The hotel investment market continues to build momentum as we enter the second quarter of 2016 and looks to extend what has been one of the most impressive investment cycles in history.
Hotel transaction volume totaled $2.3 billion in 2015, an all-time high when you exclude the M&A activity that occurred in 2006/’07. Regardless of how you look at it, 2015’s volume was well above the $1.4 billion reported in 2014. The average price per room was reported at approximately $115,000, up 15 per cent over the prior year as well.
Sellers looking to capitalize on strong pricing and buyers looking for stable assets with healthy returns spurred a number of landmark hotel sales, which drove up hotel investment volume and APR. The top five deals totalled more than $1 billion, half the volume for the entire year. These sales included the Fortis Properties’ 22-hotel portfolio ($365 million), the 511-room Westin Bayshore ($280 million), the 1,363-room Fairmont Royal York ($186 million), the 556-room Fairmont Hotel Vancouver (confidential pricing) and the 575-room Courtyard Toronto Downtown ($99 million).
Despite a major rebalancing of the national economy, transaction volume was almost equally split on a regional basis between Western Canada (45 per cent) and Central Canada (47 per cent), with Eastern Canadian hotel transactions accounting for the remainder of activity. In terms of price per room, Western Canada surpassed the rest of Canada with a $180,000 average, followed by Central Canada at $90,000 and Eastern Canada at $75,000.
Given the challenging market conditions in Alberta, it’s not surprising that British Columbia accounted for 62 per cent of investment volume in Western Canada. Alberta did report more than $275 million in transactions, most notably the 248-room International Hotel Suites Calgary, which sold late in the year to a non-traditional hotel buyer with a long-term investment horizon and undeterred by current economic volatility. Greater Vancouver had a particularly active year, with a number of high-profile hotels trading hands, including the previously highlighted Westin Bayshore and Fairmont Hotel Vancouver. The 143-room Best Western Plus Chateau Granville Hotel & Suites and 18-room Viva Suites Vancouver were purchased by CIBT Education Group, a publicly traded company, for conversion to student residences. They were purchased for $38.5 million and $37 million respectively, including renovation costs. These deals demonstrate the premium being paid for downtown Vancouver real estate. B.C. is expected to support Western Canada’s hotel investment metrics in financial spite of Alberta’s ongoing difficulties.
Ontario was the most active Canadian market for hotel investment with more than $900 million in transactions spread over 60 deals. Rounding out Central Canada, Quebec reported transaction volume of $160 million, with 15 hotels trading and more than $100 million transacting in Montreal. The Greater Toronto Area (GTA) continued its run of impressive performances, which started in 2013, accounting for 30 per cent of national hotel investment volume. The dominance of the GTA and Central Canada is likely to continue into 2016, with seven hotels transacting in the GTA as of Q1.
Eastern Canada had a strong year largely due to the Fortis Properties portfolio sale, which included 1,790 rooms in eight hotels across each province except Prince Edward Island. Overall, Eastern Canada represented approximately eight per cent of total hotel-investment volume, up from four per cent the previous year.
While there is no shortage of market participants looking to increase their allocation to Canadian hotels, private capital remained dominant in 2015, accounting for 80 per cent of total hotel investment volume. Public companies/REITs accounted for 14 per cent of transactions and equity funds rounded out the remaining seven per cent.
One particular area of investor interest was in purchasing hotels for conversion to alternate uses or future redevelopment. In some instances, buyers were willing to pay a premium for these assets. Hotels acquired for alternate use included the 342-room Best Western Primrose in Toronto ($50.5 million) which, along with the Viva Suites and Best Western Plus in Vancouver, was converted to a student residence; and while the Westin Bayshore will remain an operating hotel in the short term, it is expected to be repurposed or redeveloped in the future for multi-residential purposes. This trend is expected to continue, as seen with the recent announcement of plans for a residential redevelopment at the Courtyard by Marriott Toronto Downtown site, which was purchased by InnVest and KingSett in August 2015.
There continues to be a growing amount of U.S. and offshore interest in Canadian hotel investment, but this represents a small portion of the investor market. In 2015, approximately $200 million, or nine per cent of transaction volume stemmed from non-domestic buyers. This includes acquisitions such as the 384-room Westin Prince ($70 million/$182,000 per room) and 204-room Delta Markham ($28 million/$137,000 per room), acquired by separate private investors with capital stemming from Asia.
Similar to the buy-side, private investors and private equity groups also dominated as sellers, although to a lesser degree. Private sellers accounted for 43 per cent of transaction volume, followed by public companies/REITs with 23 per cent of sales volume, which was primarily comprised of the Fortis Properties portfolio sale as well as InnVest REIT’s continued disposition of non-strategic assets. Institutional/pension fund sellers accounted for approximately $420 million in transactions or 18 per cent of total volume, with equity funds close behind at 13 per cent. Only two per cent of transaction volume related to receivership or lender driven sales.
A number of U.S. private equity firms and REITs, including Blackstone, Starwood Capital Group and Host Hotels & Resorts, were sellers in 2015, although the majority of transactions were completed by domestic sellers to domestic buyers.
In 2015, strong investor demand created downward pressure on hotel Cap rates in Vancouver, Toronto and, to some degree, Montreal. In Alberta, Saskatchewan and other resource-dependent markets, declining hotel cash flows tempered Cap rate increases as investors looked towards revised, more moderate performance levels. Hotel Cap rates stabilized in Q1 2016.
Last year will be remembered for offering the most diverse range of available product in recent memory and enticing a deep and dynamic buyer pool. Expect this level of activity and demand for all types of hotels to remain strong in 2016, with transaction volume likely to be maintained near record levels.
CBRE Hotels is the most comprehensive provider of professional hospitality services in Canada, displaying thought leadership and industry expertise through a combination of brokerage and valuation services across all asset types and geographies, with offices in Toronto, Montreal, Calgary and Vancouver.
By: CBRE Hotels Canada
Volume 28, Number 3