Hotels hope for a better 2010

REAL ESTATE REPORTER

The hotel industry suffered one of its worst years in 2009, as investment evaporated and some new hotel owners even opted to pave over properties rather than risk renting out rooms by the night.

Already feeling the effects of the recession in 2008, Canada’s hotel investment industry experienced yet another challenging year in 2009 as transaction volume plummeted 61 per cent, according to Colliers International Hotels annual investment report.

It’s the sharpest decline in activity on record, and 91-per-cent lower than the peak reached in 2007.

The national price-per-room average also saw a decline of 12 per cent nationally.

The numbers are a sobering reminder for the industry that even without the challenges posed by a higher Canadian dollar and the broader effects of the recession, hotel revenues tend to lag behind any economic recovery.

"Certain classes of real estate, such as hotels, generate cash flows that have a greater immediate sensitivity to general economic conditions than other types of real estate," RBC Dominion Securities analyst Neil Downey wrote in a recent report.

The best that owners may hope for this year is an easing of the declines that have hammered the industry, said Colliers executive managing director Alam Pirani.

"From an operating standpoint I’m quite certain it’s never been this bad," he said. "The good news would be that many owners are hanging in there because of conservative capital structures, not a lot of them were over-levered. You can count the number of distressed sales on one hand."

Falling investment is an ominous sign for the industry, because new owners and the capital they can provide are often needed to revitalize properties that have fallen out of style and need updating.

Mr. Pirani said buyers are interested in snapping up properties, but it’s difficult to access the financing needed to get a deal done. Those that do have the money – real estate investment trusts in particular – don’t want to pay full price.

"Particularly difficult was agreeing on the market value of hotel assets, with sellers unwilling to value their properties as distressed income," he said. "Well-capitalized buyers sought bargain pricing, given the apparent instability in the marketplace and lack of available credit."

The largest investment was for the Hilton Garden Inn & Ajax Convention Centre in Ajax, Ont., at $24-million.

Peter Freed of Freed Developments in Toronto was responsible for the second-largest transaction of the year, a $21-million deal to buy a Travel Lodge in downtown Toronto. The building was relatively rundown and low-end, but he didn’t care about that. Within two months, it was knocked to the ground to make way for a condominium development.

"It’s a pretty hot neighbourhood so you’re going to pay a price for the property, but we never intended to run it as a hotel," said Mr. Freed, who is only weeks away from opening a high hotel half a block away from the condo site.

It was one of several purchased last year to make way for alternate developments. The City of Calgary paid $10.6-million for the Cecil Hotel, a gritty landmark that will likely be replaced with a parking lot. The Genosha Hotel in Oshawa was bought by a private developer for $2.3-million, and is being converted to apartments and student residences.

(prepared by Steve Ladurantaye/Globe and Mail)



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INDUSTRY OUTLOOK

Return of the buyer

After sitting on the sidelines through the recession, buyers should be able to access credit by the end of the year to start rebuilding portfolios. Activity in 2010 could increase by up to 40 per cent from 2009’s depressed levels.

Who they will be

Buyers are likely to be rich people, real estate investment trusts and investment companies looking for longer-term returns. That’s because they have access to their own capital and won’t need to depend on lenders as heavily.

What they’ll buy

Downtown hotels, or those on the edge of large cities, will likely see the most trading. They’ll likely target relatively new properties, or those with limited amenities that can be demolished and repurposed.

What they can expect

Revenue increases will boost the value of hotels, as cost-cutting helps the bottom line and an improved economy gets people traveling again. Revenue per available room is only likely to improve by 4 per cent in 2010, but 2011 is expected to be better.

Source: Colliers International Hotels