Canada’s Hotel Industry: Soaring Tourism Meets a Stalled Transaction Market

Canada’s hospitality industry is experiencing a tale of two worlds. On one hand, hotel occupancy and average daily rates (ADR) are soaring, signaling a strong recovery in travel and tourism. On the other, the investment market for hotel assets remains sluggish, as a mix of economic headwinds and structural shifts in demand create barriers to transactions.

The Tourism Revival

After a pandemic-induced lull, Canadian hotels are thriving again. In 2024, ADRs have continued their upward trajectory, and occupancy across Canada’s top 10 hotel markets stands at 64.5%, just shy of pre-pandemic benchmarks. Vancouver leads with an impressive 83.8% occupancy, while Prince Edward Island trails at 54.5%. Leisure-focused properties, particularly luxury and resort hotels, are benefiting the most from pent-up demand.

Seasonal destinations like ski resorts are reinventing themselves with year-round offerings, including mountain biking, hiking, and golf. Meanwhile, the Canadian government’s use of hotels to house refugees and asylum seekers has added another layer of demand, removing some properties from the general market.

The Investment Conundrum

Despite robust operational performance, hotel transactions have lagged. Several factors contribute to this:

• Persistent Bid-Ask Gaps: Sellers are holding out for higher prices, buoyed by strong income from operations, while buyers remain cautious in the face of high borrowing costs.
• Capital Gains Tax Changes: Recent increases in the capital gains tax rate have complicated deals, making sellers reluctant to transact unless they can identify equivalent replacement assets.
• Interest Rate Dynamics: While the Bank of Canada has reduced interest rates by 75 basis points in 2024, it hasn’t been enough to reignite transactional activity. Investors remain hesitant, awaiting more substantial and sustained rate cuts.

The Impact of Structural Shifts

The rise of remote and hybrid work has also altered the landscape. Corporate travel, which once anchored many urban hotels, has been permanently reduced as businesses trim costs and rely on virtual meetings. This shift underscores why leisure and luxury properties are outperforming, as they are less dependent on corporate clientele.

A Glimpse at Development Potential

Interestingly, stalled office and residential developments have opened the door for new hotel projects. Developers and landowners are exploring the arithmetic of hotel development, which, despite high operational and construction costs, is increasingly appealing due to the limited supply of new hotels. Hotel brands are also eyeing ground-up developments to capitalize on the demand.

Looking Ahead

The outlook for Canada’s hotel investment market remains cautious but not bleak. With two more central bank rate cuts anticipated in 2025, transactional fluidity could improve as confidence in a lower interest rate environment solidifies. For now, strong operational performance continues to buoy hotel valuations, while cautious optimism permeates the investment landscape.

Canada’s hotel industry exemplifies resilience, with tourism flourishing even as investment activity lags. The challenge for stakeholders lies in navigating these dual realities, balancing operational success with strategic opportunities for growth and development.