July 26, 2006

Construction

Hotel construction is big business

IRWIN RAPOPORT

correspondent

MONTREAL

The demand for new hotel rooms in Canada has remained constant over the past five years and all signs point towards similar growth in the future.

According to Tony Pollard, president of the Hotel Association of Canada, between 8,000 and 10,000 new hotel rooms are built annually. These rooms, on average, cost about $100,000 to construct. This translates into between $800 million and $1 billion worth of work for general contractors and a host of sub-contractors.

The majority of the money invested goes towards the construction of new hotels ranging from low-end to high-end establishments.

“There are about 6,800 properties in Canada, of which1,600 are branded or flagged,” said Pollard.

“There are more than 30 major hotel chains and each of them has thir own brands.”

In addition to new construction, on average, about $1.6 billion worth of hotel property is sold annually.

“In terms of new construction,” said Pollard, “it’s more difficult because it varies in size and scope. Typically, we have had a net gain of 8,000 to 10,000 new hotel rooms over the last four to five years. The average hotel going up has between 75 and 200 rooms. It’s not often that you put up a 1,000-room hotel.”

John Dunn, vice president of marketing and sales for Atlific Hotels & Resorts, concurs.

“The 400 to 500-room new build hotels are more rare because they are expensive projects to build and run,” he said. “Building hotels of this size has a lot to do with the right location. New builds now are mostly between 150 and 250 rooms.

“The growth of these hotels will continue and more so in the limited service segment of the business with brands such as Courtyard by Marriott, Garden Inns by Hilton and Holiday Inn Express.”

“You’ll probably see more mid-scale hotels,” he added.

ATLIFIC

The lounge at the Courtyard by Marriott Toronto Airport.

Dunn says boutique hotels are a fairly new concept in Canada.

“Montreal is well developed on the boutique side; Toronto is getting there with a few more planned and now Vancouver is definitely getting into it as well,” he says.

While large hotels are the exception, Fairmont is building a 500 to 600-room hotel on Vancouver’s waterfront while Atlific is building a 431-room hotel in Montreal.

Selecting a location for a new hotel is based on demand, the cost of acquisition of the property and return on investment, according to Pollard. In many cases, the demand may be there, but purchasing a vacant property in a city centre is too costly, which means purchasing a site outside downtown or retrofitting an apartment and office buildings.

Room cost is the key to determining profitability. The average room price takes in costs such as ballrooms, meeting rooms and other amenities. Nightly rates are based on the 1/100 rate — if a room costs $275,000 to build, the price would be set at $275 per-night if the hotel is to break even.

Purchasing and renovating an existing building could be just as costly as building a new hotel on a vacant lot.

“An old building in Toronto, a warehouse, for example that is built from stone and has 10-foot high ceilings, is going to be expensive to renovate,” explains Pollard. “But at the end of the day, thanks to high demand, you’ll get a good return on investment.”

Converting existing buildings into hotels does happen, but they are not the norm.

“The conversion is typically an apartment building,” he said. “The plumbing and electrical are already in place. However, in some cases, you might have to start from scratch just to bring the building up to code.”

The first major conversion of a large Montreal office tower into a hotel took place several years ago when with the creation of the Le Sofitel on Sherbrooke Street near Peel Street.

“It’s not a trend,” said Dunn. “In the hotel business, the cardinal rule is location, location, location. For example, the hotel business in Calgary is booming, but there really is no more vacant land downtown, so companies may look at converting office buildings.”

Dunn’s firm is putting up a 431-room hotel on the site of the former Gazette compound in Montreal, which has three existing buildings and a vacant lot that will be home to a 20-storey tower.

“If this opportunity had not presented itself, we would have looked for a lot downtown to put a hotel up.”

The “lion’s share” of new hotel construction is currently happening in secondary markets.

“It could be in places such as Red Deer, Alberta, Brandon, Manitoba, Sherbrooke, Quebec and Moncton, New Brunswick,” he said.

And future hotel construction in Ontario is strong, especially in areas such as the downtown Toronto, the east end and the Toronto Pearson International Airport districts.

“Niagara Falls is massive because of all the hotels,” he said. “Then you have southwestern Ontario, which is anything from Pearson Airport down to Windsor. The Ottawa area is growing. Kingston has 10 hotels and Brockville has seven or eight hotels — big branded hotels.”

In Quebec, in addition to growth in Montreal and Quebec City, the Gatineau is sparking the interest of hotel developers.”

And while much of the hotel growth is occurring in Ontario, Quebec, Vancouver and Alberta due to large populations, Pollard says sizable growth is occurring in smaller provinces such as Manitoba and Saskatchewan.

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