Frantic 2012 for hotel deals expected to be eclipsed, Colliers

Hotel investment in Canada was the busiest in a decade in 2012 at nearly $1.2 billion, and this year it is forecast to top that figure, Colliers International Hotels states in its Canadian Hotel Investment Report.
Colliers makes that buoyant prediction based on hotel deal flow already recorded in the first quarter of the year, which has exceeded the $384 million reported in the same period of 2012.
“We have already surpassed last year’s numbers and based on what we know is in the market and what we are involved with, we think this is going to be another good year,” said Alam Pirani, Executive Managing Director with Colliers International Hotels. “I’m pretty bullish about the future of the market.”
Unlike the prior 2005-2007 peak, characterized by “one-off strategic acquisitions,” this high cycle is marked by “traditional transactions” reflecting “a healthy market supported by the strength of other commercial real estate sectors, improving economic indicators and low borrowing costs,” the Colliers executive added.
Sophistication in the industry
Heightened competition in the retail and office investment markets in Canada and globally shows up in the lodging sector as non-traditional investors are attracted to the “premium returns relative to other asset classes” that hotels offer, Colliers said.
“The capital that is now investing in our space is institutional and is very sophisticated,” said Pirani. “A lot of the private guys, what we call hotel investment companies as well, have multiple assets, this is their core business, they know what they are doing, understand the value of the brand. We are seeing a total level of sophistication in the industry.”
Hunger for safe, predictable returns is what has made hotels such an in-demand category. “There is such a demand for yield in the market, and in other forms of real estate there is so much compression on cap rates that you are finding non-traditional real estate companies getting into our space.”
Real estate companies emerged as the leading investor group in 2012, accounting for 43% of total acquisitions, primarily for redevelopment. Private investors were the second largest group with nearly one third (29%) of acquisitions, followed by REITs/C-Corps at 17%.
Hotel investment companies, which dominated activity in 2011, saw their representation fall to 10% of total transaction volume. Hotel sales totaled $1.1 billion in 2011.
Hotels remain a hot commodity
As with other real estate classes, hotels will remain a hot commodity as long as the winning formula of steady economic growth and low rates continues. “As long as we can keep chugging along with the moderate growth we witness in the market,” said Pirani, who expects the upward trend to continue well past 2013.
“Barring anything major that happens globally, we have some good momentum. Supply seems to be in check because construction financing isn’t the easiest. A lot of new development is driven by some of the brands and in the markets where you have seen a ton of new supply, hotels are feeling the effect so I don’t think we are going to see any significant new supply.”
In markets such as Toronto, some older hotels have been converted to other uses, such as condos, he noted. “You have the old inventory coming out of the system.”
Sales activity in 2012 was relatively balanced between the west and east – 66 of the 116 hotels sold during the year were in Eastern Canada (for a total of $605 million) and 50 were in Western Canada ($573 million). On a price-per-room basis, however, Western Canada hotels sold at 28% premium to the national average, driven by the hot resource markets of Alberta and Saskatchewan.
Just the facts
* Strong employment levels and higher consumer confidence boosted hotel operating performance in 2012.
* Revenue-per-available-room grew 2.4% (up from 1.2% in 2011) with national occupancy at 62.4% (61.9% in 2011) and average daily rate rising to $129.89 compared to $127.93 the year before.
* On a provincial level, Ontario led in terms of volume and number of trades ($460 million, 50 deals) followed by Alberta ($391 million, 30) and Quebec ($135 million, 13).
* On a city level, Toronto marked the highest deal volume ($289 million), followed by Edmonton ($121 million), Montreal ($112 million) and Calgary ($80 million). Other cities that made the list in 2012 included Vancouver ($61 million), Fort McMurray and Grande Prairie ($56 million each), Victoria ($48 million) and Saskatoon ($37 million).
* Hotel values in Canada continued grew 4% during 2012 and Colliers forecasts another 4.5% increase in value this year.
* The markets with the most significant hotel value growth in 2012: Calgary (7.0%), Edmonton (5.7%), Regina and Saskatoon (5.5% each), downtown Toronto(5.2%) and Winnipeg (4.2%).
* For 2013, hotel value growth in Calgary is expected to remain the highest across the country (7.9%), followed by Downtown Toronto (6.7%), Edmonton (5.9%), Regina and Saskatoon (5.8%) with Downtown Vancouver closing the list (5.4%).







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