Fuelled by increasing investor confidence, the unfreezing of capital markets, narrowing of bid-ask spreads and pent up equity, the first half of 2010 has shown measurable improvement in the global hotel real estate market, according to CBRE Hotels.
In Canada year-to-date (YTD) September 2010, hotel transactions have amounted to almost $485 million compared to just over $312 million for the same period last year. On a price per room basis, 2010 YTD transactions have also improved over 2009 levels, from an average of $69,000 to $103,000. So far there have been nine transactions worth over $10 million in 2010, compared to ten for the same period last year; however, six were worth over $25 million in 2010, while there were no deals over this threshold for the same period in 2009.
“We are witnessing opportunistic and strategic purchases for larger assets”, said Bill Stone, executive vice president, CBRE Hotels. “While activity is certainly on the rise, the limited number of transactions in the Canadian market continues to make it challenging to peg ‘true market value’. Bid-ask spreads, while narrowing, remain and this is particularly true for assets that are performing well below stabilized levels, or without positive cash flow.”
While many Canadian markets are slowly recovering in terms of hotel operating results, income erosion is still prevalent and impacting value. Still, recent significant hotel trades show promise. They include the Niagara-based DiCienzo Family’s acquisition of the Marriott Niagara Falls (432 rooms) and Sheraton Fallsview Hotel (407 rooms). The Marriott Niagara Falls, at a price of $76.4 million, traded for $177,000 a key, and ownership intends to renovate and reposition the asset as the premier city hotel, with irreplaceable views of Niagara Falls. The Sheraton Fallsview Hotel traded at a price of $70.0 million ($172,000 a key) and is expected to receive significant renovation capital to position it as a premier meeting and conference facility. Another significant transaction was the 307-room Crowne Plaza Chateau Lacombe in Edmonton, which sold in August to a private investor for $47.8 million ($155,700 per room).
To put the depth of recovery needed into full context, Canadian hotel transaction volume fell about 90 per cent from 2007 to 2009, from a market peak of $4.6 billion to just over $400 million, which was the second slowest year of activity in the past decade.
“We are now seeing stronger investor interest, largely due to the fact that it’s been demonstrated there will be few distressed sales of urban assets” adds Stone (Generally most of the distress has been on the resort side or smaller properties in secondary or tertiary markets). Canada has proven to be a safe banking environment and the market has not seen any significant lender-driven sales.
Lender driven sales in Canada amounted to about $44 million YTD 2010. In contrast, the U.S. has continued to experience high delinquency rates on loans in the commercial mortgage backed securities market. Moody’s Investor Services reported that the percentage increased again in August for all asset classes and hotels (again) had the highest delinquency rate at 15.5 per cent. Much of this elevated rate was due to the US$825 million Innkeepers portfolio loan which represented more than 75 per cent of the newly delinquent hotel loans in the past month.
According to Stone, the recent increase in availability of acquisition financing has helped relieve an obstacle to deal flow, prompting investors to return to the hotel investment arena. However, buyer preference has been strongly focused on urban, full service, branded hotels. This preference may be reinforced by the availability of debt for these assets compared to secondary markets and/or resort assets. “While we have seen many lenders come back to the market, their risk appetite is limited. The increased lending activity has also been focused on restructuring and refinancing which eases some of the pressure owners have been feeling over the past 24 months.”