The Canadian hotel real-estate market continued its upward trajectory in 2015, finishing its sixth year in the current upcycle and bringing combined total transaction volume to more than $9 billion. It was a year of record-setting volumes; the highest since 2007 and the third highest in history at $2.47 billion in sales.
This coming year is poised to witness a similarly positive trend. With the exception of energy-dependent regions, the overall market is expected to experience continued trading momentum. Resilient conditions in major markets such as Vancouver and Toronto, increasing interest from foreign investors and dynamic debt-capital participation will shape the investment environment. Several banner transactions have occurred in the first quarter of 2016, including the $115-million purchase of the 189-key Marriott Ottawa by InnVest REIT in February and a flurry of select-service hotels trading in suburban locations, primarily in the Greater Toronto Area.
Colliers’ recently released 2016 Canadian Hotel Investment Report includes a special feature on views collected from several of Canada’s largest hotel real-estate participants. Generally speaking, industry participants remain bullish on the market (with cautious optimism being placed in energy-dependent markets), particularly given the broad cross-section of capital-seeking hospitality assets in the market today, as well as Canada’s high ranking as an attractive country for drawing international investment. The most significant motive for deals to transpire in 2016 are attractive
cash returns with regard to Cap rates and interest rates. The following is a glimpse into current viewpoints of Canada’s most significant hotel participants.
NATIONAL MARKET UPDATE
There continues to be good investment opportunities with a healthy mix of investors in the current landscape, which attracts a variety of different product given various investment and exit perspectives. Institutional capital is largely focused on urban, full-service assets in core markets for longer-term holds and would place money in key assets if the opportunities are right. While private investors and hotel-investment companies are also targeting Canada’s top markets, they are also less risk-averse to investing in smaller markets — subject to proper due diligence on timing the market, picking the right product positioning and taking advantage of the current cost of capital.
Portfolio diversity matters more than ever. This premise has evolved into a golden rule for both small and larger investors in order to spread risk and exposure over the long-run. The majority of participants cited the benefits of having properties in multiple geographic regions to help offset turmoil which can arise in markets/regions dominated by only a few core industries.
Investing in larger urban markets has the obvious advantage of reduced volatility, given more diversified economies, but, on the flipside, several smaller markets have seen such tremendous gains in the current cycle that these can often override losses — so long as the investor can weather the storm. Several groups cited that diversity into other real-estate asset classes also significantly helps their overall portfolio returns, particularly when the economy turns and the hotel market often sees larger declines than other asset types, such as office and multi-residential.
Currency trends are going to fare well for the market from both an operational as well as investment perspective. As one of the world’s top destinations, Canada continues to increase its awareness on a global scale for attracting individual travellers as well as group and tour business. There are significant benefits from the efforts of Destination Canada, the government agency responsible for marketing Canadian travel, and the low dollar means continued positive results in key markets across the country are anticipated. Cross-border investors are also increasingly looking at acquisition opportunities, although their investment criteria are largely focused on major-market urban projects, of which there is limited availability. These are typically met with increased competition from well-capitalized domestic capital sources.
Industry disruptors are top of mind. Fresh off the previous decade-long battle with online travel agencies (OTAs), innovations such as Airbnb are rapidly transforming the way travellers book their accommodations. While these innovations provide some benefit to the consumer, it has yet to be determined what impact these alternative distribution channels will have on traditional hotel performance. For the most part, asset owners in secondary and tertiary markets do not see this as a major threat. The fundamental challenge is that this channel is not properly monitored
Continued operational improvements are on the horizon from a top-line perspective, but there is more room to improve the bottom line. The recent rebound in high-torque markets such as Vancouver, Toronto and Alberta Mountain Resorts, is a great success story from a top-line perspective. Optimism abounds for further improvements in these key markets, given economic forecasts as well as currency benefits in the short to medium term. Another key component to top-line growth is the significant investment of capital into older product. This allows for healthy rate gains, as well as a reduction in supply as conversions of hotels to alternative use continues. The increase in top-line (particularly with rate growth) translates to increased bottom-line flow-through and profitability. However, many participants believe there is still room to increase rates —which is particularly crucial given increased operating costs can outpace revenue growth. In order to improve profitability, owners are continuously evaluating their cost structure including key items such as labour, property taxes and other operating expenses.
Investors in today’s market are methodically making their moves to solidify their portfolios in order to take advantage of upside and mitigate threats. While, presently, there are serious concerns with energy-linked markets, Canadian hotel investors are generally well capitalized and, for the most part, geographically diversified. The current sentiment is one of cautious optimism. But, positive industry characteristics are overshadowing near-term concerns with major hotel real-estate owners in regards to long-term opportunities and returns.
Robin McLuskie is VP of Colliers International Hotels and works on a national team responsible for hotel investment advisory services across Canada and specific markets in the Caribbean. She is responsible for business development, brokerage and debt placement, with a particular focus on client management.
Volume 28, Number 3
By: COLLIERS HOTELS INTERNATIONAL