Interest remains strong among Canadian hotel investors, but according to a new survey more than half of investors say the state of the Canadian economy remains the largest factor impacting decisions.
According to results from Colliers International Hotels’ 2017 Canadian Hotel Investment Sentiment Survey, last year boasted high hotel transaction activity ($4.1 billion) and strong activity is predicted for 2017, but with a “cautious frame of mind.”
The survey, conducted in late 2016 in conjunction with the Ted Rogers School of Hospitality and Tourism Management at Ryerson University, reached about 100 investors who currently own Canadian hotel properties or are actively seeking investment opportunities in Canada. The survey benchmarks results and identifies trends in the lodging industry.
Here are ten factors influencing decisions to invest in the Canadian hotel market:
1. Regionality was a major theme in 2016, with notable strengths in Central Canada (Ontario and Quebec) and British Columbia, while energy linked provinces (Alberta, Saskatchewan and Newfoundland) grappled with a softer economic climate. More investors are pursuing investments in Eastern Canada. Since 2014, such interest has risen five per cent.
2. Forty five per cent of respondents say that buying is their prime investment strategy for the next 12 months, while renovations and expansions have increased over the past two years.
3. The amount of investors building new hotels as a main strategy has remained flat since 2013.
4. For 2017, only five per cent of investors say selling is their primary strategy, but 40 per cent are considering disposing their hotel assets. Reasons for selling remain the same: recycling capital and timing the market.
5. The ideal size for new or acquired hotel properties ranges from 101 to 175 rooms, followed by smaller properties of 51 to 100 rooms. Full-service and limited service properties are preferred over select service assets.
6. Forty four percent favour urban markets, such as Toronto, Ottawa, Calgary, Vancouver and Montreal. However, pricing and construction costs are pushing investment in secondary markets including Victoria, B.C., Niagara Falls, Ont., Whistler, B.C., rural Ontario and Alberta mountain resorts. Suburban markets are steadily increasing, growing from 21 per cent in 2014 to 26 per cent in 2016.
7. On the financing front, more than half of investors believe debt availability will grow more difficult this year. Almost 80 per cent expect fixed interest rates to drop five per cent in 2017. Those expecting higher rates spiked nine per cent over the past 12 months. Banks and credit unions are still the common source of financing for acquisitions and new developments, but credit unions continue to be a growing trend and in secondary markets where they are commonplace.
8. Cap rates are expected to remain stable through 2017, while 38 per cent of investors expect them to increase.
9. Apprehension mounts over the Canadian economy. Almost 60 per cent of investors say they feel somewhat to very concerned, but have a more positive view for Canada over the next three to five years.
10. The most significant macro-economic factor influencing investment decisions was the state of the Canadian economy, availability of credit and overall demand trends.