Real estate investment dark horse

The real estate market continues to evolve, influenced by economic factors and social trends. Over the years, different real estate sectors have taken turns in the spotlight, with office buildings and multifamily housing generally viewed as safe and stable investments. However, recent data suggests things are changing and hotel assets are becoming a more attractive investment option. In this article, we look at how real estate investments in the accommodation industry can become more attractive.

Author: Dannie Li, Shi Jingjianxiong ‘Charlie’ Shi, Monique Rosszell

introduce

Once considered an “underdog” in the real estate investment world, the hospitality industry has experienced a remarkable recovery over the past decade, with particularly notable gains since 2021 driven by a surge in pent-up demand caused by the pandemic. improvement.

Hotels are often considered risky investments due to their seasonality and reliance on short-term rentals (day rentals).

In contrast, the multifamily and office sectors are generally considered safer real estate investments due to stable rental income, resilience during recessions, predictable expenses, and long-term appreciation. However, in the wake of the pandemic, the world has witnessed the emergence of several “new normal” trends, most notably the proliferation of remote work options. This paradigm shift has had a clear detrimental impact on the office industry, with many experts doubting whether the industry will return to its pre-pandemic status.

For Toronto’s multifamily sector, the continued influx of new residents and students, coupled with the shift to remote and hybrid work arrangements, is driving demand for rental properties. Despite these advantages, Toronto’s multifamily assets also face significant challenges, including rent control, rising operating costs, increased supply of new developments, lengthy application processes, and pressure to maintain and upgrade older properties to meet tenant expectations.

To fully appreciate the appeal of lodging investments, it is important to evaluate the asset class’s income-generating performance, understand its unique characteristics and identify market opportunities. Hotels offer a unique combination of income potential and added value to surrounding developments, making them an attractive investment option.

Asset performance comparison

The table below compares historical and forecast performance data for these three asset classes (offices, multifamily and hotels) in downtown Toronto. Performance metrics have been adjusted to reflect annual revenue per square foot, ensuring a consistent basis for comparison. Historical indicators for all three asset classes and forecasts for the office and multifamily sectors are based on supporting role data. Hotel industry forecasts are based on HVS data.

Revenue Performance Comparison – Downtown Toronto Office, Multifamily and Hotels

* Assume for comparison purposes industry average room size of 350 sq. ft. (excluding public spaces and back of house)
Source: CoStar’s historical data and office and multifamily forecasts

While it is generally accepted that the hotel industry’s performance is cyclical, its growth potential becomes particularly attractive when asset holding periods are extended (typically 7-10 years). Hotel revenue in downtown Toronto has grown at a compound annual rate of 6.5% over the past decade, outpacing the performance of other asset classes. Furthermore, the hospitality industry is expected to continue to grow at a faster than inflation rate in the coming years, driven by population growth, increased travel demand and urban revitalization efforts.

In contrast, the multifamily sector is expected to remain strong, benefiting from continued demand for rental housing and stable returns, particularly from population growth. However, the outlook for the office industry is not promising, given that the rise of remote working has resulted in more or less permanent changes in workplace dynamics. These changes have resulted in a continued decline in demand for traditional office space, forcing landlords and investors to rethink their strategies and adapt to new market realities.

Benefits of hotel investment

1) Hotels can be a solution for mixed-use developments: The past few years have also seen a surge in interest from commercial and residential real estate developers looking to pivot into the hospitality sector. HVS is currently tracking more than 20 hotel projects in various stages of development in downtown Toronto, totaling more than 4,000 rooms. Nearly all of these projects are part of mixed-use developments. In fact, there have been only three independent hotels in the past decade; Delta Hotel Toronto, Hotel X and Ace Hotel Torontohave been built in downtown Toronto and the rest are part of mixed-use projects. The trend mirrors a broader movement in major urban centers such as New York and San Francisco. The subdued outlook for other sectors has made developers more cautious about adding more supply to a market that may already be saturated, particularly in the office sector.

Developers leveraging their construction expertise, local market insights and existing land ownership of existing buildings in the city center are naturally inclined to explore hotel projects. This strategic shift promotes community development and creates a vibrant mixed-use community while meeting the growing demand for flexible hotel space.

2) diversification is an important investment principle. By including hotel assets in a portfolio, investors can more effectively spread their risk across multiple real estate sectors. according to Deloitte Commercial Real Estate Outlook 2025hotel assets have experienced a significant rise in investor interest and now rank fifth among the asset classes expected to offer the greatest opportunities to real estate investors over the next 12 to 18 months (behind industrials, digital economy, multifamily and logistics industry). That’s a significant improvement from last year’s 12th-place finish and puts the hotel ahead of many industries, including shopping malls, office buildings, life sciences, senior housing and student housing. Hotels have unique advantages and are an attractive option for investors looking to navigate market uncertainty.

