Strong Fundamentals Driving Western Canada’s Hotel Investment Landscape

August 21, 2012

Despite continued economic volatility globally, Canadian commercial property fundamentals remained strong in the second quarter, with recent weeks characterized by hallmark transactions such as the $1 billion sale of the Scotia Plaza in Toronto and significant portfolio trades, including the Maestro portfolio. In the hotel investment market specifically, year-to-date (YTD) August 2012 national transaction volume activity is tracking on par with the same period for last year amounting to over $660 million in volume. However, with the amount of product currently on the market, investor demand and availability of equity and debt, we anticipate year-end volume will surpass last year’s $1.2 billion in closed transactions, which was higher than the volume in 2009 and 2010 combined. Pricing on a per-room basis is up approximately 18% YTD over last year at approximately $120,000 per room.

In 2012, hotel transaction activity has been largely driven by a variety of owners realizing on planned exit strategies, while private investors, developers and REITs have been attracted to product with identifiable upside and markets with improving operating fundamentals through the first half of 2012. National RevPAR (Revenue Per Available Room) has increased by 3.2% during this period, with a 1.9% and 1.2% growth in occupancy and ADR (Average Daily Rate), respectively. Western Canada has seen the strongest growth led by Alberta with a 9.5% RevPAR increase, fuelled by a well “oiled” provincial economy. Even with instability in commodity prices, particularly over the past three months, continued investment in the resource sector remains strong and production promising. This continued investment and economic growth in Alberta has the Conference Board of Canada in its Provincial Outlook Summer 2012 forecasting the province to once again lead GDP growth in Canada at 3.8% for 2012. This has contributed to Alberta's attractiveness for hotel investment and the province now shares the spotlight with Ontario for hotel investment activity through the first half of 2012. Also supporting investment activity in western Canada is the cost and availability of debt with local credit unions and the likes of ATB Financial, Business Development Bank of Canada and Canadian Western Bank, all of which are actively lending in the hotel space. Investors are able to positively influence their internal rate of return expectations by leveraging a more competitive lending environment to achieve loan-to-value ratios of between 55-65% on 3 to 5 year terms (18-25 year amortization) at prime + 100 to 150 bps. Through August 2012, Alberta has seen an increased level of activity with 12 hotel trades accounting for $230 million compared to $113 million for the same time period in 2011. This 2012 volume represents approximately half of all activity since January 2010. Escalating bottom lines have spurred on activity of cash-flow driven buyers, for example, Temple REIT (TR-U:CN). In the past nine months, Temple has acquired four hotels in Western Canada and announced a fifth this month, totaling over $145 million combined. Although these transactions represent pricing premiums in their respective markets, all five trades will support double digit going-in cap rates.

On the vendors side, over the past 12 months we witnessed three out of five Canadian hotel REITs bringing to market non-core assets, including; Holloway Lodging REIT (HLR-U:CN), InnVest REIT (INN-U:CN) and Royal Host Inc. (RYL-U:CN). Motivations to sell often include lower cash flow contributions and substantial brand or other capital requirements to realize future operating upside. As the REITs look to shed non-performing assets, private investors and hotel investment companies have been the primary beneficiaries with the ability to act swiftly and provide upside through leveraging local market knowledge and relationships to reposition/refocus the asset for improved bottom line margins. Another buy-side trend witnessed nationally during the past 18 months has been the purchase of hotels by developers and real estate companies for alternate use plays. Private equity groups and developers have acquired hotels operating below stabilized levels and nearing the end of their useful life-cycle in prime locations to redevelop the site and capitalize on the strength of alternative markets. Examples of this include the Cromdale Hotel, Edmonton (retail); Four Seasons Hotel Toronto (residential); Clarion Hotel Suites Selby, Toronto (residential); 5 Calgary Downtown Suites (rental); Sutton Place Hotel Toronto (residential); Comfort Inn Vancouver Airport Hotel (residential); and Travelodge Macleod Trail, Calgary (retail).

We are forecasting Canadian hotel investment activity to remain robust in 2012, particularly in Western Canada with cities such as Calgary and Edmonton forecast to achieve the greatest GDP growth of all major Canadian markets in the next few years and the continued upward trending of operating fundamentals.


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Mark Sparrow
Director of Hotels, Western Canada
Mark plays a key role in CBRE’s national hotel platform in Western Canada and is actively involved in hotel and resort asset types, working closely with owners to develop tailored marketing programs and disposition strategies.