Alberta concerns weigh on Canada's oil sector

By Peter Mitham

VANCOUVER – Growing demand and emerging opportunities are the bright spots in an industry that shifted gears in 2019, those attending the Western Canadian Lodging Conference in Vancouver heard November 26.

While demand continues to grow in most parts of Canada – Manitoba, Saskatchewan and Ontario are the exceptions – there are clear signs that the economy is entering a slower period.

“We’re downshifting in the economy; we’re certainly seeing that in the demand numbers,” Carrie Russell, managing director of advisory firm HVS Canada told delegates as part of the overview kicking off the conference.

Nationally, demand in Canada has dropped from 2 per cent last year to 0.2 per cent this year. Demand is strongest in Atlantic Canada, rising 2.7 per cent in Newfoundland and Labrador, while B.C. showed the weakest growth at 0.4 per cent.

But when it comes to hotel performance, B.C. leads the West with revenue per available room (RevPAR) rising 2.8 per cent over the past year to $147. This is due to scant growth in the room supply, leading to an occupancy rate of 73 per cent and an average daily rate of $202.

“There’s certainly a lot of potential for more traffic, more tourism to come into Vancouver,” Russell said. “[But] we’re starting to max out our occupancy levels and get some rate sensitivity there.”

It’s the opposite situation in Alberta, where rooms continue to be added despite lacklustre demand.

The province has the second-lowest occupancy in the country after Saskatchewan, at 58 per cent, but the market saw 3,000 rooms added over the past year. This translates to a 3 per cent increase even though demand grew just 0.7 per cent. This helped to push down RevPAR by 2 per cent to $90. The effects have been felt across Canada.

“[The] lack of demand growth coupled with significant new supply is really changing the direction of RevPAR for the country,” Russell said, noting that challenges will continue through 2020.

The challenges seem set to continue, with another seven hotels under development in the province. This works out to 35 per cent of the 20 planned for Western Canada, according to CBRE Hotels.

The good news is that investors remain confident in the hotel sector, and in Alberta.

“I haven’t run into one person that’s come up to me and said, ‘Alberta’s done,’” said Greg Kwong, executive vice-president and regional managing director with CBRE Hotels in Calgary.

While sales in the nine months ended September 30 totalled just $1.3 billion, well off the records of more than $6 billion for the years 2015 and 2016, the value of transactions in Western Canada for the period were up 27 per cent from a year ago at $491.9 million. Viad Corp.’s purchase of a 60 per cent stake in the Mountain Park Lodges portfolio of seven hotels for $99 million and the sale of the Westin Calgary accounted for the majority of the aggregate sales tally, but small deals reflected the trend, too.

According to a national CBRE survey of lender sentiment, there’s “notable demand” for hotel deals. While not much has changed hands in Alberta, there also hasn’t been a wave of court-ordered sales.

“We really expected the banks to step in and said, ‘That’s enough,’ and pull the plug and at least quadruple the amount of trades so far as foreclosures and bank-owned real estate,” Kwong said.

But they’ve realized it’s better to stick by borrowers, knowing the sector has good long-term prospects.

“Investor sentiment is really saying, ‘I still think hotels are a pretty good investment relative to a stabilized office asset,’” he said. “That’s probably good news for the hotel industry.”

The confidence is borne out by Trevor Scott, senior vice-president, business development responsible for Western Canada with CFO Capital. CFO Capital recently arranged financing for the recapitalization of the 320-room dual-branded Hilton Garden Inn and Homewood Suites by Hilton Calgary Downtown. Toronto-based Timbercreek Asset Management Inc. led the fund.

“There are lenders out there that really believe in Alberta, and are bullish on it long-term provided the sponsor’s strong, the project’s right, the brand’s right,” Scott told a session devoted to hotel financing.

Capital from Alberta has also seen opportunities in neighbouring B.C., where eight hotels are under development with delivery due in the next year. Three of these are in the Okanagan, but Scott said Vancouver is also of interest now that the residential market has cooled.

“It seems like the economics are making sense for hotels to be built again in Vancouver,” he said.

But it’s not just hotels that are seeing interest. A lively panel on motels tipped them, in the words of moderator Ralph Miller, president of Inntegrated Hospitality Management Ltd., as “the original limited service property.”

The simpler model and low-cost structure make them attractive for Ron Mundi, president of Mundi Hotel Enterprises Inc., whose first investment was a 40-unit motel in Kamloops. He’s since grown his portfolio to 14 properties, including hotels.

The economics make sense to Darren Simpson, general manager of the Burrard, which transformed into a 72-room boutique hotel in 2011 after 55 years as the Burrard Motor Inn. The makeover retained the inner courtyard onto which the rooms open, and a retro chic that’s served it well.

“Profitability is there,” said Simpson. “You can really cut through to the bottom line.”

The funky retro factor lends cachet to Mandy Farmer’s Hotel Zed, which has locations in Kelowna, Victoria and, soon, Tofino. It’s hitting its benchmarks when it comes to rents, without the need for a breakfast offering.

“I would never serve breakfast there, and the reason is I don’t have to,” Farmer said. “Why would I give away something for free when my ADR is high?”

While the robust character of the B.C. market is driven by tourism, recapturing the good times in Alberta will depend on business travel picking up. And that, said Kwong, will depend on fresh investment in the energy sector.

“Building more hotel rooms is not going to solve the hotel industry. Tourism, as much as it’s strong in B.C., it’s still a smaller component in Alberta,” he said. “What’s going to stimulate Western Canada, specific to Alberta and Saskatchewan and into the interior of BC, is capital investment into the energy sector.”