Canadian hotel investment is off to a robust start in 2015,building on the momentum of $1.3 billion in trades last year. Although investment activity fell short of historic highs in 2014, Q4 ended strongly due to large-scale transactions such as the 366-room Park Hyatt Toronto ($105 million/$304,000 per room) and the 644-room Hyatt Regency Vancouver ($140 million/$217,000 per room).
Investment levels across all geographic markets, and particularly in Canada’s major urban centres, remain strong in the first part of 2015. Preliminary transaction volume for Q1 2015 is more than $600 million — almost triple last year’s Q1 performance — due to plentiful and inexpensive debt and positive operating numbers on a national basis. As a result, several notable transactions closed, including the 1,363-room Fairmont Royal York ($186.5 million/$137,000 per room) and the 556-room Fairmont Hotel Vancouver (price is confidential).
While transaction activity has continued across the country in the first part of 2015 — from the 172-room Best Western Plus Westwood Inn in Edmonton ($26 million/$151,000 per room) to the 113-room Quality Inn & Suites Bayer’s Lake in Halifax ($7.1 million/$62,000 per room) to the 159-room Hilton Garden Inn Montreal Airport ($15 million/$94,000 per room) — investment activity remains concentrated in Ontario. And, while approximately 54 per cent of Q1 2015 transaction volume occurred in the province, 52 per cent of the national total was concentrated within the Greater Toronto Area (GTA). (See Exhibit 1 for a transactional volume breakdown by region.)
Nationally, commercial real-estate investment volume across all asset classes, including hotels, reached $26.1 billion in 2014, slightly below 2013 ($26.8 billion), but above the long-term average of $23.2 billion. Capital markets in Canada have never been so deep, with domestic and global capital pursuing all sectors of commercial real estate from coast to coast. Real estate plays a larger role than ever in many investment portfolios, and hotels are increasingly part of the equation. Hotels will be at the forefront of commercial real estate in the years ahead as market fundamentals continue to improve and stable pricing entices institutional quality product onto the market. That said, Canadian commercial real-estate purchases are expected to total $25.5 billion in 2015, slightly below last year’s total, as many investors also turn to new construction and repositioning of current assets.
Per-room pricing in 2014 (approximately $97,000) was 25 per cent lower than 2013 due to the high percentage of smaller deals that closed in 2014: 70 per cent of hotel sales (25 per cent of total volume) were transacted below the $10-million mark, representing hotels with an average of 75 guestrooms. Western Canada led per-room pricing at $130,000 (a 34-per-cent premium over the national average), followed by Central Canada, which averaged $79,000 per room (some 19 per cent below the national average) and Eastern Canada, which reported approximately $64,000 per room (some 34 per cent below the national average).
PRIVATE VS. PUBLIC INVESTMENTS
Private investors continued to account for the majority of overall commercial real-estate activity in Canada in 2014 (45 per cent), mirroring the hotel sector where private investors represented 75 per cent of hotels sold, with an average deal size of about $5 million and 80 rooms. Interestingly, private investors only comprised 36 per cent of the total volume (or dollar amount). Private investors remain risk-tolerant. With financing at historically low levels and the availability of product, it seems unlikely their appetite will diminish through 2015.
Meanwhile, publicly traded hotel companies/REITs continued to acquire hotels in 2014, accounting for 21 per cent of total transaction volume. In particular, Winnipeg-based Temple Hotels Inc. continued its cross-Canada expansion, purchasing six hotels for an aggregate price of approximately $124 million (see Exhibit 3).
But REITs were also committed to re-balancing their portfolios in 2014, disposing of approximately $175 million in non-core assets. Since announcing its strategic plan in early 2013, Mississauga, Ont.-based InnVest REIT has been highly active, divesting 19 hotel assets — such as the Quality Suites London, Holiday Inn Mississauga Toronto West and more than a dozen Comfort Inns in Ontario, Quebec and Atlantic Canada in 2014 — and acquiring the Hyatt Regency Vancouver in December. The company has also identified another seven hotels for disposition in the near term, though details remain confidential.
Non-traditional hotel buyers were also active in 2014, accounting for 15 per cent of total transaction volume. Nine hotels were acquired for re-development or alternative use (student residences, seniors’ residences and rental apartments) in Quebec (Quebec City, Saint-Hyacinthe and Montreal), Ontario (Brampton, Kingston and Ottawa) and B.C. (Vancouver and Burnaby). These conversion opportunities generally result in premium pricing, and by reducing inventory within a market, strengthen existing operating fundamentals.
THE 2015 OUTLOOK
Although the plunge in oil pricing has changed the economic position across the country, the investment outlook remains positive.
While tighter construction and acquisition financing in Alberta (and to a lesser extent Saskatchewan) will restrain investment activity in the near term, there is long-term confidence in resource-based markets, and strategic investments remain attractive. Committed sellers in these markets will find buyers in existing hotel owners who understand the oil- and gas-driven marketplace and are looking to grow their portfolio. The momentum of capital will also shift back to Central Canada. A more stable economic outlook in Ontario and Quebec will support existing liquidity and robust investment activity, particularly in the GTA, as evidenced in Q1 2015.
Since a select group of owners are re-examining their portfolios or exiting the sector altogether — getting rid of non-strategic assets and/or estate planning — we anticipate a steady stream of quality assets will come to market, which will be met by a healthy supply of investment capital. In addition to the usual domestic and American buyers, mainland Chinese and Europeans represent a small but growing portion of hotel investors in Canada.
Capitalization rates remain at an all-time low, fuelled by low interest rates and strong investor demand. Cap rates have stabilized in the East, with the exception of Montreal, which witnessed a decline in Q4 2014 due to a correction over the prior year to bring its rate spreads more in line with other major Canadian markets. With falling oil and gas prices, investment activity and new development has slowed somewhat in Calgary and Edmonton, making it too early to assess the impact on capitalization rates, especially if this is a temporary downturn. (See Exhibit 2 on p.16.)
With affordable, readily available capital, strong interest for quality assets and long-term confidence in Canadian commercial real estate, we anticipate year-end 2015 hotel transaction volume to exceed the $1.3 billion achieved in 2014, reaching $1.5 to $2 billion. It looks like 2015 promises to be another active year in the hotel sector.
CBRE Hotels is a commercial real-estate brokerage firm, specializing in hotel sales, consulting and advisory, with offices in Toronto, Calgary and Vancouver. Karina Toome (email@example.com) is a financial analyst in the Toronto office.
Volume 27, Number 3
Written By: Karina Toome