By Brian Flood and Vanessa Boland, CBRE Hotels
2016 was a record year for hotel investment in Canada with total transaction volume approaching $4.0 billion. Despite the weak investment climate in energy-based Canadian markets, investment activity — particularly in Metropolitan Vancouver, Toronto, and Montreal — has remained strong. Activity was fuelled by the lower Canadian dollar, an abundance of equity capital, resilient debt market conditions, and an overall stable national economy.
The level of domestic and foreign investor interest in Canadian real estate is at record levels, with strong representation from Asia and the Middle East. The number of single asset hotel transactions in 2016 increased by 7 per cent over 2015 levels, from 112 to 120 hotels. The overall sale price per room for single assets declined to $115,000 in 2016 versus $123,000 in 2015 due to a change in the asset profile from larger full service assets sold in 2015 to primarily limited and focused service hotels in 2016.
Excluded from the above figures are the portfolio transactions which occurred in each year. The Canadian market typically sees a small number of portfolios trade in any given year; however, in 2015 and again in 2016 portfolio transactions have garnered strong interest, particularly from overseas buyers. In 2015, the 23-property Fortis portfolio sold for approximately $365 million, while the 112-property InnVest REIT sale traded for $2.1 billion in 2016. Including the InnVest sale, the Canadian hotel market has seen a record total of 232 hotels change hands with a transaction volume of approximately $3.9 billion in 2016. This will be a banner year for hotel investment with overall deal volume exceeding the prior record of $3.8 billion seen in 2006 and 2007, when Legacy REIT, CHIP REIT and CP Resorts transacted.
With strong demand for hotel investments, capitalization rates in key markets continued to decline through 2016 and are now at record low levels in several markets. This combined with strong operating numbers has driven hotel values to historic highs.
On a regional basis, Central Canada (Ontario and Quebec) continues to dominate transaction volume, accounting for 70 per cent of all national trades in 2016. There were a total of 84 transactions this year versus 72 in 2015. The most active market was the Greater Toronto Area (25 sales) where notable transactions included the Four Seasons Toronto ($225 million), Novotel Toronto Centre ($54 million), and the Holiday Inn and Express Toronto Markham ($31.8 million). In Montreal, there were a total of five trades in 2016, with two notable transactions: Le Square Phillips Hotel & Suites ($38 million) and the Sheraton Montreal Airport ($50.8 million).
British Columbia and Vancouver in particular continued to report robust investment activity accounting for approximately 18 per cent of aggregate trades, with five hotels transacting in Vancouver. Notable trades in Vancouver include the Fairmont Vancouver Airport ($90 million) and the Park Inn & Suites Vancouver ($52 million).
The Alberta and Saskatchewan markets reported a limited amount of investment activity. Weak operating results and investor uncertainty about the long awaited recovery have curtailed sales activity at the present time. Other than the sale of a 50 per cent interest in the Candlewood Suites & Holiday Inn Edmonton West ($172,900 per key) and the Four Points by Sheraton Edmonton Airport ($153,600 per key), most transactions occurred in tertiary markets at low per-key values between $60,000 and $70,000. Saskatchewan had no transaction activity this year.
Single-asset hotel transaction activity in Eastern Canada continued to be sluggish with limited product coming to market. Trades were only seen in the province of New Brunswick, all involving limited service properties.
Hotel trades outlook for 2017
The outlook for hotel investment in Canada is favourable through 2017. While we anticipate there will be gradual increases in interest rates through 2017, there remains high investor confidence in the commercial real estate sector. Investment real estate and hotel real estate in particular, will continue to attract investors and entrepreneurs alike.
Bill Stone (shown at left), executive vice-president with CBRE Hotels Capital Markets Group, provided his outlook for the coming year.
“2017 will be one of the decade’s most active years, on the heels of an exceptional 2016. Canada continues to be recognized as a safe capital haven with robust operating fundamentals, particularly in its three largest markets. Competition for hotel assets will remain strong with multiple bids following tight marketing programs, attracting Canadian, U.S. and offshore investors from around the globe.”
Brian Flood (firstname.lastname@example.org) is a senior managing director of CBRE Hotels’ Valuation & Advisory Group in Canada; Vanessa Boland (email@example.com) is an analyst with CBRE Hotels, Toronto. CBRE Hotels is the largest dedicated hospitality group offering professional services to the Canadian hospitality and tourism industries.