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After this crisis ends, expect a relative decline in business travel now that businesses are armed with cost-cutting tech-enabled tools

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The hospitality industry continues to struggle as pandemic-mandated restrictions on travel and assembly hurt the bottom line and livelihoods of both businesses and workers alike.

International travel to Canada is down by more than 90 per cent and while some travellers are still trickling in, the Canadian government requires them to quarantine at designated hotels for about three days at a potential cost of up to $2,000.

The enforced quarantining might help a small number of hotels near the airports in select cities, but it will not provide any relief for most of the 8,000 hotels of varying sizes and quality across Canada.

Room occupancy rates dropped precipitously to 33.7 per cent in 2020, from 66.5 per cent in 2019, and the decline forced the hotel industry to lower room rates. The average daily rate in Canada, which had been steadily rising since 2010, declined to $124 in 2020, from $162 in 2019. The revenue per available room correspondingly declined to $43 in 2020, from $109 a year earlier.

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A look at recent travel trends helps explain why the hotel industry’s key performance indicators have collapsed by so much, because nowhere has the impact of COVID-19 been more evident than in the international tourism and travel sector.

The number of travellers from the United States and overseas in December 2020 was down by 93 per cent compared to December 2019, according to Statistics Canada data released earlier in February. Even the number of Canadian residents returning from abroad was down by 91.3 per cent during the same period.

A year-over-year comparison reveals that the number of international trips to and from Canada dropped to 25.9 million, an annual decline of 73 per cent. Excluding Canadian residents, only 5.1 million travellers arrived in 2020, a decline of more than 84 per cent from 2019. The number of Canadian residents returning from abroad was down by 74 per cent to 14.6 million.

Returning residents and new immigrants impact housing markets more than hotels, while business travellers and tourists generate the demand in the hospitality sector. A sizable segment of the demand for overnight hotel stays, restaurant meals, and art gallery, aquarium, museum and zoo visits is generated by international and domestic tourists whose numbers have considerably declined.

Even trips by U.S. residents to Canada in December 2020 were down by 93.3 per cent from the year before. Not all U.S.-based trips are overnight trips, of course, but those visitors still enjoy meals at restaurants and buy goods at stores.

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The declines are a far cry from the glowing forecasts that greeted the hotel industry as recently as 2019. “Our hotels are full, and we are in good shape to continue to grow top and bottom lines in 2019,” said an annual review of Canadian hotel industry by CBRE Group Inc., a commercial real estate services and investment firm.

CBRE further noted that “the only factors that cause significant shifts in the hotel market are either geopolitical events — such as 9/11 and the global financial crisis — or the delivery of new hotel supply.”

With the benefit of hindsight, we can add pandemics to the list of factors that can drastically affect the hotel industry’s bottom line.

The long-term forecasts for the hotel industry do not solely depend on lifting international and domestic travel restrictions. For one thing, web-conferencing technologies have displaced some demand for intercity and international travel. Virtual meetings, conferences and even birthdays and weddings emerged in response to the restrictions that prevented face-to-face meetings.

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Traditionally large gatherings for birthdays and weddings are likely to return once the pandemic is over. However, one could expect a relative decline in business travel, given that businesses are now armed with cost-cutting tech-enabled tools.

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The resulting effect could be more pronounced in downtown employment hubs in large urban centres, where near-empty office towers could struggle to attract employees who have proven to be equally productive working from home. With employees teleworking, what’s the point of flying to a different city to visit business associates?

The hotel industry is likely to do better in 2021 and beyond than it did in 2020. Still, the industry should be prepared for a future of sustained lower demand. This might require some hotels to change their offerings, such as providing longer-term stays, and being part of the solution for challenges such as housing affordability that many cities continue to face.

Murtaza Haider is a professor at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website hmbulletin.com.

In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Dennis Mitchell CEO of Starlight Capital on the REIT market amid the pandemic

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Dennis Mitchell CEO of Starlight Capital, speaks with Financial Post’s Larysa Harapyn about the REIT market amid the pandemic.

