CANADIAN HOTELS OUTLOOK - CBRE

CANADIAN HOTELS OUTLOOK 2016

2015 IN REVIEW A record year for hotel investment activity

2015 Investment Highlights  Hotel transaction volume reached over $2.3 billion, which is a record high if you exclude the M&A activity that took place in 2006/2007, and well above the $1.4 billion reported in 2014.  The top five deals alone totaled more than $1.0 billion, almost half the volume for the entire year.  Despite growing interest from international buyers for trophy assets, the bulk of investor interest continues to originate from Canada (59%) followed by the US (23%) with Asian and EMEA buyers making up the balance.

 Assets in major markets with potential alternative uses and properties positioned for redevelopment garnered premium pricing in 2015.  Strong investor demand created downward pressure on hotel cap rates in Vancouver, Toronto and to some degree Montreal. In resource dependent markets with declining cash flows, investors looked towards revised, more moderate performance levels, tempering cap rate increases.  Absent a robust CMBS market, the debt capital markets functioned well with ample liquidity to meet both refinancing and acquisition opportunities.

WHAT DOES $1.0B LOOK LIKE?  Fairmont Royal York

 Fortis Portfolio

 Fairmont Hotel Vancouver

 Courtyard Toronto Downtown

 Westin Bayshore

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INVESTOR INTEREST BY GEOGRAPHY APAC 9%

USA 23%

EMEA 9%

Canada 59%

2016 REGIONAL HOSPITALITY OUTLOOK HIGHLIGHTS WESTERN CANADA

Notable events across the Canadian hospitality industry in 2015

Western Canada lagged with RevPAR declining 0.6% as Vancouver’s strength could not offset struggles in the balance of the region. With continued declines in the prairies, Q1 2016 RevPAR is down 5.4%.

Despite a downturn in Newfoundland, Atlantic Canada reported its strongest RevPAR growth since 2007 of 4.2%, with moderate 1.2% growth as of Q1 2016.

HOTEL

16.4% 16.6% WINDSOR

17.5%

OTHER NIAGARA REGION

Building on prior year momentum, Central Canada finished first with 7.4% RevPAR growth in 2015, and leads with Q1 growth of 6.1%.

12.8%

NIAGARA FALLS

Border cities reported significant RevPAR growth in 2015 building on the low Canadian dollar.

Trophy hotels and resorts, with ideal locations and amenities, performed well and continue to be highly sought investments.

ALBERTA MIXED BAG -15.6%

Vancouver bolstered by convention and cruise activity, led major market performance. The city is forecast to lead all major markets in 2016 with RevPAR growth of 7.0%.

Resort markets in Alberta posted double digit RevPAR growth in 2015, while the rest of the province faced steep RevPAR declines. This remains the case in Q1 2016 with Alberta Resorts RevPAR up 15.1%, compared to a 25.8% decline in the balance of the 2016 CANADIAN HOTELS OUTLOOK 3 Province.

2016 INVESTMENT OUTLOOK $2.0 to $2.5 billion in hotel investment forecast for 2016; the new norm

2016 Investment Outlook  2016 should be comparable to 2015 volume with $2.0 - $2.5 billion of transactions expected. This volume is the new norm for the Canadian hotel market.

 Foreign buyers, especially those from Asia, will continue their selective pursuits for landmark assets, but Canadian and American investors will be dominant.

 Greater Toronto will be the most active market for hotel investment and will account for a significant proportion of hotel transactions nationally. In 2015, 30% of hotel trades took place in the region.  Brand consolidation/mergers & acquisitions will also continue to be a driving force in the market.  Competition for prime assets will remain heated with an increase in unconditional offers/shorter due diligence periods and fast closings.

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Q1 2016 CAP RATES* VANCOUVER

6.50%



CALGARY

8.25%



 Major market cap rates are holding steady. However, expect to see Toronto and Vancouver rates for prime assets hitting the 5% range.

EDMONTON

8.25%



WINNIPEG

8.50%



LONDON-WINDSOR

8.63%



 The pool of lenders will be shallower although consistent terms will be offered for small and mid-sized deals. For larger deals, lenders will be looking for terms of seven years or longer to reduce re-financing risk.

KITCHENER-WATERLOO 8.63%



TORONTO

6.50%



OTTAWA

7.50%



MONTREAL

8.00%



 The low Canadian dollar should be positive in attracting non-domestic lenders to the hotel space.

