If full hotels symbolize a healthy economy, then demand to own those hotels must also be an auspicious sign. The Canadian hotel investment market logged one of its best years on record in 2013 and the outlook remains positive despite being deep into the investment cycle. CBRE Hotels’ 2014 Canadian Hotel Review indicates that landmark deals and portfolio transactions dominated the market in 2013. The report also indicates that while the market is transitioning, quality hotel properties will remain an important part of investor portfolios.
“We are four months into 2014 and are only starting to catch our breath after one of the busiest years in the history of the Canadian hotel market,” said Bill Stone, Executive Vice President of CBRE Hotels in Canada. “Next to retail properties, Canadian hotels recorded the largest increase in commercial investment volume last year. Only now is the hotel market starting to trend in line with the overall demand for commercial property.”
Hotel sales volume topped $2.1 billion in 2013, up 93.9 per cent from the prior year. Demand for hotels was not limited to any particular region of the country. Overall investment volume rose significantly in Western, Central and Eastern Canada; however, Western Canada increased its share of total volume from 41.3 per cent to 48.5 per cent year-over-year, while Central Canada continued to lead with 53.9 per cent of hotel investment activity.
The largest transaction in 2013 was the five hotel Westin Portfolio, which was acquired by Starwood Capital and a Middle Eastern fund for $765.0 million in the third quarter. This single transaction accounted for 36.0 per cent of the total transaction volume and helped push pricing per room to an average of $129,000 for the year, 23.0 per cent higher than in 2012. Remarkably, even when this portfolio is excluded from total hotel investment volume, the remaining $1.3 billion total is still 19.0 per cent higher than the 2012 hotel investment volume.
“Large portfolio and landmark hotels sales only underscore the strength of hotel market fundamentals in Canada,” Stone noted. “It will be difficult to replicate a year like we just experienced. While investment activity in 2014 will be in line with the historical average, a lack of quality product will be the limiting factor, not decreased demand. A lack of product has been an ongoing challenge for other commercial property types in Canada, but it is now a significant factor in the hotel market as well.”
Private investors will remain active in 2014 and U.S. investors are expected to continue to pursue Canadian hotel assets. That said, as the hotel market gets deeper into the business cycle, prime assets in urban areas are likely to be the most highly sought after. Investor appetite for risk is waning and as a result, demand and pricing for hotels in secondary/tertiary markets will be impacted.
“It’s hard to imagine the same number of notable Canadian hotels trading hands in 2014 as we had last year, but there is no doubt that strong demand will greet any quality asset that comes to market. While overall investment volume might decline, pricing of quality assets will remain at comparable levels to those recorded over the past year,” Stone said.