment, or recreation activities this program supports. Applicants must demonstrate a 12-month average revenue drop from March 2020 to February 2021 of at least 40%. Qualification is more stringent than the previous iteration of the program, meaning hotel owners must fund more of the shortfall on their own. Other government programs include the Hardest-Hit Business Recovery Program Wage subsidy (HHBRP - Wage), Canada Recovery Hiring Program (CRHP), and Canada Emergency Wage Subsidy (CEWS). The major unknown is when these programs are going to come to an end. Currently these programs are set to expire by May 7, 2022.

Lenders' perspective

The lending community remains cautious when considering the hospitality sector. Active hotel lenders contemplating financing opportunities require strong sponsors with a meaningful track record and assets with significant market presence. Lenders are looking to see more clarity in the marketplace. The cost of capital is still low, yet bond yields are trending upwards. To manage inflation, interest rates are likely going to rise but the significant unknown are by how much, and how quickly? Fortunately, hotels are somewhat resilient to inflation as daily rates can be adjusted swiftly. “2022 is shaping up to be another challenging year for hotel owners across all fronts including acquiring additional debt for their existing and prospective properties,” says Cameron Woof, AVP Hotels & Syndication, CWB Franchise Finance. “While the majority of Canadian lenders with exposure to the space are demonstrating commitment to supporting their existing client exposures, the recent recovery setbacks due to the Omicron variant will likely extend the ‘wait and see’ approach currently being employed by most lenders as it relates expanding appetite. This has made sourcing equity via leveraging of existing assets extremely difficult over the past two years – a difficulty that is expected to continue through 2022.”

Woof continues: “That being said, with challenges come unfolding opportunities that have caught hotel investors’ attention, namely the expected increase in the volume of asset sales triggered by owners aimed at rebalancing their portfolios and injecting liquidity into their balance sheets. Partnering with a lender who is active, understands the hotel space, and has demonstrated an ability and commitment to deliver unique debt structures throughout the pandemic will be imperative to success in 2022. This will be true for both sourcing stable and patience capital for existing maturities and reinvestment in assets, as well as taking advantage of opportunistic acquisitions. While debt will continue to remain scarce through 2022, there are select lenders who are still active in the space and comfortable structuring robust facilities for nimble borrowers.”

COVID-19 status

Effective December 15, 2021, Health Canada has recommended to avoid non-essential travel outside of Canada. Meanwhile, travelers entering Canada must provide proof of a COVID-19 negative molecular test result to enter Canada, or proof of a previous positive test result taken between 15 and 180 days earlier (starting January 15, 2022, between 11 and 180 days earlier). Travel rules and regulations continue to change as this situation is rapidly evolving.

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Curtis Gallagher* Principal, Canadian Hospitality Lead +1 416.673.4018 curtis.gallagher@avisonyoung.com

Graeme White* Associate +1 647.598.2318 graeme.white@avisonyoung.com

Bobby Singh* Associate +1 905.283.2326 bobby.singh@avisonyoung.com

Haig Basmadjian Senior Associate +1 403.232.4316 haig.basmadjian@avisonyoung.com

*Sales Representative

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© 2022 Avison Young Commercial Real Estate Services, LP, Brokerage. All rights reserved. E. & O.E.: Some of the data in this report has been gathered from third-party sources and has not been independently verified by Avison Young. Avison Young makes no warranties or representations as to the completeness or accuracy thereof. Investment sales and hotel market data sourced from Avison Young, Altus Data Studio and STR.