Hospitality took a beating during pandemic lockdowns. Hotels were empty, restaurants closed, tourism evaporated.
Three years later, where does the sector stand? And what does it mean for financing?
The Recovery Status
Let’s start with the headline: hospitality has largely recovered, but not uniformly.
Business travel has returned to maybe 70% to 80% of pre-pandemic levels. Corporate travel policies changed, video conferencing reduced some travel need, and companies are more cautious about travel spending.
Leisure travel has bounced back strongly. People want to travel, take vacations, experience things. Canadian domestic tourism is robust, and international visitors have returned.
Hotel occupancy in major Canadian cities is running 65% to 75%, approaching normal levels. RevPAR (revenue per available room) is at or above 2019 levels in many markets because room rates have increased even if occupancy isn’t quite back to peak.
Restaurants have recovered in most markets, though the sector faces labor shortages and cost pressures that challenge profitability.
The picture varies significantly by market segment and location.
Market Segmentation
Different parts of hospitality are performing very differently.
Business hotels in downtown cores are still adjusting to reduced business travel and office occupancy. Hotels that depended heavily on corporate travelers and conference attendees are below 2019 performance.
Airport hotels have recovered well. Travel is back, and people need places to stay near airports.
Resort and destination properties are doing very well. Banff, Whistler, Niagara Falls, Mont-Tremblant, tourism destinations across Canada are seeing strong demand.
Budget and midscale hotels along highways and in suburban locations have recovered solidly. Road trips, visiting friends and family, practical travel is all back.
Urban boutique hotels are mixed. Those in vibrant neighborhoods are doing well. Those that depended on downtown office workers and convention traffic are slower.
Restaurants range from thriving to struggling depending on location, concept, and management. Casual dining and fast-casual have done well. Fine dining has recovered but faces challenges from reduced corporate entertainment spending.
Financing Challenges
Hospitality financing is more complex than other commercial real estate for several reasons.
Operating businesses, not just real estate. Hotels and restaurants are businesses that happen to occupy real estate. Their value depends on operational performance, not just location and building quality.
Revenue volatility. Hospitality revenue can swing dramatically based on seasonality, economic conditions, events, and trends. Lenders don’t like volatility.
Management dependent. Good management can make a mediocre hotel profitable. Poor management can kill a great property. Lenders need to evaluate operator quality, not just physical assets.
Higher capital requirements. Hotels and restaurants require ongoing capital investment in furniture, fixtures, equipment, and renovations to stay competitive. This creates ongoing cash demands.
Shorter economic life. Hotel room design, restaurant concepts, these become dated faster than office buildings or warehouses. Properties need refreshing more frequently.
All of this makes hospitality harder to finance than multifamily or industrial properties.
What Lenders Want to See
If you’re seeking hospitality financing, here’s what improves your approval chances.
Operating history demonstrating recovery. Lenders want to see that your property has rebounded from pandemic levels. They’re looking at recent trailing 12-month performance.
Strong occupancy and rates. For hotels, 65%+ occupancy with ADR (average daily rate) at or above market norms. For restaurants, sales trends and profitability.
Experienced operators. First-time hotel owners or restaurateurs are hard to finance. Lenders want to see track records of successful operation.
Brand affiliation benefits. Branded hotels (Marriott, Hilton, IHG) are generally easier to finance than independent properties because the brand provides marketing, reservations, and operational support.
Conservative leverage. Hospitality typically finances at 60% to 65% LTV, lower than multi-family or industrial. Lenders want equity cushion.
Strong markets. Properties in established tourism destinations or strong economic centers are preferred over secondary markets.
Franchise vs. Independent
Hotel properties face a choice: brand affiliation or independent operation.
Branded hotels pay franchise fees (typically 8% to 12% of revenue) but get reservation systems, loyalty programs, marketing support, and operational standards. They’re easier to finance because lenders understand the brand performance benchmarks.
Independent hotels keep all the revenue and have more operational flexibility. But they lose the brand advantages and are harder to finance because lenders have less comparability.
The trend has been toward brands. Financing availability is a factor in that trend.
Boutique independent hotels can work in unique locations or for distinctive concepts, but they require exceptional management and often higher equity.
Restaurant Financing Specifically
Restaurants are particularly challenging to finance with conventional mortgages.
Most restaurants lease their space rather than own it. When they do own, the value is heavily in the operating business, not the real estate.
Lenders typically treat restaurant financing as business lending rather than real estate lending. Rates are higher, terms are shorter, loan-to-value is lower.
SBA (Small Business Administration) loans in the U.S. are a common restaurant financing tool, but Canada doesn’t have an exact equivalent. BDC (Business Development Bank of Canada) does some restaurant lending, but it’s more limited.
Many restaurants finance through owner equity, equipment leasing, supplier credit, and smaller business loans rather than traditional mortgages.
From a real estate perspective, properties occupied by successful restaurants as tenants can be valuable. But that’s landlord financing, not restaurateur financing.
Resort Property Economics
Destination resort properties have their own dynamics.
Ski resorts, lakefront properties, mountain lodges, these can generate strong seasonal revenue but often have limited year-round income.
Lenders want to see either very strong peak season performance that covers year-round costs or successful shoulder season programs that extend the operating calendar.
