TORONTO, February 12, 2013 – The hotel industry is a barometer of economic strength and also provides some indication of the broader trends in commercial real estate. Nationally, top line hotel performance improved for the fourth consecutive year, albeit at modest levels, and investment demand was robust. CBRE Hotels Canada’s annual report, 2013 National Hotel Outlook, forecasts key trends in the hotel market across the country. The report highlights the emergence of new dynamics that will shape an active hotel investment market in 2013.
“As expected, 2012 ended up being a very strong year for the Canadian hotel market,” said Bill Stone, Executive Vice President of CBRE Hotels Canada. “Strong hotel fundamentals, favourable financing, and the safety of the Canadian hotel operating environment, have been the key factors driving demand. These factors are likely to stay in place and produce another solid year for Canadian hotels in 2013.”
Hotels recorded higher occupancy and revenue to varying degrees across the country. Smith Travel Research reports that the national average revenue per available room (RevPAR) grew 2.6% (y/y) in 2012, with occupancy increasing 1.0% over the same period. Markets in Alberta, Newfoundland and Saskatchewan recorded the most significant increases in RevPAR on the back of strong economic growth and activity related to demand for natural resources. Marginal revenue growth was recorded in most other markets and the Canadian dollar is expected to remain near par, which could impact U.S. visitation; however, these factors have failed to deter investors from seeking the stability of the Canadian market and there are encouraging signs from other countries reporting increased travel to Canada. Total overnight trips increased from China and Australia by 18.6% and 6.1%, respectively, year-over-year as of November 2012 according to Statistics Canada’s International Travel Survey.
Canadian hotel investment volume topped an estimated $1.1 billion in 2012 as a result of 102 transactions, both metrics were on par with 2011, and there is no doubt that hotels remain a highly attractive investment vehicle for a variety of buyers and developers. Significant hotel sales in 2012 included the Four Seasons Hotel Toronto ($142.5 million), Sutton Place Hotel Toronto ($57.0 million) and Hotel de la Montagne in Montreal ($39.0 million).
“The overall level of demand and the fact that some of Canada’s landmark hotels have recently traded hands are indicative of confidence in Canada’s long-term economic prospects and hotel assets in this country,” Stone remarked.
A number of notable trends have emerged that appear likely to govern the hotel investment market in 2013:
- Pricing will likely be relatively stable as the average price per room was $100,400 in 2012, largely unchanged from 2011.
- Sellers have begun to outnumber buyers, but restraint on both sides combined with the presence of highly qualified bidders should hold off a full-fledged buyer’s market.
- Seller and buyer motivations are likely to remain varied – expect continued asset repositioning and portfolio rebalancing – which will produce a diverse range of available assets over the course of the year.
- Stable cap rates will require additional value to be achieved through reinvestment until there is a broader increase in demand and/or improved operating margins.
- Private equity investors could replace real estate companies/developers as the most active hotel buyers in 2013, as private equity is expected to seek out opportunities to reposition assets as market conditions continue to improve.
- Rigorous underwriting, which came into force during the recession, is likely to be an enduring practice even though modest improvement in fundamentals and economic activity is expected in 2013.
Overall, the Canadian commercial real estate market is expected to outperform and exhibit solid fundamentals in 2013 despite the potential for some macroeconomic volatility. Similarly, the hotel investment market is forecast to have another active year that is on par with, if not better than, 2012. Optimism stems from the variety of known sellers in the market, the steady stream of available product from coast-to-coast, new buyer entrants and Canada’s growing international appeal, as well as the expanding availability of debt, limited distress situations and forecast improvement in operating margins.
“Hotel investors have been positioning themselves for the next phase of economic expansion and it appears that 2013 could be that inflection point. It is likely going to be an interesting and active period for the Canadian hotel market,” noted Stone.
For more information and notable deal metrics, download CBRE Hotels Canada’s 2013 National Hotel Outlook on our website: www.cbre.ca/hotelscanada