CANADA The lodging investment sector in Canada came back with a vengeance in 2010 after bottoming out in the fall of 2009, with the industry now in a clear resurgence, a report from CB Richard Ellis Hotels says.
“We saw a meteoric rise in lodging stocks and a returned focus in the U.S. capital markets on the lodging sector,” says Bill Stone, executive vice president of CBRE Hotels. “Several lodging REITs were created in the U.S. in mid- to late 2009. These events inspired several large-scale North American hotel transactions in 2010.
“This activity followed the bottoming of the market from the prior fall as sellers who chose to hold—and lenders that cooperated—began to reevaluate their real estate strategies. REITs and institutional owners started to strategically pare down noncore assets while acquiring others; private investors and private equity, which had previously been quiet, began to make their mark.”
The highly cyclical nature of the Canada hotel market mirrors the rise and fall of the GDP and many other economic indices. Following growth of 0.5% in 2008 and a contraction in 2009, the Conference Board of Canada is forecasting GDP growth of 3.6% in 2010. “This economic momentum will be the impetus for increased travel and consumer spending, and ultimately improved profitability throughout the lodging sector,” Stone says.
Well more than C$1 billion of hotel assets are now or will shortly be on the market and are likely to be snatched up by high-net-worth private investors, private equity and institutional buyers, he says.
Canada hotel investment activity is sharply trending upwards with preliminary transaction volume in the C$700 million range in 2010, representing a 70% increase over 2009—a solid indication that the industry is in the expansion phase of the investment cycle.
Per-room pricing strengthened 24% year-over-year, increasing from an average of C$69,000 to C$86,000, due to more aggressive purchaser underwriting as well as the class of assets being brought to market.
“The once-large bid/ask spread is narrowing for many asset tiers, indicating the market’s willingness to price on a per-key or future-earnings basis as fundamentals ramp up,” Stone says. “We saw bottom-feeding investors wait out the typical six- to eight-month lag between the emergence of widespread distress in U.S. trending and its arrival in Canada; however, the number and scope of truly distressed assets were far lower than expected. By Q3 it was clear the Canadian market was in a much safer place than most global industrial markets.
“Building on market momentum, several portfolios came to market in Q3 that were enthusiastically received by an internationally diverse group of buyers from several parts of Asia, the U.S. and across Canada,” Stone says.
The dominant seller group has been private investors during the past two years, representing between 60% and 65% of transaction volume. On the buy side, private investors accounted for over one-third of the volume in 2010, down from about two-thirds in 2009, with reengaged hotel investment companies and real estate companies now representing 40% and 21% of volume, respectively.
“As we head into 2011, there are clear signs the quantum and variety of potential buyers is morphing monthly,” Stone says. “Unlike recent years in which private, domestic buyers clearly dominated the investment landscape, there have been an extraordinary number of international investors ready to make Canadian hotel acquisitions. Non-domestic investors have been virtually absent from the buyer profile since 2006, when more than half of the volume was attributed to non-Canadian buyer groups.
“Today, we are seeing a noticeable spike in interest by American investors as well as offshore groups, largely from Singapore, Malaysia and China. Groups are looking to spread international investment risk or are moving to Canada for personal, quality-of-life and business issues due to the growing profile of Canada as a ‘safe haven’ in an increasingly volatile world.
“We’re seeing that buyers are attracted to a variety of performance situations, from operations with substantial cash flow to redevelopment, rebranding and repurposing opportunities with little or no current income. This is an exciting turning point for the Canadian hotel investment market,” Stone says.