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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Postmedia is committed to maintaining a lively but civil forum for discussion and encourage all readers to share their views on our articles. Comments may take up to an hour for moderation before appearing on the site. We ask you to keep your comments relevant and respectful. We have enabled email notifications—you will now receive an email if you receive a reply to your comment, there is an update to a comment thread you follow or if a user you follow comments. Visit our Community Guidelines for more information and details on how to adjust your email settings.

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Their nuanced findings confirm what industry watchers have observed since the onset of the pandemic: Commercial real estate in cities that “rely heavily on subway and light rail” has been affected more by the adverse impacts of COVID-19 than cities where commuting is dominated by the automobile.

The authors caution that these trends do not suggest that downtowns are done for — far from it. The analysis revealed that businesses, even since the onset of the pandemic, have been willing to pay a premium for commercial real estate in the city centre and near rail-based public transit.

A passenger on the Toronto subway during the evening commute on March 25, 2020.
A passenger on the Toronto subway during the evening commute on March 25, 2020. Photo by Cole Burston/Bloomberg files

The paper shows transit cities reported a higher density of employment in the urban core, reflecting businesses’ preference for central locations. On the flip side, commercial rents declined faster in transit cities than it did in auto-centric cities as the distance from the city centre increased. Furthermore, “COVID-19 reduced the value of density by 21 per cent” in transit cities.

The authors said COVID-19 does “weaken” city centres, but they still remain attractive, and the weakness is only in the largest and most dense cities.”

There are only three urban centres in Canada where public transit accounts for more than 20 per cent of work trips: Montreal, Toronto, and Vancouver. Just behind them is Ottawa-Hull, where almost 19 per cent of work trips are made on public transit.

Downtown Toronto constitutes the country’s largest employment hub, with almost 500,000 pre-COVID-19 jobs packed tightly in a small space. Neither downtown Montreal nor Vancouver is as large and dense as Toronto, yet both are still bona fide large employment hubs.

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The most vulnerable are those with exposure to lockdown-sensitive businesses such as clothing retailers, gyms and movie theatres. “Certain types of retail have been impacted in a big way, and the move to online shopping has accelerated rapidly,” says Canaccord Genuity analyst Mark Rothschild.

Office-focused REITs have not been as intensely plagued by rent collection issues, but are seen as vulnerable to longer-term adjustments in work culture. A report from real estate consultancy CBRE Group Inc. pegs the national office vacancy rate, as of the end of 2020, at 13.4 per cent, the highest level since 2004.

“I think the office business has changed for a long time, if not forever,” Rothschild says. “Many people will not be back in the office five days a week any time soon. And that is something that is going to weigh on office REITs for many years.”

I think the office business has changed for a long time, if not forever

Mark Rothschild, analyst, Canaccord Genuity

At least 11 Canadian REITs have responded to pandemic-related cashflow issues by reducing distributions to unitholders, an unusual course of action in the normally placid REIT space. Among the companies who have recently chosen to cut payouts are two of the biggest names in Canadian real estate.

One of them is RioCan Real Estate Investment Trust, which announced on Dec. 3 that it would be cutting its monthly distribution by one third, from $0.12 per unit to $0.08 per unit — the first time in the company’s 26-year history that it has reduced its payouts. In a press release, the company said the distribution cut would bolster its balance sheet by $152 million per year.

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Shoppers walk through a mall in Tampa, Florida, in November.
Shoppers walk through a mall in Tampa, Florida, in November. Photo by Eve Edelhiet/Bloomberg files

Furthermore, Gomez believes Canada is not as “over-retailed” as the U.S. The retail sector consumes less space in Canada than in the U.S. when normalized by sales or consumers. The economical use of retail space has been a plus for Canada during the pandemic.

One of the most noticeable retail changes is the rapid shift to e-commerce. This has favoured traditional e-tailers, such as Amazon.com Inc., but brick-and-mortar retailers already developing their e-channels have also benefited from the large-scale pandemic-driven adoption of e-commerce.

The pandemic has only accelerated pre-pandemic e-commerce trends, Hernandez noted.

