Overall, the Canadian hotel-investment market performed well in 2022, and the appetite for lodging investment remains high despite challenges with increasing interest rates and some economic uncertainty. A range of product is expected to become available for sale in 2023 for a number of reasons, including portfolio reviews/rationalization, debt maturities, and overdue PIPs (Property Improvement Plans). Investors who are able to identify emerging trends and capitalize on opportunities in the market will be well-positioned for success as we move through this cycle. Below are some excerpts from the recently launched 2023 Canadian Hotel Investment Report.
A faster-than-expected operating recovery and investor optimism supported overall healthy hotel investment volume of $1.6 billion in 2022. National volume paced roughly 20 per cent below 2021, however, the decline was driven by a deceleration of alternate-use sales from pandemic highs with acquisitions for hotel use firmly back in demand, accounting for 80 per cent ($1.2 billion) of the year’s total. When evaluating acquisitions for ongoing hotel use, investment volume was up roughly 10 per cent year-over-year.
Last year saw participation from a well-balanced buyer pool with stronger in-place cash flow and a clearer outlook on future performance narrowing the bid-ask gap between buyers and sellers that has been an impediment to traditional transactions during the pandemic. Private capital sources drove the majority of investment activity with the pursuit of yield and appeal of smaller equity requirements in the wake of current financing conditions, pushing investors towards secondary and tertiary market investment opportunities, which accounted for the bulk of the year’s transactions.
2022 Key Takeaways
Year-end volume reached $1.6 billion in 2022, down approximately 20 per cent year-over-year. However, acquisitions for ongoing hotel use trended 10 per cent above 2021 levels to $1.2 billion.
Reflecting the slowdown of alternate-use transactions and concentration of smaller deals, Average Price Per Room (APR) metrics, including all types of lodging transactions, was $131,200 in 2022 compared with $158,100 last year. Excluding alternate-use deals, APR metrics remained healthy at $120,000.
Hotel operating fundamentals recovered years ahead of expectations in 2022, with national RevPAR ending the year 3.5-per-cent ahead of 2019 results, according to STR. Despite concerns of a recession, we anticipate positive momentum for lodging demand across the leisure, corporate, and group segments.
Hotel-transaction activity related to alternate uses comprised just 20 per cent of overall activity in 2022, compared with 41 per cent in 2021 and 53 per cent in 2020. We expect these transactions will continue descending towards historically low norms.
Trades under $10 million continued to attract investors looking to place capital with a smaller cheque size and accounted for almost 75 per cent of deals during the year.
Distressed sales remained at historic lows in 2022, representing just one per cent of sales volume over a handful of trades.
Canada’s largest urban markets (+1M populations) saw more than 30 hotels transact for some $625 million (40 per cent of total) with almost 75 per cent of volume related to acquisitions for continued hotel use.
Private investors and hotel investment companies continued to be the largest buyers of hotel assets, investing more than $1 billion during the year (65 per cent of total).
Key Themes toWatch in 2023
>> Continued Strength in Transaction Market
Catch-up capital post-pandemic will continue to propel the market this year as equity remains plentiful, with anticipated transaction volume of $1.5 to $2 billion.
>> Deal Size Both Small and Large
The transaction market will be primarily led by strong activity in secondary and tertiary markets with deals under $20 million. There is also potential for several headliner city-centre hotels and resorts to transact.
>> Creative Structuring During this Interim High Interest-Rate Period
It’s unlikely we’ll be going back to record low interest rates of yesteryear, requiring creativity in deal structuring.
>> Portfolio Rationalization, Re-financing, and Brand Requirements
Portfolio reviews, loan maturities, and overdue PIPs will prompt owners to bring assets to market.
>> Lifestyle and Extended Stay Dominate Development Pipeline
Increased focus from developers on building lifestyle and extended-stay product, given gaps in the market on that product type with strong demand and return potential.
BY FRASER MACDONALD, COLLIERS HOTELS