Resort property values are driven by cap rates applied to normalized operating income. Lenders will stress test using conservative occupancy and rate assumptions.
Financing resort properties typically requires 35% to 40% equity. The seasonality and market dependence make lenders cautious.
But well-operated resorts in established destinations can get financed. Lenders just need to see demonstrated performance and experienced management.
The Conference and Event Business
Group business (conferences, weddings, events) is an important revenue stream for many hotels.
This business was devastated during the pandemic and has been slower to recover than leisure travel.
Corporate conferences are happening but often smaller and shorter than pre-pandemic. Hybrid virtual-in-person formats have reduced some demand.
Social events (weddings, celebrations) have recovered strongly. Pent-up demand from pandemic deferrals has created busy event calendars.
Hotels with significant conference and ballroom facilities need to demonstrate that this business has returned. Lenders want to see group booking pace and revenue forecasts.
The Labor Challenge
Hospitality faces significant labor shortages and cost pressures.
Finding and retaining housekeeping staff, front desk personnel, cooks, servers, this is challenging across Canada.
Wages have increased notably. Entry-level hospitality wages that were $15 to $17 per hour pre-pandemic are now $18 to $22 in many markets.
Labor cost increases need to be offset by higher room rates or improved efficiency. Not all properties have been able to maintain margins.
Lenders evaluate labor cost trends and whether properties can maintain profitability with current wage levels.
Regional Tourism Trends
Tourism patterns vary across Canada.
BC interior and Rockies: Strong demand for mountain resorts, wine country, outdoor recreation. Financing is available for quality properties.
Toronto: Business travel recovery is moderate. Leisure tourism is good. Hotel financing is available but competitive market creates valuation challenges.
Montreal: Strong European tourism, festivals, cultural appeal. French language requirement for staff can be challenging but market is solid.
Atlantic Canada: Growing tourism interest as “undiscovered” destination. Property values are more affordable but lending options may be more limited.
Prairies: More business-dependent, less pure tourism. Markets follow general economic conditions.
Understanding regional tourism dynamics affects financing strategies.
The Short-Term Rental Factor
Airbnb and short-term rentals have disrupted traditional hospitality in complex ways.
They compete with hotels for leisure travelers. But they’ve also created demand for travel that might not have existed otherwise.
Some investors are buying residential properties specifically for short-term rental income. This is a different business from traditional hotels but serves similar markets.
Financing short-term rental properties as investment properties is more common than financing them as hospitality businesses. Residential mortgage lending applies, though some lenders restrict short-term rental use.
The regulatory environment for short-term rentals is tightening in many cities. Toronto, Vancouver, Montreal have all implemented restrictions. This affects both the competition to hotels and the viability of short-term rental investment.
Capital Improvement Needs
Hospitality properties require ongoing capital investment.
Hotels need to refresh rooms every 5 to 7 years, renovate public spaces regularly, and update amenities to stay competitive. This is called PIPreserve (property improvement plan) or CapEx (capital expenditures) planning.
Lenders want to see that adequate reserves are set aside for capital improvements. Deferred maintenance kills hotel value.
Franchise agreements typically require properties to meet brand standards, which forces regular investment. This is both costly and value-preserving.
Restaurant properties need equipment replacement, interior refreshes, and concept updates to maintain relevance.
Factoring capital requirements into cash flow projections is essential for financing underwriting.
The Investment Opportunity
Despite challenges, hospitality investment opportunities exist.
Value-add hotel properties that need renovation or repositioning can generate strong returns if acquired right and improved effectively.
Conversion opportunities: Converting office buildings or other properties to hotels in markets with limited supply.
New development in underserved markets where demand exists but supply is limited.
Specialty niches like extended-stay hotels, which serve business relocations and longer-term stays, have performed well.
All require appropriate equity, operational expertise, and patient capital, but opportunities exist for knowledgeable investors.
Lender Types
Different lenders serve hospitality differently.
CMHC provides mortgage insurance for some hotels that meet criteria, allowing 80%+ LTV financing. But approval is rigorous and limited to certain projects.
Traditional banks lend to hospitality but cautiously. They prefer branded properties, experienced operators, and strong markets. 60% to 65% LTV is typical.
Private lenders fill gaps for properties that don’t fit conventional criteria. Rates are 8% to 12%, terms are shorter, but capital is available.
REITS and institutional investors own significant hotel portfolios and can be buyers or partners for larger properties.
Working with financing advisors who understand hospitality lending is valuable given the complexity.
Looking Forward
Hospitality should continue recovering through 2026 and beyond.
Travel demand is fundamentally strong. People value experiences, and tourism will continue.
The sector has adapted to post-pandemic realities: more leisure travel, less business travel, flexible booking policies, health consciousness.
Properties that have navigated the recovery successfully are well-positioned for continued performance.
Financing will remain more challenging than other commercial real estate, but it’s available for strong properties and operators.
Partner With Hospitality Lending Specialists
Hospitality financing requires understanding both real estate and operating businesses.
At Creek Road Financial Inc., we work with hotel owners and hospitality operators across Canada. We understand what lenders look for in hospitality deals and can help structure financing for optimal terms.
Whether you’re acquiring a hotel, refinancing an existing property, or developing new hospitality assets, we can help you navigate the lending landscape.
Let’s discuss your hospitality financing needs and explore solutions that work for your project.