Canada
has over 90 markets with a population greater than 30,000. However,
with the increased
investment interest in
the industry, in-depth analysis is required to uncover Canada’s
best performing hotel markets.
The
investment community is working overtime to position themselves
in Canada’s best hotel markets whether
for acquisition or new build. There was over $800 million of hotel
transaction activity in the first quarter of 2005*. This is over
10 times the volume of sales achieved during same period last year.
As investors are busy acquiring existing assets, developers are
looking for the best markets to develop new hotels. There is a
significant amount of private equity fuelling this process. Unlike
the late 1980’s, people using their own money are driving
the development pressure. Regardless of the source of capital,
the need for caution and prudence are as necessary as should have
been the case in the late 1980’s.
A
fundamental consideration in uncovering Canada’s
best hotel markets involves accurately assessing current market
performance. There is a bad joke about a mathematician’s
first fishing trip to the Credit River. He drowned trying to walk
across the river because he calculated the river to be on average
only 2 metres deep. This is an exaggeration but investors must
be wary of relying too heavily on averages and over/under estimating
the varying depths of Canada’s hotel markets. Markets that
appear strong may have limited depth, due to lack of future corporate
demand growth or attraction development. Often these markets are
characterized with occupancies greater than 60%, with one or two
major corporations driving hotel demand and flat population growth.
Without a more diverse economic base, minimal new supply can result
in a significant decline in occupancies. Therefore, attractive
current year occupancies may be misleading in markets where there
are low barriers to entry and proposed supply additions.
Conversely,
markets that have less than inspiring occupancies may have substantial
depth, due to
significant new
corporate or leisure attraction development. Often an entrepreneurial
economic development department, diverse corporate businesses,
and consistent population growth characterize these markets. Leisure
travel is obviously a key demand generator for hotels. However,
when uncovering Canada’s best hotel markets, corporate travel
often outweighs leisure travel. Leisure travel is often more vulnerable
to uneven demand throughout the year due to seasonality of attractions.
The fisherman mentioned above should also have determined whether
the level of the water was rising or falling.
The number of other players who are looking at
those same markets compounds the issue of assessing the depth of
an opportunity. Therefore, it is essential to have a good measure
on how the supply landscape may also change.
The opportunities are still out there. However,
market conditions are changing quickly and capital is very agile
to react to perceived market opportunities. It is important to
be quiet about where one is looking and to be very careful with
the analyses. Like all good carpenters, measure twice and cut once!
Andrew Garrett, Consultant
*Source: PKF Research, RealTrack, and Colliers
Innvestment Report
