Cushman & Wakefield
Curtis Gallagher, principal broker — head of Hospitality
Rosanna Caira: What has the past year been like for you and your company?
Curtis Gallagher: Globally, our companies transaction business was down despite a few bright spots in multi-family and industrial-asset classes.
Our support businesses (i.e. valuation, occupier services, et cetera) were busy helping clients navigate their real-estate interests.
RC: From your perspective, how has COVID-19 impacted the hotel real-estate market in Canada?
CG: Since the hotel business is an industry closely tied to its real estate, when operating results are decimated there is a negative effect on value. Government support and lender patience propped up the industry, allowing owners to avoid having to sell in a down market. Now that we see vaccines deployed around the world, there’s real optimism that a recovery is imminent.
RC: How long do you think the industry will take to rebound?
CG: In general, the industry will see early signs of rebound by the end of this year or early 2022. It will take until 2023/í24 before we see a meaningful return to pre-COVID-19 levels across most markets. There will certainly be some bright spots that recover sooner.
RC: COVID -19 has greatly impacted business travel, which means large hotels in city centres and top tourist destinations have been decimated. How long will it take for these properties to return to pre-COVID levels and does this worry you with regard to the viability of future of large-scale properties in urban centres? Are there certain hotels that are better risks to purchase right now?
CG: Once broad consumer confidence returns, which will happen when a majority have received vaccines and no further outbreaks occur, there will be a resumption of corporate travel. People are social and there will be a return to large group functions eventually, but this will lag corporate travel since it takes time to plan and book large group events. An opportunity to acquire a hotel in key markets that have typically been tightly held are good targets.
RC: Is the risk too great for hotel owners looking to purchase a city asset?
CG: That depends on a buyer’s risk tolerance, asset price and belief in a recovery timeline for a specific city.
RC: What can investors expect when looking at hotel-investment opportunities in the current marketplace?
CG: That deeply discounted deals on quality hotels will be scarce. Therefore, consider the opportunity based on what was known pre-COVID-19 and contemplate whether it’s a good or reasonable deal based on industry recovery.
RC: Are there certain markets that first-time hotel investors should be targeting in this market?
CG: Ones that they know well. It’s always prudent to get professional guidance from those active on the hotel-advisory and investment side of the business.
RC: While demand has improved in some markets and in some segments across the country, it’s still very low across the board. What does this mean for hotel owner groups? Have some of the government programs helped in the short term and how long can this be sustained?
CG: Stay close to your debt and equity partners and keep them informed. The government aid will end at some point and this needs to be recognized. A variety of “what-if” strategies should be planned to not get caught off-guard.
RC: What should investors pay attention to when examining a hotel-investment opportunity?
CG: Operating projections will vary by market, but if an investor requires financing, they need to be certain that they qualify.
RC: How can investors bid competitively?
CG: Be reasonable and have your capital structure aligned with some contingency built in.
RC: Prior to COVID-19, the industry was going through one of its best cycles in years. How long do you expect the current cycle to last?
CG: The current environment is improving, which is positive. Provided there are no major public-health concerns, then the recovery should continue leading to pre-COVID levels by 2024 potentially sooner for some markets.
RC: Is it a good time to invest in the hotel sector?
CG: Yes, but it depends on the asset and market. We’ve seen the pre-COVID-19 in high-water marks” across most markets, so it’s much easier to measure what a market can achieve in future.
COLLIERS
Robin McLuskie, managing director, Hotels, Canada
Rosanna Caira: What has the past year been like for you and your company?
Robin McLuskie: The past year was certainly a challenging year for Colliers as a result of COVID-19. Our hotel team fared well and we pivoted our focus to primarily helping owners/operators and being a resource and support system. We began our webinar series and also conducted presentations and market updates to lenders, owners and other institutions to update them on the market and help track the recovery and current market sentiment. Our team managed to close 11 transactions across Canada in 2020
RC: From your perspective, how has COVID-19 impacted the hotel real-estate market in Canada?
RM: The hospitality and tourism sectors have been one of the hardest-hit industries by COVID-19, which has resulted in the rapid deterioration of operating performance in many hotels across the country. The effects of COVID-19 extend into the lodging and real-estate markets in Canada and abroad, which have stalled with relatively fewer completed transactions in 2020 compared to previous years.
Canadian hotel-transaction volume reached approximately $862 million in 2020, according to Colliers’ data, down 51 per cent year-over-year and registering as the lowest level of lodging investment since the 2009 financial crisis. However, there were only four distressed sales in 2020, out of 71 hotel transactions, backed by government support programs and a generally supportive lending community.
