After a few years of inactivity, transactions are growing
After a bumpy roller-coaster ride, the transaction market continued its upward trend, recording more than $1.1 billion in volume in 2011, making it the fifth- strongest year since Colliers began tracking hotel transactions in 1985, and the highest since the all-time record of $4.6 billion in 2007.
HIGHLIGHTS FOR 2011
- Transaction volume grew to reach $1.107 billion in 2011, representing 54-per-cent and 167-per-cent increases compared to 2010 and 2009, respectively.
- A total of 99 transactions were completed in 2011, significantly above the 86 sold in 2010 and 74 in 2009, while average price-per-room also increased to $108,000, a 30-per-cent increase over 2010.
- Average transaction size demonstrated a healthy improvement at $11.2 million by year’s end, bridging the gap from 2009 and 2010; narrowing closer to the long-term average of about $13 million.
- Cap rates averaged 8.9 per cent nationally with full-service properties 180 basis points lower and limited-service hotels 110 basis points higher than the average.
- The market was fuelled by high-quality offerings of full-service and select-service hotels, in many cases offered in a competitive bid process. Hotel investment companies and institutional investors led the way, with private capital representing a lesser share than in previous years as they were outweighed by other equity sources.
- Cross-border sellers accounted for 40 per cent of transaction volume. These sellers were primarily U.S.-based private equity funds that disposed assets to re-deploy capital in other opportunistic ventures.
Unlike recent years, transaction activity across Canada was relatively balanced with Western Canada leading in terms of transaction volume ($612 million compared to $495 million in the East). Eastern Canada recorded a larger number of asset sales (53 compared to 46 in the West). On a provincial level, Ontario led the pack in volume and number of trades ($388 million, 42 trades) followed by British Columbia ($311 million and 18 trades). Alberta followed suit with volume of $197 million and 17 trades. Saskatchewan and Manitoba also experienced a significant increase in deal activity in relative terms (510 per cent and 135 per cent, respectively) compared to the previous year. This was mainly attributable to product availability and a strong interest shown by investors given the solid economic strength in these markets. The province of Quebec was the only market that experienced a decline in activity, with volume decreasing 14 per cent from the previous year.
Buyer groups in 2011 included hotel investment companies (representing 45 per cent of the total transaction market), private investors (29 per cent), institutional (15 per cent), real-estate companies (eight per cent), and REITs (three per cent). REITs were largely inactive as they were net sellers, divesting just under $100 million in assets. While private investors were the most active in terms of the number of completed transactions, they were dwarfed by institutional and hotel investment companies, which averaged deal sizes of more than $25 million. Only eight per cent of total transaction volume was completed by real-estate companies for redevelopment to alternative uses in 2011, compared to 17 per cent and 14 per cent in 2010 and 2009, respectively.
2012 AND BEYOND
- Similar to last year, we anticipate hotel investment companies, institutional and private investors to be the most active buyers through the remainder of the year.
- Overall cap rates will remain in the range of seven to nine per cent, supported by the low-interest rate environment, following the trend from 2010 and 2011.
- The recycling of hotel assets to alternative uses will likely continue, particularly in large urban markets as older assets become obsolete. Redevelopments such as residential condominiums continue to be favoured by developers, particularly in Toronto and Vancouver.
- Lender-driven sales are not expected to increase and, similar to 2011, should comprise only a small percentage of the overall market.
- A continued low-interest rate environment will bode well for borrowers, and improving industry performance will provide confidence to the lending community.
Further analysis and a special report on the hotel debt market in Canada can be obtained from the “2012 Canadian Hotel Investment Report” available online at colliershotels.com