HALIFAX

9.25%



* Midpoint of Downtown Full-Service Hotel Ranges Change from Q4 2015

2016 REGIONAL OUTLOOK WESTERN CANADA BC’s strong performance will offset another decline in oil and gas dependent markets.  Favourable foreign exchange rates are likely to drive film and television production in and around Metro Vancouver, which will benefit the hospitality industry.  The low dollar will entice leisure travellers from Washington State.  Vancouver should see another 3.4% growth in foreign visitors in 2016 with increased visitation from traditional markets (USA, UK, Australia and Germany) and growing interest from China.  Hotels in Calgary and Edmonton will continue to feel the effects of low oil prices and less corporate travel to the region which could be exacerbated by recent increases in hotel supply; however, hotels in smaller communities are likely to experience the steepest declines in RevPAR.

 Saskatchewan’s hospitality sector is also being affected by oil and gas industry challenges. Saskatoon recorded a 10% increase in supply in 2015 which will continue to impact the market in the year ahead. Regina’s supply concerns will continue with two more hotels slated for completion in 2016.  In Western Canada, hotel investment will continue to be concentrated in BC, specifically in Vancouver with pricing for downtown assets continuing to reach record highs, as evidenced by the $548,000 per room price paid for the Westin Bayshore in Q4 2015.  BC hotel profits were up 28% in 2015 and are forecast to grow 13% in 2016. In contrast, Alberta was down 31% in 2015 with 2016 profits anticipated to drop another 27% in 2016.

OPPORTUNITIES  Strong demand for hotels in downtown Vancouver and the Richmond/Airport area will benefit properties in the suburban markets as well. Burnaby, Surrey and Langley will be able to charge more aggressive rates as the regional average increases.  Visitors to Vancouver will also bolster demand in Vancouver Island and

Whistler, which recorded 12.6% and 15.2%, RevPAR growth in 2015, respectively. As of Q1 2016, Whistler’s RevPAR is up 30.6%, with Vancouver Island up 3.8%.  Even in Alberta, trophy resorts will be sought out by U.S. and domestic travellers.

2016 CANADIAN HOTELS OUTLOOK

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2016 REGIONAL OUTLOOK CENTRAL CANADA

Central Canada will stay in the lead from a RevPAR perspective in 2016 with 5.3% growth forecast for the region.  U.S. visitors had been a key source of demand for hotels in Toronto and the dollar is starting to lure Americans back to the city. U.S. visits to Toronto increased by 10.0% in 2015, the strongest year-over-year improvement on record. An additional 3.2% growth in U.S. visitation is expected in 2016.  Greater Toronto RevPAR improved 6.8% in 2015, 9.4% in Q1 2016 and is forecast to increase 6.0% in 2016.

 Greater Montreal RevPAR grew 7.6% in 2015, 3.9% in Q1 2016 and is forecast to grow 5.0% in 2016.  Hotel profits grew 22% in 2015 in Central Canada and are forecast to be up 11% in 2016.  On a national basis, Central Canada will dominate transaction activity, with Greater Toronto likely to account for up to 60% of regional volume as has been the case for the past few years.

OPPORTUNITIES  Montreal will be courting Canadian and foreign tourists in the lead up to its 375th anniversary in 2017.  Ottawa is gearing up for Canada’s 150th anniversary in 2017, which should make for a strong year for hotels in the National Capital Region. Three new hotels will add nearly 500 rooms to the market in 2016/2017;

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however, the market should be able to support this given the closure and conversion of four hotels taking 1,800 rooms off the market.

2016 REGIONAL OUTLOOK ATLANTIC CANADA

With the exception of Newfoundland, which is being affected by the pullback in the energy sector, all other provinces in Atlantic Canada reported RevPAR growth in 2015.  There has been significant turnover in regional hotel ownership with Fortis’ sale of eight hotels in the region (in addition to 2.8 million sq. ft. of office and retail space). This will continue to characterize the region with additional portfolios on the market.  St. John’s reported a 7.1% RevPAR decline in 2015, while Halifax performed well with 8.2% RevPAR growth. This disparity will likely continue to define the Atlantic Canada

hospitality market through the end of this year. As of Q1 2016, Halifax RevPAR was up 2.4% while St. John’s is down 15.4%.  Rate growth and stable occupancy are likely to continue to characterize the market in 2016 with Atlantic Canada’s 2016 RevPAR forecast to grow 4.4%.  Hotel profits in the region improved 10% in 2015 and are projected to grow another 8% in 2016.

OPPORTUNITIES  There will be continued hotel development in Halifax, especially in the revitalizing downtown core where a hotel is proposed as part of the new convention centre.

 The St. John’s Airport completed its new runway landing system meant to enhance accessibility in the foggy season, allowing an estimated 700 more flights and 70,000 people to arrive and depart annually.

2016 CANADIAN HOTELS OUTLOOK

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