Despite some economic slowdowns in parts of the country, hotel investment activity is continuing on the upward trajectory that began in 2013. “The hotel market typically runs in a three- to five-year cycle. We’re coming through one of those now,” says Brian Flood, VP, Valuation and Advisory Services for CBRE Hotels in Toronto.
Investment activity was very strong in 2014, confirms Monique Rosszell, managing director, HVS in Toronto. Last year saw a total transaction volume just shy of $1.5 billion. “It wasn’t as active as 2013, which was a stellar year with $2 billion in transactions, given the large Starwood Westin portfolio purchase. At the same time, however, activity in 2014 was much higher than the recent five-year average,” she says.
Investment activity has been in high barrier-to-entry, diversified markets such as Vancouver, Toronto and Montreal. “The bigger markets have really performed. There have been a lot less rooms on the market, which has helped downtown hotels bump up occupancy,” Flood notes.And, Toronto’s strong performance should continue this year thanks to this summer’s Pan Am Games, Flood adds. Vancouver also had a very strong 2014, which is expected to continue this year.
Key factors contributing to ongoing activity are the overall strength of the economy and the decline in the Canadian dollar. “That’s really benefiting some key markets, especially southern Ontario, Vancouver and Montreal to a certain extent as well,” Flood says of the destinations that attract tourists to hotspots such as Niagara Falls, Ont.
Alternatively, Flood speculates that, while the Rocky Mountains will continue to gain steam as a tourist attraction, Alberta and Saskatchewan could experience contraction due to the downturn in energy-related activity. “We’re not seeing it yet, but it will happen later in the year. Whether it will be short- or mid-term will be anybody’s guess. However, Saskatchewan is a bit more diversified with its strong agriculture and mining [sectors], so [it] may not feel the same impact,” he says.
The softer markets will be smaller, low barrier-to-entry, undiversified areas, particularly those that depend on oil and gas or mining exclusively and have significant new supply. “When you have low barriers to entry, it’s easy for new hotels to come into the market. We’ve seen a lot of that. However, we’re already hearing about projects [in the West] being put on hold as they wait to see how things go. Projects in smaller markets can stop on a dime, so expect to see postponements,” Flood says.
The bulk of the growth continues to be in the mid-scale, focused-service segment at hotels such as Fairfield Inn & Suites by Marriott. “There we will see both new builds and conversions,” Flood says. “DoubleTree [by Hilton], for example, has made a pretty big splash on the conversion front and will continue along that line as older assets are rejuvenated. It makes a great deal of sense in urban markets, because it’s cheaper to buy an older, run-down hotel and convert it into a quality asset versus a new build. That’s very attractive from an investment standpoint.”
Meanwhile, Ottawa and Montreal have had many underperforming properties converted for a new use. “Last year Montreal lost about 1,500 rooms and Ottawa [lost] 1,000 to student housing,” HVS’s Rosszell says. “This often occurs when hotel owners don’t want to put in the large amounts of capital required to bring properties up to standard to compete. Older properties have high fixed expenses.”
On the new-build front, investment activity in select-service properties in downtown cores has been non-existent. Even the 567-room Delta in downtown Toronto that opened in December was the first standalone new build, full-service hotel in downtown Toronto in 25 years, Rosszell notes. “The land is too expensive. Any new supply has been condo hotel development: the Shangri-La, Four Seasons, Trump Toronto and The Ritz-Carlton,” she adds.
One positive trend that will continue into 2015 is the availability of capital for transactions. “There is no shortage of debt capital coming into the hotel market,” Flood says. “There are more lenders than there were a year ago. Credit unions and BDC (Business Development Bank of Canada) are still very active, while interest from chartered banks has increased. On larger, meatier transactions we’re seeing more U.S. and offshore lenders.”
The relative strength of the Canadian economy and low dollar are behind the inflow of international capital, including from Asia. “The low dollar is helping foreign investors seeking cheaper assets,” Rosszell says. “A lot of potential international institutional investors are looking at larger portfolios, which has contributed to overall pricing as well as volumes. U.S. insurance companies are also getting back into the game. On the smaller properties, credit unions are being very competitive in their rates.”
Transactions worth more than $50 million represented more than 25 per cent of the market activity in the past year, with B.C. leading the country in terms of per-key prices at $121,000, compared to Alberta at $105,000 and Ontario at $95,000. “Quebec is lower because of the number of properties purchased for redevelopment,” Rosszell says of the province that’s attracting $49,000 per key.
During the past year, Vancouver and Toronto have posted similar stats, including RevPAR, occupancy and ADR. In 2014, RevPAR in downtown Vancouver was $131.65 at 74-per-cent occupancy and $177.96 ADR. “This was neck and neck with downtown Toronto at $131.23 RevPAR, a 74.3-per-cent occupancy and $176.55 average rate,” Rosszell says. “In 2013, RevPAR for Vancouver was at $119.70 and Toronto at $125. In other words, while Toronto saw a five-per-cent increase, Vancouver had a 10-per-cent increase, as it is benefiting from strong growth in Asian demand.”
Flood projects that, while overall numbers are strong, 2015 will see a shift in momentum from west to east. “Whereas western markets have done phenomenally well over the last four to five years, some are now lagging and eastern markets are doing well. In fact, one of the strongest markets last year in terms of growth was Windsor, (Ont.), which showed 15.5-per-cent RevPAR growth in 2014,” he says, pointing out a strong area of growth in Ontario.
While Calgary will see 9.3 per cent more new rooms this year, the low oil prices and less-aggressive employment atmosphere will make it challenging for the market to absorb. “Over 1,000 rooms are coming into the market this year alone, followed by another 700 next year and another 1,000 a year after that. That’s a tremendous amount of new supply that will put upward pressure on rates and drive everyone to renovate to compete,” Rosszell says.
The good news is lower oil prices and a stronger U.S. economy are supporting hotels’ bottom lines. “Utility costs go down, manufacturing improves and more people travel. That pushes up hotel demand. While it’s hurting Alberta, it’s benefiting regions in Eastern Canada,” Rosszell explains.
She predicts another hot market this year, as institutional investors look for strategic buys. Indeed the market is hot, with Hilton’s recent acquisition of the Delta Meadowvale. “We’re seeing a tremendous amount of interest in properties on the market because of their strong performance, such as the Novotel in Mississauga, (Ont.) and the Fortis portfolio out of St. John’s, (N.L.), which includes 23 hotels. These properties will sell this year.”
Volume 27, Number 3
Written By: Denise Deveau