High growth real estate industry

Source: Deloitte 2025 Commercial Real Estate Outlook Survey

Office conversion opportunities

The Greater Toronto Area (GTA) is currently grappling with underutilization of office space, a challenge that is expected to persist over the next two decades. This insight comes from Altus Group Economic Consulting titled “Office needs and policy directions in the Greater Toronto Area”, commissioned by the NAIOP Greater Toronto Chapter. The main reason for the oversupply is the rise of hybrid work models and remote work, which are fundamentally changing the need for office space. As businesses adapt to these new work models, there is a growing demand for traditional office environments Demand has also increased significantly, leaving a large portion of existing office space underutilized.

It is predicted that a large amount of office space will remain vacant in Toronto for the foreseeable future. The report suggests that millions of square feet of space could remain vacant until at least 2041 as businesses continue to reassess space needs in a post-pandemic world. This chronic oversupply could put downward pressure on rents and could even lead to some office buildings being converted to other uses, such as residential or mixed-use developments, to mitigate the economic impact of underutilization.

City councilors are pushing and proposing to convert old and underutilized office buildings into apartments or condos in an effort to combat the city’s housing crisis. However, converting office buildings into residential or mixed-use developments also presents challenges, as purpose-built offices have different floor plans and layout needs than residential buildings, making these conversion projects costly and complex. Nonetheless, success has been achieved throughout North America in converting them for hotel use.

Most renovation projects take place in major U.S. cities such as New York, Chicago, and Boston. In Canada, Calgary has been a leader in providing incentive programs for the adaptive reuse of vacant office space. These measures have contributed to The Westerly Calgary City Center Tapestry Collection by Hiltonand the development of Element Westin. The City of Toronto is currently conducting a study to assess the benefits and risks of office retrofits. Several office renovation projects are already underway, including 88 Queen Street Eastbeing converted into a hotel, and located in Victoria and King Street EastOriginally planned as office space, it is now proposed as a hotel component. Given the large amount of vacant office space, we expect more projects to be announced.

Conclusion

In the rapidly changing real estate investment landscape, the hotel industry has emerged as a surprising and promising investment option. The sector’s resilience during the COVID-19 pandemic, adaptability to market trends and inflation, and industry innovation have allowed it to outperform other asset classes, particularly office assets. However, when deciding to invest in the hospitality industry, it is important to conduct thorough research and consider one’s investment objectives and risk tolerance. As the real estate industry continues to evolve, hotels are a dynamic and interesting industry worth exploring by both experienced and new real estate investors.

about Li Dancong

Dancong ‘Dannie’ Li is a bilingual Mandarin Assistant in HVS’s Toronto office. Dannie earned her Master of Science in Hospitality Business from the University of Houston and gained valuable experience holding positions at various hotels in Houston and Toronto both during and after her academic pursuits. This experience gave her a comprehensive understanding of hotel operations from a global perspective, complementing the analytical skills she acquired during her studies. Dannie became a member of the Canadian Appraisal Association in 2023 and is working towards achieving AACI designation.

about Takeshio Shijing “Charlie”

Jingjianxiong (Charlie) Shi AACI, is Managing Director of HVS’s Toronto operations. After earning a Master of Business Administration from City University of Toronto and a Master of Science in Hospitality Management from the University of Houston, Charlie joined HVS Toronto and worked on hundreds of consulting and evaluation assignments related to existing and existing services across central and eastern Canada. . Recommended hotels and resorts. Charlie is AACI qualified in Canada, publishes annual outlook reports for various markets, and lectures at City University of Toronto. Prior to joining HVS, he held various operational roles in the hospitality industry. He speaks English and Chinese (Mandarin).

about Monique Rozelle

Monique Rosszell AACI, MRIS, is a Senior Managing Partner at HVS Canada, leading the Toronto and Montreal HVS teams. After graduating with a BA in Economics from Queen’s University, she then studied for a Master’s degree in Hotel and Restaurant Management at Ecole Hôtelière de Lausanne in Switzerland, subsequently gaining AACI and MRICS assessment qualifications in Canada. Monique has worked in the hospitality industry for over 30 years and has completed hundreds of valuation and feasibility studies, including transaction and portfolio valuations in Canada and the United States. Her fluency in French gave her a strong influence in Quebec and New Brunswick. She also provides litigation and expert witness support in partnership disputes, hotel expropriations, insurance claims and general hotel industry practices. She speaks at numerous conferences and is the trusted go-to hospitality investment advisor for the central and eastern Canadian lodging industry. Contact information for Monique Rosszell: Phone (416) 686-2260 ext. 23 Email: mrosszell@hvs.com