Market Pulse: Toronto Airport Strip, ON, Canada

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Market Pulse: Toronto Airport Strip, ON, Canada October 24, 2017 By Jingjianxiong (Charlie) Shi, Cedric Oberlin, Monique Rosszell Toronto Pearson International Airport YYZ is the primary airport for

Toronto Pearson is the largest and busiest airport in Canada and North America s second busiest airport in terms of international passengers.

YYZ has seen an increase in air capacity lately. A number of airlines are offering new routes or have added more flights to existing routes.

1 Market Pulse: Toronto Airport Strip, ON, Canada October 24, 2017 By Jingjianxiong (Charlie) Shi, Cedric Oberlin, Monique Rosszell Toronto Pearson International Airport YYZ is the primary airport for the Golden Horseshoe, an urban agglomeration including and surrounding Toronto that is home to approximately 25% of Canada's population. Toronto Pearson is the largest and busiest airport in Canada and North America s second busiest airport in terms of international passengers. YYZ is well on its way to reaching mega hub status airports that handle more than 50 million passengers, including 20 million international passengers, and connect to 80% of the global economy. YYZ has seen an increase in air capacity lately. A number of airlines are offering new routes or have added more flights to existing routes. So far in 2017, Air Canada has launched new international service between Toronto and Mumbai, Berlin, Memphis, San Antonio, and Savannah. In the summer of 2017, WestJet increased the frequency of flights on its routes from Toronto to Orlando, Los Angeles, Las Vegas, Summary The YYZ hotel market has been capitalizing on growth in airport traffic. Hotel revenue growth is expected to shift from occupancy gains to rate increases as occupancy levels remain high and capital improvements to lodging facilities are completed. Montreal, and Moncton, respectively. YYZ Passenger Traffic Expected to Set New Record Again in Views Comments FILED UNDER CATEGORIES Canada North America Toronto, ON, Canada Ontario, Canada Source: Toronto Pearson International Airport Major Projects For the past 12 years, the three terminal airport has been undergoing a $4.4 billion CAD redevelopment program in order to help the airport meet the future air transportation needs of the Greater Toronto Area. The airport will be capable of accommodating up to 65 million passengers a year by The Terminal 3 Enhancement Project, which involves improved retail, energy efficiency initiatives, and new security screening in advance of United States Customs and Immigration Processing, is underway and scheduled for completion this year. In 2016, the capital spending on airport infrastructure amounted to more than $128 million. In early 2016, the Greater Toronto Airports Authority GTAA announced plans to develop an $11.2 billion

2 regional transit hub to connect the airport area with key employment and residential areas throughout the Greater Golden Horseshoe. The proposed transit centre is to be located on 68 hectares of GTAA land across Airport Road from Terminals 1 and 3. A number of transit lines, such as trains, light rail cars, and bus lines, would all circulate through the hub. A new mixed use commercial area that will include office, retail, hotel, and other commercial space will be included in the development. In August 2017, the GTAA launched a Request For Proposal to procure design consulting services for the concept development of the regional transit centre. The target completion date for the project is The new Union Pearson UP Express LRT line was launched in June 2015 and is a key infrastructure enhancement that better integrates the airport with Downtown Toronto. As traffic between Downtown Toronto and the airport is expected to double over the next ten years, the rail service will become essential to the efficiency of Toronto s transportation infrastructure. In addition, the Eglinton Crosstown LRT is expected to connect to the UP Express line upon completion in 2021, enhancing the accessibility between the airport and the northern Toronto area. The impact of the UP Express LRT on the YYZ hotel market has been generally positive, especially since the increasing rates at downtown hotels have been encouraging customers to stay in the airport area. Hotels that are farther away from the UP Express train station have yet to see any direct benefit aside from a small amount of overflow demand from hotels that are close to the train station, such as the Sheraton Gateway Toronto Airport and the Alt Hotel Toronto Airport, during periods of compression. In April 2017, Woodbine Entertainment Group WEG unveiled the completed master plan for the Woodbine Racetrack lands. Woodbine s privately owned 684 acre site will be transformed in the years to come into a city within a within a city, creating a new urban heart for northwest Toronto. The vision would have Woodbine remain the ultimate destination for horse racing and gaming while adding new and expanded entertainment and cultural offerings, including dining, hotel, shopping, office space, post secondary education, recreation, and health and wellness amenities, along with options for urban residential living. A new concert venue with the ability to accommodate as many as 5,000 spectators could also be built next to the racetrack. The first phase of development includes an expanded gaming district complete with integrated entertainment, hospitality, and related amenities. The first phase will attract approximately 12 to 15 million people per year, more than double the current number of visitors. In August 2017, the Ontario Lottery and Gaming Corporation announced the chosen operator for the new full fledged casino, a consortium formed by the Great Canadian Gaming Corporation and Brookfield Business Partners. Woodbine is hoping to break ground on the project by next fall. At the end of September 2017, the City of Toronto still had the applications for rezoning and subdivision under review. Hotel Market Supply According to STR, there are more than 10,000 hotel rooms in the Toronto Airport/West region. The area thus has more hotel rooms than some major Canadian cities, including Calgary, Ottawa, Quebec City, Halifax, Winnipeg, and St. John s. The market has seen strong growth in the past three years. In the discussion of the factors affecting the near term vitality of the Toronto Airport hotel market that follows,

