Turbulent Times for Hotel Real Estate, says Colliers International Hotels’ 2010 Canadian Hotel Investment Report
May 27, 2010
By Steven Chester
The level of hotel transaction volume dropped 61 per cent year over year and by 91 per cent since the market peak in 2007, indicators of last year’s rough time in hotel real estate, according to Colliers International Hotels’ 2010 Canadian Hotel Investment Report.
The report cites challenges such as uncontrollable pressures in the economy as well as the retreat of the lending community, resulting in a year that ended with thin levels of transactions. Transaction volume was approximately $414 million with 74 hotels sold – 18 fewer than the year prior - yielding an average price per room of $65,500. Private investors were responsible for 60 per cent of total volume, followed by real estate companies at 14 per cent and hotel investment companies at 13 per cent. The balance of transactions volume was comprised of institutions (seven per cent), public companies (two per cent) and other (two per cent).
“Despite the slide in volume, not all is bad,” the report says. “While the average price per room dropped considerably, lender-driven and foreclosure sales did not transpire into a significant part of the transaction activity, which, in turn, helped to shelter investors from colossal devaluations and a ‘fire sale’ loss of assets.”
The bid-ask gap spread widened as sellers and buyers had difficulties agreeing on the market value of hotel assets, as well-capitalized buyers sought bargain pricing. Just 14 hotels transacted over the $10 million threshold, though they accounted for 52 per cent of the year’s transaction volume.
The effects of down trending occupancy rates led to revenue per room falling 12 per cent. Nearly every major downtown market suffered significant declines, and resource dependent markets reeled from revenue per room erosion of 30 per cent, in some cases.
As net income failed to represent the value of a stabilized year, valuating a hotel of any type was difficult. This led to properties trading largely on a price per room metric supported by comparable trades instead of the more traditional approach of applying capitalization rates to current income.
Deep discounting in most areas across the country, especially in major downtown markets, did very little to drive demand. Owners faced decreased profitability as a result.
“As owners and operators reacted by expense tightening, the fixed nature of many costs amplified by poor top-line performance, translated into bottom lines on par with 2003, when the industry was devastated by SARS, natural disasters in western Canada, power outages in Ontario and tense political relations with the U.S. on the backdrop of the Iraq war,” the report says.
Stating that 2009 was a ‘cyclical trough’ for the industry, that year will be treated as a base year, and the report says investors will fuel the transaction market with trading that could potentially increase in 2010 by 25 to 40 per cent from 2009 levels. “After sitting on the sidelines, investors are primed to re-enter the hotel transaction market in 2010. With well-priced assets that present a strategic entry point, those seeking to build their portfolios for the long-term will be active,” the report says.
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