Similar to other commercial real-estate investment sectors, investors postponed or shelved their plans to sell or purchase properties during the pandemic. Given so much uncertainty in the market, hotel values were very difficult to measure and the bid/ask gap was too wide which led to limited traditional transactions. Hotel purchases for alternate use comprised the lion share of activity once COVID-19 hit, and we forecast this will continue into 2021.
RC: Are you worried about the future of large-scale properties in urban centres?
RM: From a real estate point-of-view, despite the impact of COVID-19 on hotel top-line metrics and profit margins, pricing on hotel acquisitions in urban centres is expected to remain strong as investor capital continues to pursue assets in these markets. There is no shortage of demand given the historically limited number of hotel-acquisition opportunities available in prime downtown markets which has stemmed from a lack of motivated owners to sell considering strong operating metrics and underlying real-estate values and high replacement costs. In several urban markets, there are hotel assets being converted to alternate uses, and with limited new supply on the horizon this should help in the recovery.
RC: What can investors expect when looking at hotel-investment opportunities in the current marketplace?
RM: Average national capitalization (cap) rates have hovered in the mid seven per cent range for the past five years (2014 to 2019), reflecting the competitive financing environment and strong investor demand. At present, in-place and short-term cap rates have become effectively meaningless, with investors instead focused on metrics prior to COVID-19. As such, the market has seen a large bid/ask spread, with sellers generally reluctant to budge much on prior peak values’ and buyers hoping for significant discounts to account for the re-set of the market cycle.
RC: While demand has improved in some markets and in some segments across the country, it’s still very low across the board. What does this mean for hotel owner groups? Have some of the government programs helped in the short term, and how long can this be sustained?
RM: There were only four lender-driven hotel sales that occurred in 2020. Most owners are focused on liquidity preservation. Aid to the hotel sector has come from allies in the lending community that have been willing to work with owners to starve off the need to dispose of assets at a discount. Additionally, while hotel-operating performance is at an all-time low, the ability for owners to stay afloat is also aided by flexibility from brands on franchise fees and required renovation timelines, as well as assistance from the government with programs such as CEWS, CERS and the newly introduced HASCAP lending program, providing much needed lifelines to hotel owners and operators. A number of approved vaccines currently being rolled out in Canada is providing some hope for a return to business as usual in 2021, and the hope to no longer need to rely on relief programs.
RC: How can investors bid competitively and what does owning a hotel asset in this environment look like?
RM: Beyond submitting a competitive purchase price, sellers also look at the length of the inspection period and closing, as well as deposit amounts and the investors ability to complete the transaction (proof of equity and financing). Buyers must price in the anticipated recovery into their modelling to ensure they account for a ramp-up period and incorporate some changes in the operating model that owners across the country are implementing including scrutinizing the cost structure, embracing technology more and ensuring cleanliness/safety are at the forefront of the operating philosophy
RC: Prior to COVID-19, the industry was going through one of its best cycles in years. How long do you expect the current cycle to last?
RM: Looking at the most recent cycle (2010 to 2019) before COVID-19, the Canadian hotel-transaction market was very robust, registering approximately $19.75 billion in lodging sales across the Country and averaging more than $1 billion annually. This is approximately 50-per-cent higher than aggregate transaction volume recorded over the preceding decade.
Uncertainty brought on by COVID-19 has resulted in a decrease in transaction volumes, and it is now clear that the hotel investment cycle has re-set.
RC: Is it a good time to invest in the hotel sector?
RM: The pool of capable buyers with the financial wherewithal to close on transactions has condensed at this time, as many groups are currently consumed with managing hotel operations to see it through to the end of the pandemic and preserving cash, softening the competitive landscape, but providing an opportunity for capable groups to step-up.
Looking back at SARS and 9/11, for example, and how Canada was able to rebound stronger than before – tourism has shown a clear growth trend and great resilience to crisis situations, paving the way for the tourist sector to re-emerge strongly and becoming, once again, a key driver of the country’s economic growth.
CBRE
Mark Sparrow, executive vice-president, Hotels
RC: From your perspective, how has COVID-19 impacted the hotel real-estate market
in Canada?
