Capitalizing on opportunities in the market will help investors be well-positioned for success

BY FRASER MACDONALD, COLLIERS HOTELS

Overall, the Canadian hotel-investment market performed well in 2022, and the appetite for lodging investment remains high despite challenges with increasing interest rates and some economic uncertainty. A range of product is expected to become available for sale in 2023 for a number of reasons, including portfolio reviews/ rationalization, debt maturities, and overdue PIPs (Property Improvement Plans). Investors who are able to identify emerging trends and capitalize on opportunities in the market will be well-positioned for success as we move through this cycle. Below are some excerpts from the recently launched 2023 Canadian Hotel Investment Report. A faster-than-expected operating recovery and investor optimism supported overall healthy hotel investment volume of $1.6 billion in 2022. National volume paced roughly 20 per cent below 2021, however, the decline was driven by a deceleration of alternate-use sales from pandemic highs with acquisitions for hotel use firmly back in demand, accounting for 80 per cent ($1.2 billion) of the year’s total. When evaluating acquisitions for ongoing hotel use, investment volume was up roughly 10 per cent year-over-year.

Last year saw participation from a well-balanced buyer pool with stronger in-place cash flow and a clearer outlook on future performance narrowing the bid-ask gap between buyers and sellers that has been an impediment to traditional transactions during the pandemic. Private capital sources drove the majority of investment activity with the pursuit of yield and appeal of smaller equity requirements in the wake of current financing conditions, pushing investors towards secondary and tertiary market investment opportunities, which accounted for the bulk of the year’s transactions.

2022 Key Takeaways

Year-end volume reached $1.6 billion in 2022, down approximately 20 per cent year-over-year. However, acquisitions for ongoing hotel use trended 10 per cent above 2021 levels to $1.2 billion.

Reflecting the slowdown of alternate-use transactions and concentration of smaller deals, Average Price Per Room (APR) metrics, including all types of lodging transactions, was $131,200 in 2022 compared with $158,100 last year. Excluding alternate-use deals, APR metrics remained healthy at $120,000.

Segment Analysis

Hotel operating fundamentals recovered years ahead of expectations in 2022, with national RevPAR ending the year 3.5-per-cent ahead of 2019 results, according to STR. Despite concerns of a recession, we anticipate positive momentum for lodging demand across the leisure, corporate, and group segments.

Hotel-transaction activity related to alternate uses comprised just 20 per cent of overall activity in 2022, compared with 41 per cent in 2021 and 53 per cent in 2020. We expect these transactions will continue descending towards historically low norms.

Trades under $10 million continued to attract investors looking to place capital with a smaller cheque size and accounted for almost 75 per cent of deals during the year.

Distressed sales remained at historic lows in 2022, representing just one per cent of sales volume over a handful of trades.

Canada’s largest urban markets (+1M populations) saw more than 30 hotels transact for some $625 million (40 per cent of total) with almost 75 per cent of volume related to acquisitions for continued hotel use.

Private investors and hotel investment companies continued to be the largest buyers of hotel assets, investing more than $1 billion during the year (65 per cent of total).

Full-service transaction volume increased more than 30 per cent year-overyear, elevated from the sale of a handful of hotels in major urban and resort markets.

Limited-service assets continued to comprise a steady component of the market, although declining from the close to $1 billion of volume seen in 2021, which was elevated from the sale of many assets in major markets for conversion to social housing.

Despite strong investor interest, focused-service acquisition opportunities have been limited in recent years; however, given the current lifecycle of many assets in this segment and upcoming capital requirements, we expect to see increased trading of this product in the medium term.

Key Themes To Watch In 2023

Buy-Side Sale Data

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Continued Strength in Transaction Market

Catch-up capital post-pandemic will continue to propel the market this year as equity remains plentiful, with anticipated transaction volume of $1.5 to $2 billion.

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Deal Size Both Small and Large

The transaction market will be primarily led by strong activity in secondary and tertiary markets with deals under $20 million. There is also potential for several headliner city-centre hotels and resorts to transact.

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Creative Structuring During this Interim High Interest-Rate Period

It’s unlikely we’ll be going back to record low interest rates of yesteryear, requiring creativity in deal structuring.

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Portfolio Rationalization, Re-financing, and Brand Requirements

Portfolio reviews, loan maturities, and overdue PIPs will prompt owners to bring assets to market.

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Lifestyle and Extended Stay Dominate Development Pipeline

Increased focus from developers on building lifestyle and extended-stay product, given gaps in the market on that product type with strong demand and return potential.

CLIENT STATEMENT: “Built both hotels on time and on budget. This was an incredible feat considering the builds were during the worst global pandemic in many years.”

