There isn't a question in anyone's mind that the value of hotels generally across North America declined as a resultof the terrorist attacks in the United States. 

According to Stephen Rushmore, President of HVS International, the value of lodging assets has declined by as much as 10% to 20% in some U.S. markets; however, values are expected to be back to where they were by the end of 2002.

Hotel values are dependent on future income streams and the travel industry has been one of the hardest hit in the days following September 11th. Immediately after the attacks, there was a sharp decline in demand as airplanes were grounded and most travel was suspended. The impact continued into late September and October with the cancellation of conferences and reduced levels of business travel, as travellers avoided flying. Now that a month has passed since the tragic events, demand is beginning to rebound. Conferences are being held, and business travellers are returning to airports and hotels. But there are fears that these events have thrown our economy in a full-blown recession, which creates further challenges for hotels.

Barring any additional terrorist attacks, all indications are that the U.S. economy will return to positive growth territory in the first half of 2002. Canadian recessions typically follow the U.S. lead but historically have been longer and flatter than those experienced in the U.S.

Given that recovery in the U.S. is expected by mid-2002, we anticipate that hotel income streams will also begin to improve at that time. Demand levels will start to rebound and supply growth will decelerate significantly. While supply growth has not been a major concern in most Canadian markets in recent years, due to the difficulty in obtaining financing, it is expected that the recent events will create further hesitancy on the
part of Canadian lenders to finance new development. This hesitancy will benefit the income streams of existing hotels.

Improvements in hotel income in the second half of 2002 is expected not only from increasing revenues, but also from better cost control within the hotels and management companies, as hotels are now forced to find ways to improve efficiency. Some of the inefficiencies accumulated in the years with consistent RevPAR growth will now have to be trimmed.

Another key factor causing an immediate decline in hotel values in Canada is the lack of debt financing available for transactions and a corresponding lack of liquidity in the market. Following the attacks many lenders decided to re-evaluate their lending policies with respect to the hotel industry. In many cases, lenders with already tight lending policies are making them tighter, or pulling out of hotel financing altogether.

The increases in equity required for a transaction to occur has pushed capitalization rates and discount rates above what would have been acceptable prior to September 11th. Therefore, transactions that may occur in the final months of 2001 are not considered market value transactions, as hotel owners will not sell unless it is a distressed situation.

It should be noted that while most hotels are expected to be impacted, the impact will not be felt equally among all markets. Markets that are heavily dependent on airline passengers and major events will be hurt more than drive-in markets. Cities such as Toronto, Montreal, and Vancouver, will be impacted to a greater degree than smaller drive-in markets.
Some Canadian markets have not even stumbled in the weeks following the attacks. Areas in northern Alberta, that are heavily oil- and gas-dependent and have been booming in recent months, have continued to be strong with little or no decline following the attacks.

On another positive note, some are predicting that the impact in Canada could be softened more than the US because, now more than ever, Canada is seen as a safe haven. Some film crews and international meetings have already moved from US locations to Vancouver because it is perceived to be safer.

So what will be the long-term effect of September 11th on hotel values in Canada? Likely, there will not be a long-term effect; however, for those who may be forced to put their hotel on the market in the next six to twelve months, the value has most certainly declined from where it was on September 10th, 2001.