Mark Sparrow: Initially, the pandemic pushed the hotel real-estate market into a COVID-19-induced coma – transactions were non-existent; contemplated deals were shelved; buyers anticipated a sharp discount in pricing; and owners looked to lenders and the government for immediate support. The gap between buyer and seller expectations widened to Grand-Canyon proportions and we found ourselves very quickly in a no-bid market. Traditional hotel transaction activity between March and December of 2020 saw a 67-per-cent decline over the same period in 2019. Move forward one year, and we’re seeing signs of the market continuing to pick itself up off the floor of the worst operating decline in recent history. Managers have made operational adjustments and with vaccines on our doorstep, there is increased optimism which is translating in a narrowing of the bid/ask gap. We’re seeing increased capacity from investors to reach seller expectation as the demand for capital chasing hotels continues to grow, and limited product of quality actively on the market. In a way, this supply-and-demand dynamic has allowed pricing to hold in key gateway markets with limited distress, outside of the prairies.
RC: How long do you think the industry will take to rebound?
MS: Our partners on the Valuation and Advisory team at CBRE Hotels recently revised our national RevPAR forecast with a recovery to 2019 RevPAR levels anticipated by mid-2024. We believe the recovery will be led by local leisure-based demand as restrictions begin to ease, followed by regional corporate, small group, social catering and national corporate demand as the vaccines roll out and over an extended period we anticipate large group and international corporate/tour to regaining strength as well.
RC: COVID -19 has greatly impacted business travel, which means large hotels in city centres or top tourist destinations have been decimated. How long will it take for these properties to return to pre-COVID-19 levels, and does this worry you with regard to the future of large-scale properties in urban centres? Are there certain hotels that are better risks to purchase right now?
MS: With heavy reliance on large corporate and meeting/convention based business, city-centre assets of scale have certainly felt the woes of the pandemic more than any other segment. We anticipate these hotels may take longer to fully recover as the demand outlook for large corporate and convention-based demand is less clear. We anticipate these assets could take up to four to five years to reach pre-COVID-19-related levels and in some cases, there may be a need to address programming and segmentation in the short-medium term.
After reviewing a year’s worth of pandemic -related operating statements across Canada a few issues have become clear: smaller assets (less than 100 rooms) as well as extended-stay and budget properties have been the relative strong performers through the pandemic; drive-to resort destinations have become steady ATMs; rubber-tire traffic has bolstered limited-service assets along driving corridors; and unencumbered properties have allowed flexibility to pivot during a pandemic to short/medium term alternative- use lease structures
RC: What can investors expect when looking at hotel investment opportunities in the current marketplace?
MS: We view the current marketplace as a tale of two stories – vulnerable and durable assets. Vulnerable assets are those that have high burn rate and estimate a longer or less certainty around the recovery timeline. This builds liquidity pressure on owners as they sustain headwinds from the COVID- 19 pandemic. These assets have included large city-centre hotel properties with high room count and rely on significant corporate/group business to drive value. Vulnerable assets are typically forced into liquidity trades, driving value discounts between 10 and 30 per cent relative to 2019 year-end values. Durable assets have a low burn rate and a strong sense of recovery on the horizon, allowing the property to sustain headwinds from the pandemic. These assets are often well located with strong ownership groups servicing reasonable debt thresholds. These durable assets are transacting at spot liquidity trades, mitigating value discounts of zero to 10 per cent relative to 2019 year end values.
RC: While demand has improved in some markets and in some segments across the country, it’s still very low across the board. What does this mean for hotel owner groups? Have some of the government programs helped in the short term, and how long can this be sustained?
MS: The government programs have been incredibly helpful for hoteliers across the country. Without them, the narrative throughout this article would be very different and a number of owners would be forced out of their investments that have often taken generations to foster and develop. The industry has counted on the support of their lenders and the government.
I would prefer not to comment on when this support will end – we’re hopeful that the industry will be supported until demand return to levels where businesses are viable without the support programs.
RC: How can investors bid competitively and what does owning a hotel asset in this environment look like?
MS: Having a strong relationship with your lender and commitment for additional growth is the first step. We’re seeing strong investor action on deals we’re marketing across the country. The appetite is there to invest and we see groups spending significant time and resources on due diligence ahead of bids to ensure they are able to support their position once the hotel is under contract. Depending on the type of property and current performance level, some investors are treating acquisitions similar to new development with a two to three year ramp-up period prior to stabilization. Medium-long-term investors are still very active and the current environment seems to be unlocking deals that we may never have seen come to market otherwise.
RC: Is it a good time to invest in the hotel sector?
MS: Yes – early on in my career a mentor shared a view with me that you make your money when you buy. I believe that to be true. If you’re able to acquire at discounted levels and ride the industry back up, in additional to the inflationary growth we anticipate in the short/medium term, you are putting your money to work in a smart way.
BEACHWOOD REAL ESTATE ADVISORS
Sylvia Occhiuzzi, vice-president
Rosanna Caira: From your perspective, how has COVID-19 impacted the hotel real-estate market in Canada?
