As of October 2025, Canadian hotel valuations exhibit structural pricing dispersion that transcends simple market segmentation narratives. HVS's 2025 Canadian Hotel Valuation Index, spanning 19 distinct markets, reveals cap rate spreads approaching 300 basis points between gateway and tertiary assets, a divergence that signals fundamental shifts in how institutional capital prices liquidity risk, operational complexity, and exit optionality. This analysis examines the methodological rigor underpinning these valuations, dissects the regional variance mechanics driving persistent yield gaps, and explores emerging opportunities where operational excellence can arbitrage structural mispricings. For allocators constructing hospitality portfolios, understanding these dispersion dynamics proves essential to distinguishing sustainable alpha from unsustainable yield compression.

HVS Canadian Hotel Valuation Methodology: Beyond Cap Rate Compression

HVS's 2025 Canadian Hotel Valuation Index employs a multi-layered analytical framework that transcends simple cap rate compression narratives. The methodology treats hotels as operating businesses rather than static real estate assets, incorporating revenue management dynamics, competitive market positioning, and forward-looking demand drivers into valuation conclusions, according to HVS's Valuations & Appraisals methodology overview¹. This hospitality-focused perspective distinguishes hotel appraisals from conventional commercial real estate valuations by modeling multiple revenue streams (rooms, F&B, ancillary services) and operational leverage effects that generic DCF models often misrepresent.

Bay Street's AHA framework complements this approach by isolating performance alpha from fundamental market conditions, revealing when valuations reflect operational excellence versus unsustainable yield compression. The 19-market analysis integrates both top-down macroeconomic indicators and bottom-up property-level data to establish defensible value ranges across regional submarkets. HVS's transparent assumptions and clearly documented analytical frameworks ensure conclusions withstand lender scrutiny and regulatory review, particularly critical as Canadian banks recalibrate hospitality exposure limits amid evolving Basel III capital requirements.

This methodological rigor addresses what Aswath Damodaran identifies in Investment Valuation as the "garbage in, garbage out" problem: "The quality of a valuation is only as good as the assumptions that go into it." For institutional allocators evaluating Canadian hotel exposure, HVS's granular market segmentation (gateway vs secondary markets, luxury vs select-service, urban vs resort) provides the analytical precision necessary to construct portfolios with uncorrelated return drivers rather than index-hugging beta plays. Regional pricing dispersion signals emerging from the Index reflect structural shifts in post-pandemic travel patterns rather than transitory demand volatility.

Markets demonstrating persistent BAS expansion (risk-adjusted returns above historical norms) warrant deeper investigation into supply pipeline constraints and barriers to competitive entry. As David Swensen observes in Pioneering Portfolio Management, "Illiquid assets require illiquidity premiums." The HVS methodology's incorporation of transaction comparables, income capitalization approaches, and cost approaches provides triangulated value conclusions that reduce reliance on any single valuation technique. For LPs constructing hospitality allocations, this multi-method validation addresses LSD concerns by establishing realistic exit pricing assumptions across various hold period scenarios and market conditions.

Regional Cap Rate Variance: Liquidity Premiums and Structural Dispersion

Canadian hotel cap rates exhibit persistent regional dispersion that reflects fundamental differences in liquidity depth, demand stability, and exit optionality rather than transient pricing anomalies. As of Q3 2025, gateway markets command cap rates 100-200 basis points lower than secondary markets, according to CBRE econometric analysis². This structural premium parallels dynamics observed in European markets, where cap rate compression amid ample liquidity has driven investors toward refurbishment and ESG upgrades as routes to incremental yield, per Mordor Intelligence's Hospitality Real Estate Market analysis³.

Toronto and Vancouver assets trade at compressed yields that reflect institutional buyer depth and covenant-quality tenant bases, while tertiary markets price in execution risk and thinner buyer pools. Our BAS framework explicitly adjusts for this regional variance when evaluating risk-adjusted returns across portfolio allocations. Hotels typically trade at higher implied yields than core multifamily, CBRE reported core multifamily going-in cap rates around 4.73% in Q3 2025, due to operating complexity and volatility, according to Ellsbury Group's capital markets analysis⁴.

Yet that yield gap creates asymmetric upside when operators can stabilize cash flows through revenue management discipline and brand affiliation strategies. The spread between trophy gateway hotels and secondary-market select-service properties often exceeds 300 basis points, reflecting not just demand fundamentals but also the liquidity premium that institutional capital assigns to scalable exit scenarios. As Howard Marks observes in Mastering the Market Cycle, "Risk means more things can happen than will happen." Regional cap rate variance embeds precisely this concept, gateway markets price in lower probability of adverse scenarios, while secondary markets demand compensation for tail events that include prolonged demand weakness, brand disaffiliation, or franchise fee escalation.

Sophisticated allocators exploit this dispersion by underwriting tertiary assets with gateway-quality operational protocols, effectively arbitraging the cap rate differential through execution rather than hope. The 525-basis-point public-private dislocation currently observable in hotel REITs amplifies this opportunity, as private buyers can acquire stabilized cash flows at yields that public market participants implicitly reject through persistent NAV discounts. Markets that demonstrate consistent ADR growth above inflation while maintaining occupancy floors above 65% warrant premium pricing, yet algorithmic selling in public REITs creates temporary mispricings that patient capital can harvest through take-private transactions or selective portfolio acquisitions.

Implications for Allocators

The 2025 Canadian Hotel Valuation Index reveals a market structure where methodological rigor, regional dispersion analytics, and operational execution converge to create asymmetric opportunities for sophisticated capital. HVS's multi-method validation framework provides the analytical foundation necessary to distinguish sustainable alpha from cyclical beta, while persistent cap rate spreads signal structural inefficiencies that patient allocators can exploit through disciplined underwriting and operational value-add strategies.

For allocators with existing Canadian exposure, our BMRI analysis suggests rebalancing toward secondary markets where supply constraints and demand recovery create favorable risk-reward asymmetries. Properties demonstrating occupancy resilience above 65% coupled with ADR growth exceeding inflation warrant premium allocations, particularly when acquired at yields 150-200 basis points above gateway comparables. The public-private dislocation in hotel REITs presents tactical entry points for allocators capable of withstanding mark-to-market volatility while harvesting stabilized cash yields that private markets validate through transaction activity.

Critical risk factors to monitor include franchise fee escalation trajectories, brand affiliation stability in tertiary markets, and evolving Basel III capital requirements that may constrain Canadian bank hospitality lending. Markets exhibiting persistent LSD expansion signal deteriorating exit liquidity conditions that could compress realized returns despite attractive going-in yields. As the Index demonstrates, regional pricing dispersion reflects not market inefficiency but rather the accurate pricing of liquidity risk, operational complexity, and execution uncertainty that separates institutional-grade assets from opportunistic plays.

A perspective from Bay Street Hospitality

William Huston, General Partner