This study, based on an analysis of the market for the hotel industry in the coming years, evaluates the potential for hotel development in Old Montréal over the next decade.

Generally speaking, the different socio-economic indicators (employment growth, value of construction permits, industrial and commercial investment, office occupancy rates), combined with the ongoing revitalization of the downtown core and the historic district point to a healthy economic situation and a favourable outlook for the greater Montréal area.

The socio-economic context in Old Montréal

Old Montréal has been enjoying continuing investment in its infrastructure, residential accommodation and tourism facilities of late. The development of specialized vocations, for instance in the International Quarter and the Cité du multimédia, has also greatly helped to revitalize the district. The expansion of the Palais des congrès will make it one of the gateways to Old Montréal and help to further strengthen the identity of the International Quarter and reinforce its links with the historic district.

Tourism is growing at a very good pace in Montréal and throughout Québec. In fact, in 1999 Montréal had its best tourist season since Expo 67. The wide variety of tourist attractions, Montréal's unique character, a favourable exchange rate and a larger marketing budget have all contributed to this success, making Montréal a very popular international tourist destination. The historic district racked up some 3.5 million person-visits in 1998, or one-third of all visits to the greater Montréal area, making it a major component of the tourism product in Montréal.

Other factors, such as the upgraded entry points to the historic district and the renovations to many public squares, the waterfront development related to the restoration of the Lachine Canal and the growing share of the international convention market that the new and enlarged Palais des congrès will be sure to attract, promise continuing growth in Old Montréal in the years to come.

All these elements add to the potential of the historic quarter as a destination for tourists who come for pleasure, conventions or business, and open the way for the development of hotels specific to the district to welcome this larger clientele.

The hotel context in the Montréal region

After a recession at the beginning of each of the last two decades, a development boom in the 1980s and, more recently, seven consecutive years of rising demand and stable supply, the Montréal hotel market has now reached an acceptable level, with an overall occupancy rate of approximately 70%. There has been a significant improvement, in other words, for current occupancy rates actually exceed the previously unmatched peaks reached in the 1980s.

Just recently, this increase in occupancy rates has made it possible to take the long-awaited step of adjusting average room rates, which nevertheless remain lower than in the other major Canadian cities of Toronto and Vancouver. The resulting appreciation in the value of Montréal hotels is essential for new development to occur, for when acquisition costs approach construction costs, promoters become interested in undertaking new projects.

Conditions are now ripe for a new phase of hotel development in greater Montréal. This situation is clearly favourable for new hotel projects in Old Montréal, to complement the existing supply in the downtown area.

The hotel context in the of Old Montréal catchment area

The Old Montréal catchment area is bounded by the St. Lawrence River to the south and University Street to the west, Sainte-Catherine Street to the north and Berri Street to the east (see the attached map).

If we compare the trends in hotel supply and demand in the last ten years in the whole downtown area and in the catchment area, it can be seen that the indicators have risen most in this latter area (Table 1).

Although the growing supply has stimulated demand in the catchment area, analyses show that hotel development there is not a response to overflow from downtown hotels, but rather results from the needs of the local market.

Table 1
ANNUAL AVERAGE GROWTH OF SUPPLY AND DEMAND
OLD MONTRÉAL CATCHMENT AREA AND DOWNTOWN
(1988 TO 1998)

In 1998, the occupancy rate in the Old Montréal catchment area was comparable with that of the downtown area and other parts of the city, at 70%. Given the seasonal nature of demand in Montréal, this rate was equivalent to saturation at some points during the year. Consequently, the only way to respond to much of the anticipated growth in demand is by increasing the supply within this catchment area. Such an increase is all the more justified in that the revitalization of Old Montréal, the development of the Cité du multimédia and the emergence of the International Quarter (with the ICAO headquarters and the expansion of the Palais des congrès), are all important catalysts for the growth of the hotel market.

Hotel potential in Old Montréal

In order to estimate the capacity to absorb new hotels in this district in the coming decade, forecast of trends in supply and demand was drawn up, based on an analysis of the socio-economic, tourism and hotel contexts shaping the development of the hotel market in the Old Montréal catchment area.

These projections take into account probable short-term trends in supply, estimated demand growth rates for each clientele segment, based on historic trends, and the possible impact of events that could affect local demand.

Forecasts of trends in supply were drawn up on the assumption that 981 rooms would be added within the next two years. These projects are already planned or are currently being carried out. Close to half of these rooms are included in the proposed convention centre hotel coinciding with the expansion of the Palais des congrès.

Projections of demand for the next ten years, on the other hand, are based on two scenarios, one conservative and the other optimistic. This approach makes it possible to take account of events that might not have been foreseen by this study and that could influence the hotel potential of the area. An annual growth rate of 2.5%, reflecting the predicted economic growth for Québec, was used and applied to the various tourist clientele segments. Accordingly, the average annual growth rate for demand during the projection period should be on the order of 3.2% (conservative scenario) to 4.2% (optimistic scenario).

To determine the number of additional rooms that could be absorbed by the market, a stable occupancy rate of 65% was selected as an acceptable threshold. This rate reflects the profitability level generally applied in the hotel industry, as well as the average rate in Montréal over the last ten years.

With these assumptions in mind, the projections show that the hotel market in the Old Montréal catchment area can support a further 1,200 (conservative scenario) to nearly 1,550 rooms (optimistic scenario) between now and 2008. The pace at which these new hotel rooms are introduced will be the decisive factor in determining the stability of the hotel market in this area over the coming years.

Table 2
TOTAL ABSORPTION CAPACITY FOR NEW ROOMS
IN THE OLD MONTRÉAL CATCHMENT AREA
(BETWEEN 1999 AND 2008)

Source: Projections, Horwath Consultants

From the point of view of quality, the projects currently planned in this area correspond perfectly to the market niches to be developed, i.e.:

• a conventional hotel product, first class but not luxury class, compatible with the requirements of the expanded Palais des congrès, comprising 350 to 500 rooms with a complete range of services and affiliated with an internationally recognized hotel chain;
  
  
• a "boutique"-style hotel product, first class or intermediate-superior class, to stand out from conventional hotels because of its unique design, comprising 50 to 150 rooms and offering a smaller range of services;
  
  
• an "inn"-type hotel product, intimate and personal, first class or intermediate class, comprising fewer than 50 rooms and reflecting the historic cachet of Old Montréal.

The hotel product unique to Old Montréal

While the first type of product meets the requirements of conventional client segments (convention-goers, business people, tourists), the other two types of product are different from most of the hotel rooms available in the downtown area, and make it possible to target a knowledgeable clientele looking for something special.

The "inn"-type hotel rooms may well be the type that have the most in common with the character of Old Montréal. The environment of the historic district is not only well suited to an intimate and personal type of accommodation, but also offers a number of historic buildings that could be converted for hotel purposes. Various financial assistance programs from the different levels of government could be used to help carry out such conversion work.