According to CBRE Hotels, year-end hotel transaction volume has topped $2.0 billion, well ahead of the $1.1 billion achieved in 2012. Although influenced by the $765 million sale of the Westin Hotels portfolio, this trending is in contrast to total transaction volume of overall commercial real estate transaction activity, with preliminary estimates for year-end falling below last year.
Some notable 2013 trends include:
• Average per room pricing is up almost 30 per cent over the $100,000 reported in 2012, a reflection of the significant number of large-scale urban assets that traded this year. Eight hotels traded at over $200,000 per room in 2013 as compared to two in 2012.
• The majority of trades occurred in Central Canada with Ontario accounting for 52 per cent of national volume. Western Canada represented 38 per cent of transaction volume with this amount split roughly 60/40 between Alberta and British Columbia, as there were only a few small deals in Manitoba and none in Saskatchewan. Eastern Canada recorded 5 per cent of national volume, up from 1 per cent in 2012. Transactions took place in each of the Atlantic provinces this year with the exception of Prince Edward Island.
• The most active buyer group in 2013 by volume was Institutions/Equity Funds followed by Hotel Investment Companies. Private Investors accounted for the greatest number of deals, although representing only 17 per cent of volume.
• Four hotels were purchased for re-development to alternate use compared to 13 in 2012, and included the Delta Centre-Ville in Montreal, Quality Hotel Downtown Montreal, St. Regis Hotel in Winnipeg and Coast Vancouver Airport Hotel.
• Three significant portfolio sales occurred in 2013 accounting for almost half of total transaction volume, compared to only one portfolio sale in 2012.
These portfolios included:
• Westin 5-hotel portfolio;
• GTA Marriott select service 5-hotel portfolio; and
• Temple Hotels Inc.’s purchase of three full-service properties in Nova Scotia.
With the number of substantial deals in 2013, we anticipate fewer large-scale assets will come to market in 2014. Further, as 2013 saw REITs and Hotel Investment Companies continue to re-assess and bring to market non-strategic assets within their portfolios, we expect a slowdown in this activity going forward. That said, we believe there will be an increase in smaller, private deals, particularly in Western Canada. As a result, 2014 volume will likely return to more stabilized levels as seen in 2011/2012, which at around the $1.0 billion mark, still represents an encouraging investment environment.
Q4 CAP RATE TRENDS
In the fourth quarter of 2013, Canadian capitalization rates largely held steady, leaving most markets and sectors still near record lows. Cap rates continue to demonstrate surprising “sticky-ness” and highlight the depth and strength of Canada’s commercial real estate market. Within this largely “steady-as-she-goes” scenario the shift in market sentiment, witnessed in mid-2013, continues to adversely impact non-core real estate – a somewhat evolutionary process that has yet to fully play out. In recent weeks long-term interest rates have staged a mild pull-back, with 10-year Government of Canada bond yields falling by approximately 25 basis points providing a reprieve for interest rate sensitive asset classes including commercial real estate. Hotel cap rates were little changed during the quarter with only Calgary and Edmonton showing a slight increase, based on the amount of new supply coming into these markets.
Year-end 2013 Smith Travel Research (“STR”) results indicate national hotel occupancy was 63.3 per cent versus 62.3 per cent for the same period in 2012. Room demand grew by 2.1 per cent with supply growth of just 0.5 per cent. ADR for 2013 rose by 2.3 per cent, pushing RevPAR up 3.9 per cent. According to STR, lead markets for occupancy growth year over year included all three suburban Vancouver markets: Vancouver North Area (8.9 per cent), Vancouver Airport (6.1 per cent) and Vancouver South Area/Surrey (5.6 per cent), while the strongest ADR increases were reported in Regina (7.8 per cent), Alberta North Area (7.4 per cent) and Victoria (6.8 per cent). For RevPAR, lead markets were Alberta North Area (12.2 per cent), Vancouver North Area (10.7 per cent) and Vancouver South Area/Surrey (9.8 per cent).