When it comes to finding a hotel, your first thought will probably be the Fairmont Empress. It's a beautiful hotel, and you should spend some time there. I always recommend the afternoon tea and drinks (if not the Indian buffet) in the Bengal Lounge. (We had martinis there the other night. They were delicious, but $12? Ouch!) I've never stayed there, but I am told the rooms are nothing special, so you might be better off just playing tourist.
If I were visiting, I would be more inclined to stay in one of the newer hotels right on the water: maybe the Inn at Laurel Point, the Coast, the Victoria Regent or the Delta. Even the Days Inn by the Inner Harbour is in a nice location. If you're really on a budget, you might try one of the many Travellers Inns, but stick to one on Douglas Street.
I would avoid any of the hotels on Gorge Road ... even the name brands like the Ramada. They are pretty far off the beaten path, and some of the motels there attract transients. There are good things about the Gorge, but I don't think the hotels are among them.
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