Sylvia Occhiuzzi: [COVID-19] caused the transaction market to briefly stop. Much of what was listed at the time was taken off the market as owners focused on operations. Opportunistic buyers were anticipating significant discounts, which for the most part did not materialize – a signal of the financial strength of hotel owners across the country and the positive impact of the federal support programs that were made available relatively quickly. Several assets were acquired for alternate uses or re-development, reducing stock in some markets, while other hotels, particularly in downtown and airport areas, have been temporarily leased by government and institutions to address short-term housing needs and COVID-19-related demand. Although transaction volume dropped last year by 50 per cent over 2019, pricing held up relatively well, on par with 2016, due to deals that were already in place, acquisitions from government bodies and the absence of distressed sales. As of the first quarter of 2021, transaction activity has been minimal, however there is more than $1 billion of product on the market and a much narrower bid/ask spread than even six months ago.
RC: How long do you think the industry will take to rebound?
SO: Nationally, RevPAR will likely take up to three years to return to prior peak levels. Secondary and tertiary markets in parts of the country, such as Northern Ontario or markets where there are stable levels of demand have shown resilience and should recover faster. Resorts across the country have been the beneficiaries of travellers flocking to drive-to, open-air destinations and have not seen the level of decline that other sectors of the industry have experienced.
In terms of investment volume, we’re beginning to see signs of the market reforming and with increasing amounts of product available, early indications are that investment volume could return to the 10-year average of $1.75 billion to $1.8 billion within a two-year period.
RC: COVID -19 has greatly impacted business travel, which means large hotels in city centres or top tourist destinations have been decimated. How long will it take for these properties to return to pre-COVID levels, and does this worry you with regard to the future of large-scale properties in urban centres? Are there certain hotels that are better risks to purchase right now?
SO: Full-service hotels in urban markets have certainly seen some of the most severe declines in both occupancy and Average Daily Rate and the re-opening of our international border is essential to see the levels of demand climb back to pre-COVID-19 levels. There are signs of pent-up demand and recognition from many that virtual calls and online meetings cannot replace face-to-face interaction and the spontaneity and productivity that comes with being around friends and colleagues. I believe in-person meetings and social events will continue to be an integral part of business and daily life and the services many large, city-centre hotels offer remain valuable, however there may be a shift in what services guests will want and need, how they want to receive these services and how often they need them. There will be a lag in the recovery for large, city-centre hotels as meetings and group business form the last segment of demand expected to return.
From an investment standpoint, the markets and asset classes that have been less impacted through the downturn, such as drive-to markets and limited- or select-service hotels, will be the most attractive as there is a clearer path to their recovery. As well, assets with strong repositioning potential will also be highly sought after.
RC: Is the risk too great for hotel owners looking to purchase a city asset?
SO: Not with proper underwriting, being realistic on the performance over the next couple of years and a clear understanding of the asset and operation they are considering. Good assets across the country are becoming available and long-term holders of real estate will see the opportunities to acquire properties that may otherwise not have come to market.
RC: What can investors expect when looking at hotel investment opportunities in the current marketplace?
SO: Active investors are using creative capital structuring and alternative sources of debt and equity to get deals done. The traditional debt markets have been challenged up until recently, but those are starting to open up, which will once again provide a key funding source for investors. Relationship lenders are playing an integral role these days.
RC: Are there certain markets that first-time hotel investors should be targeting in this market?
SO: Whether you are a first-time hotel buyer or seasoned owner, a viable hotel investment is highly dependent on your specific investment criteria. As a first-time hotel buyer, limited- or select-service assets with straight-forward operations and a small employee base are good properties to get started with. New investors to the sector may find more opportunity in secondary and tertiary markets across Canada.
RC: How can investors bid competitively and what does owning a hotel asset in this environment look like?
SO: Bids that offer straight-forward terms, provide confirmation around debt and equity and put forward short due diligence and closing timelines generally demonstrate a buyer’s solid understanding of the asset and give sellers a sense of confidence in the offer. Buyers need to consider the time, cash reserves and planning that may be required to carry the operation through to a full recovery.
RC: Is it a good time to invest in the hotel sector?
SO: Investors are finding this period a good time to consider acquisitions. Interest rates are still at relatively low levels and they can take advantage of slower periods of demand to undertake capital improvements and execute re-positioning plans so that the hotel they acquire will be solid when the recovery takes hold. History has shown us that when industry cycles are disrupted, trends shift, innovation emerges, and great opportunities are born. We are beginning to see the signs of change already and I’m optimistic that our industry will see some of its brightest days ahead.