the focus is on the 23 hotels that are located along the Airport Strip, defined as the portion of

Together, these hotels have more than 6,000 rooms.

Airport Strip. Since 2015, HVS has completed more than 15 engagements on the Airport Strip.

3 the focus is on the 23 hotels that are located along the Airport Strip, defined as the portion of Airport and Dixon Road between Derry Road East and Martin Grove Road. Together, these hotels have more than 6,000 rooms. These lodging facilities generally perform better than the hotels that are more distant from the Airport Strip. Since 2015, HVS has completed more than 15 engagements on the Airport Strip. Hotels on the Toronto Airport Strip Source: HVS Largest Portion of Branded Rooms on the Toronto Airport Strip = Upper Upscale Class Largest Portion of Branded Rooms in the Country = Upper Midscale Class Source: STR

Supply Changes There has been no new hotel development on the Toronto Airport Strip since the opening of the Alt Hotel Toronto Pearson in 2012.

With these sales have come a number of major hotel renovation, repositioning, and rebranding initiatives.

4 Supply Changes There has been no new hotel development on the Toronto Airport Strip since the opening of the Alt Hotel Toronto Pearson in Given the ongoing improvement in overall market fundamentals, however, the market has seen numerous changes in hotel ownership during the past three years. With these sales have come a number of major hotel renovation, repositioning, and rebranding initiatives. Source: HVS The hotels that have gone through extensive renovations without a change in brand include the Westin Toronto Airport, the Holiday Inn Toronto International Airport, the Radisson Suites Hotel Toronto Airport, the Hilton Toronto Airport, and the Sheraton Toronto Airport Hotel & Conference Centre. Several hotel development projects are now in the pipeline for the Airport Strip. Source: HVS Hotel Market Performance and Forecast With the recession and the resulting slowdown in international travel, the market wide occupancy hit a historical low point of approximately 60% in Lodging demand for hotels on the Airport Strip has grown rapidly since 2010, spurred by the recovery in the North American economy; however, the average daily rate ADR remained on a downward trend, in part because hoteliers relied heavily on low rated demand, such as airline crew contracts, to fill rooms. These contracts, which typically cover a period of one to two years, heavily favour airlines in the form of low rates, minimal year over year rate increases, short booking windows, and light cancellation penalties. The market wide occupancy reached 73% in 2014, the highest it had been since 2005, which created the conditions to support ADR growth. The high level of competition had been keeping hotel managers from negotiating better rates, but this pressure eased with the further strengthening of demand. The Airport Strip market set new records for both occupancy and ADR again in 2015 and Local hoteliers have become more selective in the demand that they take on since the market wide occupancy reached 75% in As most of the hotels on the strip have undergone or are undergoing some form of renovation, owners and managers have shifted their focus away from low rated leisure and airlinecrew demand in favour of corporate accounts that show less rate resistance. Given the high level of occupancy in the market area, most airport hotels have finally been able to negotiate better rates with airlines or are turning away airline business altogether. Direct Correlation between Passenger Traffic and Hotel Demand

Source: Toronto Pearson International Airport, STR, HVS The correlation between the amount of passenger traffic and the demand for airport hotels is apparent.

