Canadian commercial real-estate investment activity surpassed historic highs in 2016 as our economic and political stability and safety attracted diverse global capital. A record-breaking $34.7 billion in commercial property sales was reported in 2016 as property fundamentals improved and values increased on a national basis. For the first time, foreign capital surpassed private Canadian capital as the most active buyer group, accounting for 27.4 per cent of all sales over $10 million in 2016. At an overall national average of 5.9 per cent, cap rates ended the year at record lows for most commercial property types as heated competition — resulting from the influx of foreign capital — propelled values upwards. Global gateway cities, Vancouver and Toronto captured the majority of new foreign capital. With cap rates on trophy-office product below four per cent in these markets, commercial real-estate valuations in Canada’s major cities are approaching those of New York, Paris, London and Shanghai.

Canadian hotel-investment activity was similarly robust, with 2016 volume reaching $4.1 billion. This level of investment has not been achieved since significant entity-level transactions and merger-and-acquisition activity pushed volume to $4.5 billion in 2007. Entity-level transactions were the driving force behind last year’s activity. However, when this is excluded, transaction volume approached $1.8 billion — still a healthy year based on historic trends. Approximately $2.7 billion was acquired by foreign capital in 2016, the majority of which stemmed from two entity-level transactions: the $2.1 billion privatization of InnVest REIT by Bluesky Hotels & Resorts, backed by Hong-Kong capital; and the $210 million acquisition of Coast Hotels & Resorts by Japan-based APA Group. In terms of single-asset transactions and smaller portfolio deals, private Canadian capital continued to dominate.

Regionally, activity was heavily skewed to central Canada (Ontario and Quebec) and more specifically, Ontario. Central-Canadian transaction volume (excluding entity-level transactions) approached $1.3 billion, with Ontario representing 85.7 per cent of this activity. Ontario hotels transacted at an average price-per-key of $128,000, while Quebec per-room pricing was in the $94,000 range. Approximately $635 million transacted in the Greater Toronto Area (GTA) alone, representing more than 35 per cent of national transaction volume and equating to an average price-per-room of $165,000. This is the fourth consecutive year that GTA hotel sales have accounted for at least a third of the national total.

Investment volume in Western Canada amounted to approximately $480 million, representing 26.6 per cent of national volume (excluding entity-level transactions). Not surprisingly, the majority of Western-Canadian investment took place in B.C., where more than $375 million in transaction activity was reported. Interestingly, at an average price-per-room of $217,000, Vancouver posted a 31.5-per-cent premium over average pricing in Toronto. While many believe the Prairies’ resource-driven markets are reaching the bottom of the cycle, there was minimal investment activity and limited distressed-sale activity to-date. Atlantic Canada accounted for only one per cent of national transaction volume, which is not uncharacteristic as this region typically accounts for less than five per cent. Average per-room pricing was in the $50,000 range, the lowest of the three regions, however given the small number of deals, this value tends to be easily skewed in either direction on an annual basis for the region.

Major market hotel cap rates are generally holding steady across the country with the exception of Toronto and Vancouver, as rates for prime assets hit the sub-five per cent range. The 259-room Four Seasons Toronto sold in September 2016 to a U.S.-based investor for $225 million — representing record per-room pricing at the time of $869,000 — at a reported four per cent cap rate. Additionally, Hong Kong-based Able Shine and Magnificent Hotel Investments Ltd.’s pending acquisition of the 156-room Rosewood Hotel Georgia in Vancouver further demonstrates strong international investor interest and resulting downward pressure on cap rates, with the cap rate reported to be 4.2 per cent based on 2016 net income. The Rosewood’s purchase price of $145 million reflects per-room pricing of $929,000, surpassing that of the Four Seasons Toronto to set a new record. From a performance standpoint, national RevPAR improved 3.8 per cent in 2016, with resource-market declines in both Western and Atlantic Canada offset by significant gains in major urban centres and large resort markets. The top major urban market RevPAR performers were Toronto and Vancouver, reporting growth of 12.7 per cent and 11.5 per cent, respectively, surpassing all major U.S. markets. Further, while these were the top-performing urban markets, other secondary markets in Southern Ontario, interior B.C. and on Vancouver Island also posted double-digit growth. Most notably, Whistler’s RevPAR improved 23.4 per cent — its third consecutive year of double-digit growth and the highest growth of any market nationally. Further, Alberta Resorts reported RevPAR growth of 13.3 per cent, helping offset declines in virtually all other Alberta markets.

Total commercial real-estate investment is forecast at $31.9 billion in 2017, the third-highest annual total in Canadian history. Activity will be largely driven by demand for commercial property in Canada’s major urban centres as its stature on the global stage continues to grow and attract both foreign and domestic capital. While there is potential for an increase in interest rates in the U.S., Canadian bond yields are anticipated to remain at historic lows, which will maintain the current spread with cap rates. Further, continued interest by foreign capital and the perceived lack of risk in the Canadian markets will protect against any sudden drop in asset pricing and will ensure that commercial real-estate yields remain attractive.

Overall, the outlook for the Canadian hotel market in 2017 is very favourable. As Canada celebrates its 150th anniversary, the low Canadian dollar will continue to entice visitors from the U.S. and Asia, while also encouraging domestic travel. International overnight arrivals to Canada increased 11.1 per cent in 2016 according to Statistics Canada and overall demand is expected to rise in 2017. National RevPAR is forecast to improve 4.6 per cent in 2017 and while the outlook for earnings growth is less optimistic than previous years at 6.4 per cent, it’s really a return to more sustainable growth levels following sharp RevPAR increases in many markets.

From an investment standpoint, there are early indications that 2017 will be another exceptional year, with a number of portfolios and significant assets that have already closed, are tied up or are on the market. Of note to-date is the February 2017 sale of bcIMC’s SilverBirch Hotels & Resorts portfolio — comprised of 26 hotels — to Hong-Kong based Leadon Investment Inc., with pricing reportedly exceeding $1 billion. The pace of market activity is expected to endure as competition for prime assets remains heated. There has been an increase in unconditional offers, or offers with minimal conditions and short due diligence periods as well as expedited closings.

In terms of hotel financing, the pool and composition of lenders remains consistent, while the continuity of lending criteria is predictable. Buoyant fundamentals in the majority of markets continue to support sensible debt underwriting by many lenders. The inexpensive Canadian dollar combined with confusing signals associated with U.S. cross-border travel and the resulting optimism for increased domestic overnight stays is assisting Canadian property owners and lenders underwrite robust property economics.

As operating and financing fundamentals continue to be strong, there is abundant domestic and international equity looking to be invested in safe, yielding Canadian hotels as we move through 2017. In line with 2017 forecasts for the overall Canadian commercial real-estate market, hotel transaction volume should approach a top three finish this year.

Karina Saks is a financial analyst with CBRE Hotels in Toronto


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