In Q1 2012, the outlook for Canada’s economy was lowered and equity markets reacted to a stream of mixed economic news from the U.S. and overseas. Despite this, Canadian property markets continued to perform well as illustrated in the CBRE Q1 Cap Rate Survey. Similarly, Canadian hotels are realizing solid growth in operating results and strong activity in the investment sector. Real estate continues to offer comparatively high returns with good prospects for future value growth.
Canada’s sound financial system and steady economic growth offers stability to domestic and international investors. These traits, along with a sustained period of low interest rates, have provided the foundation for a healthy upswing in hotel transaction activity, rather than the unsustainable frenzied periods witnessed in 1997 and 2006 when M&A activity peaked. Although the number of hotels sold in Q1 2012 was below the prior year period, volume and pricing increased substantially. Based on Q1 trending and our outlook for the market, CBRE expects 2012 will be a very active year as investors redeploy capital in keeping with their longer term growth strategies. Institutional owners will make available a number of non-core assets as they rebalance their asset mix and take advantage of favourable market conditions.
Smith Travel Research’s results to March 2012 indicate national room demand and ADR grew by 3.3 per cent and 1.8 per cent, respectively. The highest demand growth by region was recorded in Vancouver South Area/Surrey (19.1 per cent), Alberta North Area (12.3 per cent) and Niagara Falls (11.9 per cent). Provincial RevPAR leaders included Newfoundland (11.4 per cent), Alberta (8.7 per cent) and British Columbia (7.3 per cent), reflecting the strength of the Canadian resource sector.
In terms of property type, midscale (7.0 per cent) and highway hotels (6.0 per cent) led in room demand growth and would include brands such as Ramada, Country Inn & Suites and Wingate by Wyndham. Resort and highway hotels led ADR growth at 5.2 per cent and 3.5 per cent, respectively.
While demand is strengthening, ADR remains below pre-recession levels in many markets. The lack of ADR growth since the recession and higher demand levels should be an impetus for ADR levels to improve, increasing returns to owners.
According to Lodging Econometrics’ Q4 2011 report, the Canadian development pipeline is relatively flat in comparison to Q4 2010 (16,820 rooms), and well below its Q1 2008 peak (33,964 rooms). In 2012, 31 new hotels are forecast to open (4,128 rooms) and 32 hotels (3,569 rooms) in 2013, whereas 66 new hotels opened in 2008 representing 7,784 rooms. With fewer hotels opening in the near term, recently introduced hotel supply will become fully absorbed in the market, further stimulating occupancy levels.
Q1 2012 hotel transaction volume was approximately 151 per cent ahead of the same quarter last year and represented an increase of 27 per cent over Q4 2011. Average price per room for Q1 2012 is reported at approximately $142,000, well above the Q1 2011 average of $69,500, however this quarter’s per room pricing has been skewed upwards with the inclusion of the Four Seasons Toronto.
Transaction types have been varied over the first quarter of 2012, including a number of assets purchased for conversion to alternate use, most notably the Four Seasons Toronto which sold in March 2012 and is being converted to residential condominiums.
Building on year-end 2011 transaction volume of $1.2 billion, which was almost three times greater than the recorded volume just two years ago, Canadian hotel transaction activity continues to strengthen. The number and diversity of deals being brought to market is escalating, while cap rates and pricing appear to be beginning to stabilize.
Real Capital Analytics has reported sales of hotels in the United States at US$3.8 billion in Q1 2012 down 2 per cent from Q1 2011. Looking forward, CBRE Hotels Americas is forecasting transaction activity to increase significantly across all segments of the hotel sector, largely resulting from continued RevPAR growth, the re-emergence of hotel REITs as active buyers, the resurgence of hotel lending and a continued lack of supply growth. Similarly, CBRE is forecasting Canadian activity to remain robust in 2012, particularly as there is extensive and diverse debt and equity sources, historic low interest rates and a stable financial infrastructure.