Coming To Canada In 2023

Moxy Hotels, Marriott International’s newest and edgiest select-service brand is making its way to Canada.

“Moxy is a very unconventional brand,” says Aaron Laurie, VP Lodging Development for Eastern Canada, Marriott International.

The Moxy brand stands out because it targets younger travellers and the young at heart, he adds. “Our guests are searching for unique accommodation experiences. Moxy is unlike anything out there. It is truly a one-of-a-kind concept in Canada and around the world.”

This year, we will see the official openings of the Moxy Halifax, which is part of a mixed-use, new-build project, and Moxy Banff, a conversion project. An additional two Moxy hotels will be opening in Montreal (216 rooms) and Ottawa (222 rooms), which will also be part of key mixed-use-development projects. It’s all part of Marriott’s long-term plans to reach every major urban market in Canada.

“This is an exciting moment for Marriott Hotels in Canada. The growth of the Moxy brand across the country exemplifies both developer interest and also guest demand for unique lifestyle concepts and experiences,” says Duncan Chiu, senior director, Lodging Development - Western Canada, Marriott International. “Moxy hotels is a vibrant and playful brand with an efficient development and operating model, suited for standalone purposebuilt hotels, conversions, and mixed-use projects”.

Halifax and Banff are the perfect starting points for the Moxy brand in Canada, says Laurie. “Both locations have a very strong pool of transient and leisure guests and are situated within a vibrant food, beverage, and entertainment environment. Both cities’ hotel supply is majority represented by classic hotel brands. Moxy will fill a market need by providing a distinctive hotel brand experience unlike any other.”

Moxy fills a gap in Halifax’s hospitality space says Moxy Halifax owner Joe Metlege. “It offers a modern and energizing vibe where people can gather for business meetings, spontaneously meet up with friends after work or create the ultimate staycation.”

Moxy hotels was a natural fit for Moxy Banff’s conversion project because of the brand’s vibrant, lifestyle experience-driven product, says owner Brooke Christianson. “We are so excited to be introducing Western Canada’s first Moxy hotel in the world-renowned Banff National Park. We are confident that this hotel will provide an exceptional and unique experience for all travellers coming to Banff”

The distinctive brand is all about social spaces and activations. A signature design element is the public zones, where communal spaces allow guests to check in, work, play, or socialize in a comfortable and vibrant interactive setting.

Bar Moxy is an essential feature of the hotel lobby design, serving as a hub of activity for guests throughout the day and night. A natural meeting point for guests, the tech-enabled space provides an ideal central location where all essential services of the hotel are focused, including deskless check-in, 24/7 self-service grab and go offerings, all-day retail, a DIY station, a game room, The Welcome living-room space, the Lounge, and the Library/Plug In peace-and-quiet zone.

Other public spaces include a full circuit fitness centre and fun zone complete with gymnastic equipment, a boxing bag, and stretch areas. Scalable meeting space options are also available on demand.

The minimalistic style guestrooms at 180 to 260 sq. ft., provide exceptional value to owners working with tighter, limited-density sites, says Laurie.

While the rooms may be small, the well-appointed design offers guests the perfect balance of efficiency and comfort. Design elements include a peg storage wall, platform bed with storage, signature door with a glass panel, flexible furniture, a fun chair, and fold-down desk, a 55-inch LED TV with screen casting, free Wi-Fi and multiple USB plugs, a bathroom window, and a spacious shower.

Laurie notes that franchises are being incredibly creative with incorporating elements of the local communities into their design components. “Everyone is working with brand agencies and design firms to help bring localized nodes to life in the interior design.”

Maximizing the utility of space and revenue per square foot within hotels comes at a time when construction and land costs are at an all-time high, he adds. The Moxy brand offers a favourable cost-to-build model that attracts experience focussed guests. It is also supported by a lean staffing model that translates into improved project economics.

Currently there are 28 Moxy locations in the U.S., with 34 more to come and 122 globally with an additional 125 in the pipeline.

Each Marriott branded hotel is supported by a powerful global distribution platform and innovative sales-and-marketing programming focused on delivering high-value guests, including Marriott Bonvoy®, the industry’s largest hotel loyalty program. The Power of Marriott also helps operators drive efficiencies through the use of state of art technology, global negotiating power, shared services, and the most experienced teams in the industry.

With its vibrant public spaces, chic design, and efficiently spaced guestrooms, Moxy will be a standout in Canada, says Laurie. With Moxy, Marriott is shaking up the traditional hotel model to attract a new generation of travellers. “We’re very much looking forward to seeing the Moxy brand attract the ‘Fun Hunter’ travellers from across Canada and internationally.”