Thoughts of the global financial crisis moved to investors’ rear-view mirrors in 2013 as exhibited by the strong demand for a variety of assets. The proof is in the numbers as hotel transaction volume rose to more than $2 billion in 2013. Last year, the market was flush with capital, and the strong and diverse rotation of buyers and sellers took advantage of current conditions. Improvements in the lending environment were exhibited throughout 2013 and into 2014, aided principally by the all-time low cost of credit and an expanding universe of lenders attracted to the Canadian lodging industry. Below is a list of 10 reasons why it’s the optimal time in the Canadian hotel investment market for both capital flows and debt availability.

Robust Transaction Environment

Entering 2014, there’s a variety of product available for sale and a strong cross-section of buyers. We estimate $1.25 to $1.75 billion in transaction volume for 2014, given favourable market conditions and deal pipeline channel checks. There is a trend in growing transaction size represented by deals over the $10-million threshold, accounting for approximately 86 per cent of full-year volume in 2013. Average price per room has also seen healthy growth levels, increasing to $133,000 in 2013, representing a 59-per-cent increase from 2012; similar levels are anticipated in 2014.

Growing Operating Metrics

Healthy RevPAR gains across the country are spurring investor interest. RevPAR is forecast to grow by 4.1 per cent in Canada for 2014, reports PKF Consulting, much higher than the 10-year running average of 2.9 per cent.

Favourable Debt Conditions

The bullish transaction market described above is welcomed by a healthy list of Canadian, U.S. and international lenders eager to fund prime, institutional-grade hotel assets brought to market. Borrowers will continue to be pleased with the ample supply of debt capital available for hotels, which encourages lenders to be more aggressive on both underwriting standards and pricing. For larger full-service urban assets, the active lenders are insurance companies as well as foreign banks and U.S. institutions. GE Capital, credit unions, the Business Development Bank of Canada and other regional banks are very active for select- and focused-service assets. The landscape is quite different from west to east, with additional competition in the resource-rich markets of Alberta and British Columbia given the strength of their economies.

Default Risk Is Low

Canada has benefited from a significantly smaller amount of lender-driven scenarios than the U.S. This trend will continue into 2014 as we expect to see even less distress than last year’s meagre $65 million in dollar volume. There is a significant amount of capital from private investors and hotel investment companies in Canada who are comfortable putting substantial equity into deals and are therefore more conservative from a leverage standpoint. This bodes well for the hospitality industry where limited

lender-driven distressed sales impact pricing and overall metrics.

New Supply Remains Low

The new supply of guestrooms will remain below historical norms (two per cent to 2.5 per cent) and should average 1.5 per cent to two per cent in 2014, according to Colliers. Ensuring new supply is in check is a critical component of maintaining an active transaction market. Lenders tend to look closely at this before financing an existing hotel as the negative impact on the older properties can be quite meaningful once a new hotel opens. However, for the most part, the markets seeing new supply have strong economies that can absorb the new rooms.

Institutional capital checks In

The availability of rarely offered prime city centre hotels in Canadian gateway cities will continue to attract institutional capital. When the right product is available for sale, it attracts a diverse array of capital sources such as pension funds, private equity firms, hedge funds and other public vehicles such as REITs, helping to further legitimize hotels as an institutional grade asset class.

Acquisitions for Alternative Use

Although this theme has slowed in the last 18 months, the appetite for conversion to student residence or redevelopment to residential or retirement home still exists, taking non-performing hotels out of inventory and helping the existing stock of inventory in select markets. Where an asset has reached the end of its life as a hotel, converting to an alternative use often makes the most economic sense.

Cap Rate Stability (& Compression)

It’s tempting to say cap rates should trend upwards, but the market seems stable overall with continued compression in gateway markets (more capital, more competition equals a great outlook). Overall, cap rates averaged 8.5 per cent in 2013, which is still more attractive than other real-estate classes, such as office, where cap rates can be as low as sub five per cent.

Interest Rates/Foreign Exchange

The Bank of Canada has reported plans to keep its prime rate at one per cent through 2014, and perhaps much of 2015, resulting in a continued record-low interest-rate environment. Coupled with a Canadian dollar that’s forecast at 90 cents U.S. for 2014 (per BMO Capital Markets), this should generate interest from cross-border capital.

Behind-The-Scenes Action

There’s been a substantial market for partnership buy-outs, refinancings and new joint ventures. These don’t register as market transactions but are significant and representative of a healthy investment market. u Colliers International Hotels is an active hotel brokerage, having been involved in more than 300 Canadian hotel and resort property transactions with an aggregate asset value of $6 billion. Robin McLuskie is the VP of Hotels and is based in Toronto. She can be reached at [email protected].


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