Values, investors and tourists drive near-record hotel investment
Canada has some of the strongest commercial real estate fundamentals of any mature market globally. Canadian commercial real estate investment volume of over $43 billion in 2017 shattered the record set just a year earlier and far surpassed initial forecasts. Record pricing unlocked a new supply of marquee properties for sale as owners looked to capitalize on highly coveted assets, particularly in Canada’s urban centres, and according to CBRE’s 2018 Canadian Hotels Outlook report this certainly held true within the hotel sector, with new historic highs set in 2017 for both deal size and per room pricing.
Both top and bottom line hotel performance metrics are trending upwards, with Canadian hotel transaction volume reaching $3.4 billion in 2017 (including M&A activity), below 2016’s $4.1 billion but still reflecting an exceptionally strong level of investment. When entity-level/M&A activity is excluded, $2.3 billion in single assets/portfolios traded, well-above the decade average of $1.4 billion. Several significant deals occurred, such as the $335 million sale of the Sheraton Centre Toronto, the largest single hotel asset transaction on record in Canada, and the sale of the 156-room Rosewood Hotel Georgia in Vancouver set a new luxury pricing threshold, at $930,000 per room.
Key Hotel Investment Trends
Excluding entity-level deals, Central Canada dominated deal volume for the sixth consecutive year, largely driven by $1.1 billion transacting in the GTA alone. With relatively few trades in the prairies, transaction volume in Western Canada accounted for 29.0 per cent of national transaction volume, a similar proportion as the year before.
There continues to be a strong appetite for assets in major markets, however with a significant number of institutional grade assets having traded in recent years, availability of product has slowed, contributing in part to 72 per cent of deals occurring in secondary/tertiary markets. Interestingly, while representing only 28 per cent of the deals, primary markets accounted for 76 per cent of the dollar volume.
Private capital dominated at 88 per cent of total transaction volume, comprised of private investors (56 per cent), non-public hotel investment companies (21 per cent) and real estate companies/developers (11 per cent). Foreign capital was again a significant factor in hotel investment, with Hong Kong-based Leadon Investment Inc.’s $1.1 billion acquisition of bcIMC’s SilverBirch Hotels & Resorts portfolio, consisting of 26 hotels, in Q1 2017. This followed the privatization of InnVest REIT and its 107-hotel portfolio for $2.1 billion by Bluesky Hotels, backed by Hong Kong capital, just a year earlier.
2018 individual hotel and portfolio sales should reach at least $2.0 billion.
There was downward pressure throughout the year on Montreal cap rates as investors looked for a desirable urban alternative from competition heavy Toronto and Vancouver. Despite the perception of higher rates, cap rates on Alberta transactions were relatively low as buyers did not double punish weak market-wide performance with high yield expectations and bought on a per room basis with lower initial yields.
Total overnight travel was up 3.3 per cent in 2017, with the strongest growth posted by overseas travel at 10.4 per cent. National accommodation demand grew 4.1 per cent in response, with RevPAR improving by almost eight per cent. Western Canada’s resource markets continued to struggle, but the rate of decline has slowed, bringing optimism for 2018. That said, recovery will be tempered in markets impacted by new supply, particularly in Calgary and Edmonton, and to a lesser degree Saskatoon and Regina. In terms of RevPAR, Western Canada posted growth of over six per cent in 2017, while Central and Atlantic Canada both improved by nine per cent. The net result from a bottom line performance perspective was an increase of almost 16 per cent in operating income nationally to $14,300 per room in 2017. This growth was led by Quebec at almost 25 per cent; Atlantic Canada at 20 per cent; Ontario at 19 per cent; and British Columbia at 17 per cent. At $23,600 per available room in net operating income, British Columbia still leads the country.
National commercial real estate momentum is building off 2017’s record breaking year, with a number of significant deals already tabled, including Slate Acquisitions Inc.’s pending $1.1 billion acquisition of 97 office, retail and industrial properties from Cominar Real Estate Investment Trust across the GTA, Atlantic and Western Canada. Overall, CBRE is projecting a robust investment year in 2018, with Canada likely to contend for a third consecutive year of record investment volume, with hotel investment following suit.
- Non-traditional hotel deals, includingmixed-use hotel component opportunities, site redevelopments and where feasible, land acquisitions, will become more prominent.
- Well established regional hotelinvestors that have been activeacquirers in recent years will continue their growth trajectories by expanding geographically and becoming national players, as well as from developing more sophisticated management platforms and corporate infrastructure.
- These same groups are alsoexpanding and exploring other realestate asset classes, particularly multi-residential and seniors’ housing.
- There is a risk for increased newsupply over the next few years ifinvestor capital cannot be recycled into existing hotels.
- Building off a strong 2017, overnighttravel in 2018 is anticipated tomoderate, but at growth of 2.2 per cent remains quite strong. Overseas travel is expected to lead the pace of growth, forecast at 6.4 per cent. In fact, 2018 has been dubbed the Canada-China Year of Tourism, based on an initiative between the two governments to boost the two-way flow of tourists. Room demand across the country is forecast to increase 2.4 per cent and RevPAR is anticipated to move upwards by 4.7 per cent, with profitability expected to rise by over eight per cent.
- Despite recent Bank of Canadainterest rate increases, debt remainsrelatively inexpensive and readily available with interest rates in the four per cent range in most markets, and sub-four per cent for deals with strong sponsorship, with Alberta being the exception. There are fewer lenders entering Alberta’s hotel space and some interest rates are approaching double what they were 12 to 24 months ago.