Dark horse of real estate investment

The real estate market is constantly evolving, influenced by economic factors and social trends. Over the years, various real estate sectors have taken turns in the spotlight, with offices and apartment buildings considered safe and stable investment destinations. However, recent data suggests a change in the landscape, with hotel assets emerging as a more attractive investment option. In this article, we explore how real estate investment in the lodging sector is becoming increasingly attractive.

Written by Dancong 'Dannie' Li, Jingjianxiong 'Charlie' Shi, Monique Rosszell

introduction

Once considered the 'underdog' in the world of real estate investment, the hotel sector has made a remarkable comeback over the past decade, particularly from 2021 onwards due to a surge in pent-up demand due to the pandemic.

Hotels were often perceived as high-risk investments due to their reliance on seasonality and short-term leases (i.e., daily payments).

By comparison, the multifamily and office sectors are considered safer real estate investments due to their stable rental income, resilience during economic downturns, predictable expenses, and strong long-term value. I'm here. However, in the wake of the pandemic, the world has seen the emergence of several “new normal” trends, most notably the proliferation of remote work options. This paradigm shift has had a noticeable negative impact on the office sector, with many experts wondering whether the sector will ever return to its pre-pandemic state.

The continued influx of new residents and students, combined with the shift to remote and hybrid working arrangements, has increased the need for rental properties in Toronto's multifamily housing sector. Despite these strengths, multifamily housing in Toronto continues to struggle with challenges such as rent control, rising operating costs, an increasing supply of new developments, longer application processes, and pressure to maintain and upgrade older properties to meet tenant expectations. , also faces notable challenges.

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

Asset performance comparison

The table below compares historical and projected performance data for these three asset classes (office, multifamily, and hotel) in downtown Toronto. Performance metrics are calibrated to reflect annual revenue per square foot, ensuring a consistent basis for comparison. Historical metrics for all three asset classes and forecasts for the office and multifamily sectors are based on CoStar data. Forecasts for the hotel sector are based on HVS data.

Comparing Revenue Performance – Downtown Toronto Offices, Apartments, and Hotels

* For comparison purposes, let's assume the industry average is 350 square feet per room (excluding public spaces and backyards).
Source: CoStar for historical data and office and multifamily forecasts

While it is generally recognized that the hotel sector's performance is cyclical, its growth potential becomes particularly attractive as assets are held for extended periods (typically 7-10 years). Over the past decade, hotel revenue in downtown Toronto has experienced compound annual growth of 6.5%, outperforming other asset classes. Additionally, the hotel sector is expected to continue to grow above inflation in the coming years due to population growth, increased travel demand, and urban revitalization efforts.

In contrast, the multifamily sector is expected to remain strong, benefiting from consistent demand for rental housing and stable revenues, particularly from population growth. However, the outlook for the office sector is less optimistic, given the more or less permanent changes in workplace dynamics due to increased remote working. These changes have led to a continued decline in demand for traditional office space, forcing landlords and investors to rethink their strategies and adapt to new market realities.

Advantages of hotel investment

1) Hotels serve as a solution for mixed-use developments. In recent years, there has also been increased interest from commercial and residential real estate developers looking to transition into the hotel sector. HVS is currently tracking more than 20 hotel projects in various stages of development totaling more than 4,000 rooms in downtown Toronto. Most of these projects are part of mixed-use developments. In fact, in the past decade, only three standalone hotels have been built in downtown Toronto: Delta Hotel Toronto, Hotel X, and Ace Hotel Toronto, with the rest being part of mixed-use projects. This trend reflects broader movements in major urban centers such as New York and San Francisco. The subdued outlook in other sectors has made developers wary of adding further supply to a potentially saturated market, particularly in the office sector.

Developers leveraging construction expertise, local market insight, and existing land ownership, including established buildings in the downtown core, are naturally more likely to seek out hospitality projects. This strategic shift will enhance community development and create a vibrant mixed-use district while capitalizing on the growing demand for flexible hotel space.

2) Diversification is an important investment principle. Including hotel assets in a portfolio allows investors to more effectively spread their risk across multiple real estate sectors. According to Deloitte's 2025 Commercial Real Estate Outlook, hotel assets are among the asset classes that have seen a significant rise in investor interest and are expected to offer the greatest opportunities for real estate investors over the next 12 to 18 months. It currently ranks 5th in the world (behind industry, digital economy and mixed economy). -family, logistics department). This is a notable improvement from last year's 12th place, with hotels outperforming many sectors including shopping malls, offices, life sciences, senior housing, and student housing. Hotels have unique advantages that make them an attractive option for investors looking to weather market uncertainty.

