Hotel markets in western Canada, including Vancouver, Calgary and Edmonton, are poised for a steady 2023 given the inherent resiliency of hotels in the provinces of British Columbia and Alberta.
During a webinar hosted by CoStar focused on the hospitality outlook for western Canada, two analysts and two hoteliers shared their expectations for the region.
Carl Gomez, CoStar's chief economist and head of market analytics for Canada, said a moderate recession is likely to occur in the country in 2023, but on the whole, hotels in western Canada have been outperforming the rest of the country since the start of the pandemic. Alberta's hotel market specifically has gotten a big lift as oil and gas markets have recovered.
"Part of the reason why Alberta is outperforming ... is simply because of the orientation of its economy, which is very much oriented towards oil and gas, which is doing quite well," he said.
On the labor front, Gomez said job cuts in the tech and financing sectors will likely boost the pool of employees that can be recruited into the hospitality industry.
"There has been difficulty bringing people in back into the industry, cost constraints and things like that. So the labor market is not as tight as it appears to be," he said.
Laura Baxter, CoStar's director of hospitality analytics for Canada, said Canadian hoteliers benefited from the high inflation throughout the country in 2022 as they kept room rates high rather than slash them to chase occupancy.
"Not only were hoteliers reacting to the high inflationary environment, they also didn't cut rates to generate demand," Baxter said.
Carrie Russell, senior managing partner with HVS Canada based in Vancouver, said she looks closely at hotel performance for any signs of softening demand, which could indicate a recession.
"If demand softens because we come into a recessionary period, are hotels going to be in a position to hold that rate?" she said. "Over the historical period, if you look back, hotel rates typically do outpace inflation. So if we've got another strong year of inflationary growth in the economy, it's very likely that hotels are going to be able to meet or exceed that rate growth."
Pent-up domestic leisure demand carried Canada's hotel industry throughout the year, but hotels in urban markets that are typically more reliant on group demand lagged, Baxter said.
"Overall, we saw a remarkable recovery in 2022, but as we look forward and enter into a probable recession, there are questions surrounding whether this growth will be maintained or whether it will pull back," Baxter said.
On the plus side, Canada's hotel industry should benefit from slow supply growth, and Baxter added that hotel markets in British Columbia are still undersupplied.
"Overall we have seen the pipeline contract with fewer project starts earlier in the pandemic, which this was mostly due to skyrocketing costs of materials and also the cost of borrowing rising," she said. "We are expecting limited supply side pressure over the next year or maybe even two."
Duncan Chiu, senior director of lodging development for Western Canada at Marriott International, said the constraints on hotel development have eased somewhat.
"It's overall getting better," Chiu said. "I don't think it's going to get as bad as it was during the pandemic, and if it does, we've learned how to manage, so that's a positive. We are seeing hotel construction starts improving."
Chiu said there are still uncertainties for hotel developers around inflation and the higher cost of debt. In the end, it will take some time for the supply chain to "rebalance," he said.
"But the good news from our perspective is we haven't seen a lot of projects fall out of the pipeline. That kind of speaks for owners' conviction in the markets that they invest in and they can see beyond the challenges," Chiu said. "Building materials and shipping container costs have come down, but lead times for key building materials and infrastructure pieces are still challenged. I would say total construction costs are still up double digits, probably in the range of 20% year over year. But again, I would say overall, we're trending in the right direction."
While environmental, social and governance policies are the talk of the hotel industry, Chiu said sustainable hotel development in Canada is a little behind the U.S. That doesn't mean guests aren't looking for it.
"A lot of companies and government agencies are beginning to require their staff to select hotels that have practiced or offer some of these sustainability initiatives. You're seeing it in [requests for proposal]. You've got to check the box," he said. "From a lending side of things, we see more of the ESG conversation in the U.S. for the time being, but it will probably start to permeate up to Canada. I think it'll be sort of lender-driven and we'll see more of activity when the time comes."
Obstacles for Luxury Hotel Development
Russell called the select-service hotel segment the "bread and butter" of the Canadian hotel industry due to its lean operating model. She added it's been a bit more difficult for luxury hotel development to take off.
"It's hard to do luxury in Canada," Russell said. "The development that had happened in downtown Vancouver that was luxury-related was mixed-use, and it was the residential piece of it — the lift you were getting on the residential component — that was making the overall project make sense. Our rates just aren't high enough to command the profitability levels that you need to make luxury work."
Seasonality is another detriment to any sort of luxury hotel boom in Canada, Russell added.
"You may have certain markets that can command that luxury customer and get those extremely high rates that you need to make it all work, but you can only do it for a really short season," she said. "There may be some resort areas where there could be some demand for luxury, but I think it'd be challenging. They tend to be high-net-worth individuals that want to own luxury, or mixed-use residential."
Lifestyle brands have found better traction in Canada's urban markets, Chiu said.
"These are brands that are a bit more unique ... a bit of a departure from the traditional sort of big-box, convention-center-style hotel," Chiu said. "These brands typically punch above their weight and they’re able to achieve a higher ADR, which bodes well for the entire project. You need these brands to make these hotel projects pencil in urban markets in Canada."