Retailers and investors are bracing for an uncertain future as lockdowns have returned to Canada’s more populous parts in response to the pandemic’s second wave. December sales are critical for the bottom line of most retailers, but current lockdowns and restrictions make those sales uncertain. This has severe implications for retail landlords.

In Canada, many enclosed malls are owned by institutional investors, such as real estate investment trusts and pension funds, which are well-capitalized and can withstand disruptions to rent payments better than private landlords.

The rapid shift to e-commerce has favoured traditional e-tailers such as Amazon.
The rapid shift to e-commerce has favoured traditional e-tailers such as Amazon. Photo by Pascal Rossignol/Reuters files

Institutional investors being active in the retail space in Canada implies that landlords would have the means to adapt their retail spaces in response to economic shocks or sudden changes in retail channel preference. The same might not hold true for open and strip malls where private investors dominate.

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“It is opportunity specific,” said Snyder, adding that some retail acquisitions in the U.S. have been pursued to keep the anchor tenant in a shopping mall and preserve so-called co-tenancy provisions. Once an anchor tenant leaves, these co-tenancy clauses can trigger reduced rents for other mall tenants or allow them to get out of lease commitments relatively unscathed.

It’s going to make sense in certain circumstances that these landlords back or buy some of these material retailers

Bradley Snyder, Tiger Capital Group

Some landlords, spooked by the complications of running a retail operation, have sought strategic partners, Snyder said, pointing to another form of deal that has gained traction in the U.S.

Simon Property Group, which has bid on struggling retailers including Brooks Brothers, Forever21 and Lucky Brands, partnered with Authentic Brands Group to acquire apparel and accessories brand Aéropostale, for example.

Still, some industry watchers are skeptical Canadian landlords will follow the path of their U.S. counterparts, suggesting that the risk profile of a retailer doesn’t fit the investment appetite of pension funds in which they are housed.

“I would be surprised if the big pension funds were going down this path,” said Charlene Schafer, a partner specializing in commercial real estate and private equity at law firm Torys LLP in Toronto.

She noted that such investments would have to meet the specific criteria of the risk officers or committees at some of Canada’s largest and most sophisticated pension funds.

Oxford Properties Group, which partly owns Toronto’s Yorkdale Shopping Centre, said the company had only collected 20 per cent of total rent from most of their malls for April. 
Oxford Properties Group partly owns Toronto’s Yorkdale Shopping Centre Photo by Peter J. Thompson/National Post files

Cadillac Fairview, which owns 19 shopping malls across the country including the Toronto Eaton Centre, is part of the Ontario Teachers’ Pension Plan. OMERS, which oversees the pension of municipal workers in Ontario, owns Oxford Properties, another large owner of shopping centres. And Ivanhoé Cambridge, owner of 26 shopping malls across Canada, is housed within the Caisse de dépôt et placement du Québec.

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Regional data in the U.S. also showed varying levels of decline in office demand. Commercial real estate company CBRE Group Inc. reported that 3.6 million square feet of office space joined the sublease inventory in the Baltimore and Washington, D.C., area in the second and third quarter.

Savills PLC, a brokerage in the U.S., reported that Manhattan had its biggest quarterly gain in new sublease space since the Great Recession. In Orlando, CoStar Group reported 1.2 million square feet of sublease space, the highest amount since 1999.

Overseas, the sublease office inventory jumped by 30 per cent in Australia. CBRE data showed that sublease space was almost two per cent of Australia’s office inventory in the third quarter and that Sydney’s sublease inventory increased by 56 per cent.

In many markets, office vacancy rates in the urban core are growing faster than in suburban markets. In Australia, premium quality office space, often located in the urban core, has accounted for the largest increase in sublease space. Like in the residential market, signs that suburban office space is now preferred are emerging.

A big reason for all this new sublease space is teleworking. Kastle Systems International LLC data showed that a mere 27 per cent of employees visited their workspace in the week ending Nov. 10. Physical attendance was even more sparse in the metropolitan New York and San Francisco areas.

The future of extensive office inventories in the urban core is becoming a growing concern for office landlords and tenants. Many believe, or at least hope, that workers will increasingly return to offices once a vaccine is readily available. The desire to socialize and interact with coworkers will be the pull.

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