High growth real estate sector

Source: Deloitte 2025 Commercial Real Estate Outlook Survey

Office conversion opportunities

The Greater Toronto Area (GTA) is currently grappling with underutilized office space, a challenge that is expected to continue for the next 20 years. This insight was obtained by Altus Group Economy Consulting in a report commissioned by the NAIOP Greater Toronto Chapter titled “Office Needs and Policy Directions in the GTA.” The oversupply is primarily driven by the rise of hybrid work models and remote work, which have fundamentally changed office space requirements. As companies adapt to these new working patterns, demand for traditional office environments has decreased significantly, leaving a large portion of existing office stock underutilized.

Projections suggest a significant amount of office space in Toronto will remain vacant for some time to come. The report suggests that millions of square feet could be left unused until at least 2041 as businesses continue to reassess their space needs in a post-pandemic world. This prolonged oversupply is likely to put downward pressure on rental rates, and some office buildings will be repurposed for alternative uses such as housing or mixed-use developments to reduce the economic impact of this underutilization. It's even possible.

City Council members are pushing and proposing converting old, underused office buildings into apartments and condos to combat the city's housing crisis. But converting office buildings into residential or mixed-use developments also faces challenges. Dedicated offices have different floor plan and layout needs than residential buildings, making these conversion projects costly and complex. Nevertheless, it has been successfully converted to hotel uses across North America.

Most conversion projects are implemented in major U.S. cities such as New York, Chicago, and Boston. In Canada, Calgary has been a leader in offering incentive programs for the adaptive reuse of vacant office space. These efforts led to the opening of Westley Calgary Downtown, the Tapestry Collection of Hilton Hotels, and the development of Westin's Element Hotel. The City of Toronto is currently conducting a study to assess the benefits and risks of office conversion. Several office conversion projects, including 88 Queen Street East, which is being converted into a hotel, and the mixed-use development at Victoria and King Street East, which was originally planned as office space and now has a proposed hotel component. is already underway. Given the abundance of available office space, expect more projects to be announced.

lastly

In the rapidly changing real estate investment environment, the hotel sector has emerged as a surprising and promising investment option. The sector's resilience during the COVID-19 pandemic, its ability to adapt to market trends and inflation, and industry innovation have contributed to its outperformance compared to other asset classes, particularly the office asset class. However, when deciding to invest in the hotel sector, it is essential to conduct thorough research and consider your individual investment objectives and risk tolerance. As the real estate industry continues to evolve, hotels are a dynamic and interesting area worth exploring for both experienced and new real estate investors.

About Dancong 'Dannie' Li

Dancong 'Dannie' Li is a bilingual, Chinese-speaking associate in the HVS office in Toronto. Danny earned a Master of Science in Hospitality Business from the University of Houston and gained valuable experience working at various hotels in both Houston and Toronto during and after his studies. This experience gave her a comprehensive understanding of hotel operations from a global perspective, complementing the analytical skills she acquired through her research. Danny became a member of the Appraisal Association of Canada in 2023 and is working toward AACI accreditation.

About Jingjianxiong “Charlie” Shi

Jingjianxiong (Charlie) Shi AACI is Managing Director of HVS' Toronto office. After earning a Master of Business Administration from Toronto Metropolitan University and a Master of Science in Hospitality Management from the University of Houston, Charlie joined HVS Toronto to join hundreds of existing and associated consulting and I have been working on evaluation work. Suggested hotels and resorts. Charlie holds an AACI rating designation in Canada, publishes annual outlook reports for various markets, and speaks at Toronto Metropolitan University. Prior to joining HVS, he held various operational roles in the hospitality industry. He speaks both English and Chinese (Mandarin).

About Monique Roselle

Monique Rosszell AACI (MRICS) is a senior managing partner at HVS Canada and leads the HVS teams in Toronto and Montreal. After earning a bachelor's degree in economics from Queen's University, he enrolled in a master's program in hotel and restaurant management at the École Hôtelière de Lausanne in Switzerland, and earned both AACI and MRICS assessment certifications in Canada. Monique has worked in the hotel industry for over 30 years and has completed hundreds of evaluations and feasibility studies, including transaction and portfolio evaluations throughout Canada and the United States. Her fluency in French gives her a strong presence in Quebec and New Brunswick. We also provide litigation and expert witness support in partnership disputes, hotel expropriation, insurance claims, and general hotel industry norms. She has spoken at numerous conferences and is a trusted hotel industry investment advisor for the lodging industry in central and eastern Canada. Contact information for Monique Rosszell: Phone (416) 686-2260 Ext. 23 Email: [email protected]