A few week’s ago, local newspapers lauded the sale of a $28 million penthouse suite in the new Four Seasons in Toronto, currently under construction.  With a sale price in excess of $3,000 per square foot (quite possibly the highest anywhere in Canada), this opulent transaction sparked me to reassess and lend my thoughts on the surprising luxury hotel construction boom well underway here in my hometown.

It seems as though every luxury hotel chain on Earth decided that this city is the place to be, and all within a narrow timeframe.  Looking at the luxury hotel segment, here are the newcomers, in order of their opening date:

• Thompson Hotel, opened Spring 2010, 102 rooms
• Hotel Le Germain at Maple Leaf Square, opened Fall 2010, 171 rooms
• The Ritz Carlton, opened early in 2011, 267 rooms
• Trump International Hotel & Tower, scheduled to open late in 2011, 256 rooms
• Four Seasons Hotel & Residences (replacing existing Four Seasons), scheduled for May 2012, 253 rooms
• Shangri-La Hotel & Residences, scheduled to open in July 2012, 220 rooms

Before this upscale onslaught, Toronto’s total luxury room count was 1,125 based on the following property set: the Hazelton Hotel; the Windsor Arms, the “old” Four Seasons Hotel, the current Hotel Le Germain, and two Metropolitan properties.  A caveat to this sum is that I did not include niche luxury hotels – those with a double-digits quantity of rooms – but the statistics are still quite remarkable.  The city is experiencing an addition of 1,279 new luxury rooms, which represents a staggering increase of 113% over the current base.

Why Now?
To a certain extent, Toronto lagged behind other metropolises insofar as luxury stock, so this may be partly considered as pure catch-up.  Call it pride, but I like to think of this more as a “coming out” party; a distinction that marks Toronto’s ascension into the upper echelons of worldly cities.  With this, there are several macro and micro considerations.

First, the Canadian banking system, largely centered on Toronto’s Bay Street, has been far more conservative than others within the past decade.  As such, the city was not as heavily hit by the recent economic downturn, implying two major stimuli for luxury hotels.  First, stable banks equate to steady cash flow, which means no stalls on construction projects.  Second, the top tier Canadian banks flourished in the wake of the recession, leading to more high-end business travelers to and from the city.  This is a whole separate topic, but the gist of it is that the city is flourishing, with a prosperous core of banks as the foundation.

As something that only a local can truly observe, Toronto’s neighborhoods have undergone significant change of recent.  Originally, if you wanted a high-end room, you stayed in Yorkville, which is our ultra chic and quite expensive shopping district.  And so it became saturated with hotels.  But with a consistent condominium boom over the past decade (again, a whole other topic), many other downtown areas along the lakefront have gentrified with more sightseeing, more shopping and more nightlife.  This has paved the way for luxury brands to consider properties in other areas where land is more plentiful than the overdeveloped Yorkville hub.  Of those listed above, only the Four Seasons is based in Yorkville, and it is replacing the existing Four Seasons just a few blocks away.

On a more microeconomic level is the Toronto International Film Festival (TIFF).  Started in 1976, it was a niche event clustered in Yorkville, then a burgeoning artists’ enclave.  As of 2010, however, TIFF is a citywide festival, drawing over a quarter of a million people and rivaling Cannes as the foremost symposium of back-end movie deals.  And all those actors, directors, producers and studio execs want luxury rooms for these business negotiations, right?  Toronto has done an excellent job to bolster such premium events throughout the year, likely heightening demand for luxury rooms.

Last of note, many foremost luxury brands were devoid of a Toronto locale, and to cycle back on the city’s rise to worldly prominence, it has now become fitting for those hotel chains to claim their piece of the pie, whether be driven by namesake, loyalty programs or overall brand strategy.  No doubt this was a consideration for Trump, Shangri-La and the Ritz-Carlton.

Be Prepared for the New Kid on the Block
As each new product launches they have to be aggressive in their marketing to nudge their way into a crowded sector.  What first comes to mind is the “what’s new factor”.   That is, new properties often launch with programs that generate fresh customer trials with rates that are typically less than the ADR level targeted for the long run.  These introductory discounts are hard for consumers to resist.  Here is what can be expected in anticipated priority order:

• Targeting customers on their own corporate loyalty programs, introducing their newest destination
• Aggressive pay-per-click advertising using the new destination as a key word
• Organic SEO programs that include the new destination
• Local public relations that announce the new property
• Open house events for travel agents and meeting planners
• Tradeshow representation for meetings and weddings
• Direct marketing lists (typically using AMEX) of potential guests who have utilized accommodations in the new city
• Local advertising targeting leisure weekends

What Can Current Properties Do?
First, recognize that you are now in a defensive mode.  You will probably lose business as the supply has significantly increased without any proportionate growth in demand.  But, don’t just sit there and expect everything to even out in the long-run.  Do something.  Now is the time to really take advantage of loyalty programs, and here’s how:

• If you are a chain, review your loyalty point category and program participation
• Target your marketing to past guests and encourage repeat visits with value-added discounts and best rate guarantees
• Recognize past guest through social media, such as Facebook and Twitter, to create targeted promotions that reward fans
• Spruce up your electronic communications programs with special, select offers for past guests
• Use flash sales sites such as Jetsetter or Snique Away to revive business during dry periods
• Spend the time with your sales team to develop defensive strategies to protect your business base
• Be prepared to spend more in marketing on a per-room-sold basis than you needed to over the past two years

The addition of this many luxury rooms will probably be fully absorbed in the long-run given Toronto’s continued growth and no stoppage in sight.  But in the meantime, all operators should expect to see occupancy erosion due to all the new competitors.  A smart operator will recognize this and plan accordingly.

As a case study, I find this to be a fascinating little experiment.  With all these hotels, both new and old, survive?  As always, only time will tell.  I’m sure I will revisit this topic in a year’s time with further insights.

(Article by Larry Mogelonsky, published in Canadian Lodging News on July 25, 2011)