5 Source: Toronto Pearson International Airport, STR, HVS The correlation between the amount of passenger traffic and the demand for airport hotels is apparent. With the growth in passenger traffic at YYZ, demand for the hotels on the Airport Strip has likewise increased. The Hotel Demand to Passenger Traffic Ratio calculated by Number of Hotel Room Nights/Passenger Count can be used to evaluate the trend at airport lodging markets as it measures the percentage of airport pessengers that are captured by the airport hotels. For the 10 year period from 2005 to 2014, the Hotel Demand to Passenger Traffic Ratio for the Toronto Airport Strip hovered between 4.0% to 4.4%. The ratio dropped below 4.0% in 2016, and it is expected to decrease further by the end of The decrease can be partly attributed to the fact that hotels on the strip are not able to fully accommodate the surge in demand, resulting in unaccomodated demand which must be displaced to neighbouring hotel markets. Unaccommodated demand in the Toronto Airport market is high on weekdays, as a result of strong commercial demand, and on weekends in the summer, given the high leisure demand. The decrease in the Hotel Demand to Passenger Traffic Ratio is also a result of the hotels on the strip taking the initiative to turn away some low rated business, which prevented additional demand growth. This strategy aims to increase hotel ADR and thus bottom line performance. Passenger Traffic to Occupied Room Nights Decreases as Hotels Become More Selective Source: Toronto Pearson International Airport, STR, HVS The robust rate growth in Downtown Toronto has also supported rate growth in the airport market. The rate disparity between the two markets has widened greatly. From 2005 to 2013, the Downtown Toronto market commanded a rate premium between $40 and $60 over the Airport Strip lodging market, but this gap has increased considerably in recent years and is projected to reach nearly $100 in This rate difference, coupled with the availability of the UP Express since 2015, has encouraged visitors to stay in the airport area. The widened rate disparity also indicates that the airport market has the potential for greater rate growth in the near term.

The Rate Disparity between the Airport Strip

since 2009 and will Reach Nearly $100 in 2017

STR, HVS The Outlook for the Toronto Airport

Source: STR, HVS Hotel Transactions Source:

confirmed hotel transactions that have taken

6 The Rate Disparity between the Airport Strip and Downtown Toronto has Increased Steadily since 2009 and will Reach Nearly $100 in 2017 Source: Toronto Pearson International Airport, STR, HVS The Outlook for the Toronto Airport Strip Lodging Market is Strong Occupancy ADR Source: STR, HVS Hotel Transactions Source: STR, HVS The following table details the confirmed hotel transactions that have taken place on the Toronto Airport Strip since Source: HVS & Colliers

Closing Remarks The Toronto Airport Strip is experiencing a period of economic expansion, driven primarily by increasing passenger traffic at YYZ.

As the annual passenger count at YYZ is expected to reach 65 million by 2033, the outlook for the Toronto Airport Strip lodging market is positive.

7 Closing Remarks The Toronto Airport Strip is experiencing a period of economic expansion, driven primarily by increasing passenger traffic at YYZ. After many years of price competition, hotels on the strip are now capitalizing on the demand growth by shifting their market segmentation towards higher rated patrons. As the annual passenger count at YYZ is expected to reach 65 million by 2033, the outlook for the Toronto Airport Strip lodging market is positive. The capital investments that have been put towards improving the existing lodging supply in the past few years are expected to help hoteliers further push up rates. The growth in airport traffic, the weak Canadian dollar, the improved hotel facilities, the UP Express bringing downtown much closer, and the strengthened local economy are all contributing to a healthy operating environment for the hotels on the Toronto Airport Strip. About Jingjianxiong (Charlie) Shi Jingjianxiong Charlie Shi, an HVS Associate, joined HVS Toronto s Consulting & Valuation team upon completion of a Master of Business Administration degree from Ryerson University and a Master of Science Degree from University of Houston. Prior to joining HVS, he worked in various operational roles in the hospitality industry. Charlie works on various consulting and valuation assignments across Eastern Canada related to existing and proposed hotels. He speaks both English and Chinese Mandarin. Contact Jingjianxiong Charlie Shi at ext. 22 or cshi@hvs.com About Cedric Oberlin Cedric Oberlin, an Associate with HVS Toronto, earned his Master s degree in Social Economy from Université de Haute Alsace in France, as well as his Bachelor in International Hospitality Management majoring in Finance from Ecole Hôtelière de Lausanne in Switzerland. Bilingual in French and English, Cedric also held various positions in hotel and restaurant operations with companies based in Europe and North and South America, as well as Russia and Polynesia. Contact Cedric Oberlin at ext. 26 or coberlin@hvs.com About Monique Rosszell Monique Rosszell is the Managing Director of HVS Toronto. Upon attaining a bachelor's degree in economics from Queen's University, she subsequently enrolled in the Master's program in Hotel and Restaurant Management at the Ecole Hoteliere de Lausanne and then attained both her AACI and her MRICS appraisal designations in Canada. She also offers litigation and expert witness support, speaks at numerous conferences, and is a trusted advisor within the lodging industry. Contact information for Monique Rosszell: Phone ext 23 mrosszell@hvs.com

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