Q1 2024: Trends in Canadian hotel financing

THE WORLD HAS EXPERIENCED SIGNIFICANT CHANGES OVER THE LAST YEAR, WITH THE PACE OF LIFE SEEMINGLY ACCELERATING THREEFOLD.

Ed Khediguian doesn’t likely need an introduction but for those who may not know him, Khediguian is senior vice president at CWB Franchise Finance and an editorial advisory board member at STAY Magazine. In this article, he lends us his expertise and thoughts on what he thinks 2024 has in store for the Canadian hotel sector, shedding light on the state of Canadian hotel financing, and the challenges and opportunities on the horizon for Canadian hoteliers.

We’re still recovering

The Canadian hotel industry continues to blaze a path to recovery after the tumult of the pandemic. We may be tired of hearing the words “recovery” and “resilience” but that does not change the fact that in Canada, we’re still recovering as we begin a new year and we are still seeing remarkable tenacity and elasticity in Canadian society, our economy and the hotel sector. To boot, 2023 has been an uncertain year for our economy with a great deal of unrest and uncertainty in the world.

What does this mean for lending and financing in the near future? With the aforementioned elements in mind, Khediguian notes that while there's a rebound in appetite from larger institutions, there's a selective approach. Certain credit unions, having faced challenges through the pandemic, are cautiously re-entering the space. The larger institutions, having taken a step back through the pandemic, are gradually recognizing the resilience of the hotel sector as a decent hedge against inflation. This being primarily attributed to the ability to drive average daily rates in certain circumstances well beyond inflation rates, mitigating both the erosion in demand through the cycle as well as accelerating costs of operations.

Market dynamics and specialization

Khediguian highlights the changing dynamics in other real estate asset classes, such as offices experiencing a significant downturn, and industrial and multi-tenant residential experiencing growth. With the pandemic in the rearview mirror, this has led to the hotel sector slowly coming back to the focus of a broader investor base. There's also a growing appetite forspecialized sectors like industrial buildings, impacting structures and pricing.

Flying in the face of inflation

The hotel sector has demonstrated remarkable elasticity during these inflationary times. Through the pandemic and recovery, the industry has maintained discipline in rate management. Consolidation in hotel ownership across major markets in Canada has contributed to increased sophistication in operations, ownership, and pricing strategies. This awareness has played a role in the sector's ability to weather the challenges posed by inflation.

Lending institutions' focus(es)

That being said, lending institutions that were in the space before the pandemic and who paused their originations, are now re-entering the sector. However, they are doing so gradually and under a more charged regulatory environment, with the impact of an initial narrowing focus to better-capitalized, larger, more experienced borrowers. The impact on the lending landscape for hotels is of greater divergence of availability of capital between the larger, well-capitalized borrowers who are experiencing accelerating liquidity, versus the smaller, less well-capitalized portions of the sector facing tougher conditions in the near term.

Changing demand dynamics

Demand in the hotel sector has seen shifts during the pandemic. Corporate demand initially retrenched, but leisure demand compensated for it. Currently, corporate demand is continuing to recover to pre-pandemic levels, while leisure demand is expected to retrench as inflation and interest rate hikes start impacting consumer discretionary spending capacities. The sector is adapting to these changes, with a focus on sustaining profitability levels.

Outlook for hotel financing

Looking ahead, Khediguian anticipates continued improvement and growth in hotel financing, with expansion concentrated in specific markets. Larger, better-capitalized borrowers will likely see more robust liquidity, while smaller borrowers may face more muted conditions. The industry's outlook will be influenced by factors such as supply, rate dynamics, and the evolving global landscape.