Real estate players are increasingly buying hotels to turn them into everything from private schools to retirement homes and apartment buildings.
An abundance of hotels are being put up for sale in Canada for a variety of reasons and a growing proportion of them are being bought by real estate firms, which have typically accounted for a small proportion of the acquisitions, according to a new report on the state of the hotel industry that will be released by real estate services firm CBRE on Tuesday.
About $1.1-billion worth of hotel deals were done in 2012, and $437-million – or about 40 per cent – will be converted to alternate uses, according to the report.
Among recent deals that highlight the push to re-purpose hotels include the Sutton Place Hotel and the Four Points on Toronto's Lakeshore, which were bought by condo developers, the Best Western Royal Brock Hotel in Guelph, Ont., which was bought to be turned into student housing, and the Ramada Hotel on the Kingsway in Vancouver, which was purchased by the city of Vancouver to create a new seniors residence.
Last year was a defining one for real estate players to take advantage of the chance to re-purpose underperforming hotel assets, CBRE's report says. As a result, the mix of buyers changed. Real estate companies and developers accounted for 41 per cent of deal volume during the year, "when typically they have been a minority buyer group accounting for no more than 15 per cent of the volume in any given year," the report said.
Real estate investment trusts and other publicly traded companies were responsible for about 19 per cent of the deal volume last year, compared to less than 5 per cent in 2011. In 2011, hotel investment companies accounted for 52 per cent of the deal volume, followed by private equity at 29 per cent and institutions and pension funds at 12 per cent.
The large quantity of hotels coming up for sale is largely a result of a buying spree that occurred in 2006 and 2007, when a number of real estate investment trusts, private investors, hotel investment companies and institutions amassed large hotel portfolios. The volume of hotel deals in those years were more than triple what they are today. With market conditions changing over the years, many of the hotels bought at that time are no longer considered core assets by their owners. Partnership disputes, estate planning, and brand upgrades are other reasons behind the abundance of hotels on the market.
All told, 2012 did not see the high level of hotel deals that forecasters had expected, although eight hotels traded for more than $30-million each, double the number in the prior year.
"Early predictions for 2012 optimistically pegged hotel transaction activity to reach a considerably higher level than was actually achieved, particularly given first-quarter volume of $384.4-million was almost three times stronger than the start to 2011," the CBRE report says. "As the year progressed, a number of anticipated transactions, ranging in size and market positioning, faced challenges that prolonged marketing programs, or extended conditional periods, that resulted in deals collapsing or being pushed into 2013."
Hotel sellers have begun to outnumber buyers, but the large number of highly qualified bidders should keep the situation from turning into a full-fledged buyers' market, the report says.
"Hotel investors have been positioning themselves for the next phase of economic expansion and it appears that 2013 could be that inflection point," said Bill Stone, executive vice-president of CBRE Hotels Canada.
"Just weeks into 2013, deals are transacting and setting the stage for building momentum once again," the report said.
The strong Canadian dollar is expected to continue to weigh on U.S. travellers into Canada, but travel from China and Australia has been on the rise. Nationally, hotels generally saw modestly higher revenue per available room last year, led by Alberta, Newfoundland and Labrador, and Saskatchewan.