| As we enter 2004 and reflect back upon 2003,
it is evident that the year proved to be one of the most challenging years
in the history of Western Canada�s hotel industry and for most other countries
in the world. The lingering effects of 9/11, SARS, Mad Cow disease, the
Okanagan forest fires all contributed to provide challenges to not only
the hospitality industry, but the general economic climate of our region
and Canada. We are optimistic that in 2004, barring any other natural or
man-made disasters, we may be finally begin to see some greater confidence
by travelers.
The general perception in the hotel investment
market has not really changed since our third quarter market report in
that, until the margin between the buyers� expectations and sellers top
price narrows, few hotel transactions will take place. We believe that
margin will gradually narrow in 2004. The single biggest problem facing
the hotel markets is that during the past couple of years, most properties
have faced a substantial decline in net operating income. As a result,
asking prices with cap rates of 10% and below, (and they may be negative
due to negative cash flows), are deterring investors. This trend indicates
that there are a lot of hotels unofficially on the market for sale in the
Vancouver area and throughout the province; however, the majority of buyers
are looking for deals with upside potential. Only properties that have
sufficient net income to cover debt service are likely to sell, unless
receivership or bankruptcy scenarios force the sale of the hotel.
 With
most of Canada�s chartered banks reluctant to renew hotel mortgages, more
owners may be forced to sell or seek financial partners if they cannot
secure replacement financing. We are working with one source of hotel financing
who has funds in the $1 - $5 million range and are targeting hotels that
have to refinance.
The announcement that Vancouver/Whistler will
host 2010 Winter Olympic Games has provided some increased interest in
the major markets in BC, notably downtown Vancouver, Squamish and Whistler.
Vendors, however, need to maintain some sense of reality in their pricing
expectations, as few buyers will be willing to pay the prices that are
being asked and the demand projections associated with the Olympic Games
may be overly optimistic.
According to the Pannell Kerr Forster (PKF) Trends
report for 11 months through November of 2003, RevPAR in Western Canada
as a whole is down 4.9% over 2002. Saskatchewan fared the best posting
a 3.0% gain, followed by Manitoba which saw a decline of 2.1%, B.C. which
fell 4.7% over 2002 and Alberta saw the largest drop with a 6.8% decline
over the same period in 2002. These rates compare to an overall decline
in the country of 8.8%. The following are some of the highlights for the
first eleven months of 2003:
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The two market areas that saw the greatest growth
this past year were Other Vancouver Island (Tofino, etc.) and Parksville/Qualicum
with RevPAR growth of 17.1% and 12.8% respectively.
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In contrast, the Edmonton market has seen the largest
declines with a 16.3% decline in RevPAR in the West, 11.6% in the South,
10.0% in the downtown core. The other notable areas that suffered in 2003
were the resort areas of Alberta and Whistler which posted RevPAR declines
of 8.5% and 9.0% respectively.
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Some of the secondary markets of Western Canada performed
above the market in 2003 with RevPar gains of 8.1% in Kamloops, 6.6% in
Penticton, 4.9% in Red Deer, and 4.2% in Regina.
The investment markets in Western Canada that continue
to have buyer demand are Victoria, Vancouver, and Richmond. Through November
2003, PKF reports that the Greater Vancouver market has declined 9.6% in
RevPAR over the past three years while Vancouver Island has been basically
flat during that period. While Greater Vancouver�s decline is significant,
it is important to try and understand the trends in the individual markets.
According to the sample statistics collected by Tyne for year-end 2003:
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The downtown core experienced a decline in RevPAR
of 8.7% in 2003 over 2002 with the 3 star hotels down by 14.7% while 4
star hotels have declined only 6.1%.
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The 5 star hotels declined over 10% in RevPAR.
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Of the 4 star hotels, two hotels saw positive gains
in 2003 and the majority saw declines of less than 2.5%. But 2 hotels declined
by more than 10%.
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Downtown Vancouver�s 3 star hotels have the largest
competitive set and only one hotel increased its RevPAR. 6 hotels reported
a decline of more than 10% with 1 over 30%.
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Hotels in areas of Vancouver outside of the downtown
core fared slightly better with an average decline of 6.2%.
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The Richmond, hotels were stronger than the downtown
Vancouver hotels with an overall decline in 2003 of 4.2% and only 5% of
hotels in that market saw a decline greater than 10%
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The suburban markets outside of Vancouver and Richmond
held their own in 2003 with very minimal declines (less than 2%).
Only a small percentage of the hotels in the lower
mainland are suffering from exceptional declines in RevPAR. In most of
the markets, because only one or two properties have severe declines, the
market averages are distorted.
Looking forward, there are two key components
to investment and growth in the Vancouver market, the first being the pending
groundbreaking of the expansion to the Vancouver Trade & Convention
Center (VTCC). Construction is expected to begin this fall with completion
in 2008. The expansion of the VTCC with an additional 419,000 square feet
of meeting space (a 300% increase over the current size) will have a significant
impact on the Vancouver lodging market, much more so than the Winter Olympic
Games in 2010.
The second key however is far more challenging
due to the escalating land prices as the city planning department allows
more and more commercial sites to be rezoned for residential development.
With the limited amount of good hotel sites left in the Central Business
District of Vancouver, hoteliers may have to become more creative in the
approach to site selection by working with condo developers to include
a hotel component in a residential high-rise, by demolishing obsolete hotels
or office buildings and rebuilding them with modern hotel facilities.
The price per square foot that can be justified by hotel developers are
well those being paid by residential developers.
Vancouver hotel prices are a bargain on the international
travel scene with an average daily rate of less than $93 (US) compared
with cities like Seattle at $130.00 (US), San Francisco at $146 (US), New
York at $194 (US) or London at $185 (US). While this encourages visitation
to the city and region, it discourages new hotel development as the current
prices of land and construction are too high for projects to be financially
viable.
Supply growth has been limited during the past
few years in Vancouver but the suburban markets like Richmond and Surrey
continue to see new supply. In Surrey/Langely, over the past eighteen months
and including the hotels that are now under construction and scheduled
to open in 2004 �the Surrey hotel market will see a 73% increase in rooms
and the total market supply will increase by 48%. The Surrey/Langley market
ran at an occupancy of 55.4% through November 2003 with an ADR of $80.44,
for a RevPAR of $44.58, which is down 0.7% over 2002. With all the new
supply that is entering the market, hotels have sold at less than replacement
cost, as was evident with the Meristar REIT hotel sales.
Financing will continue to be an issue for the
industry in 2004. Developers are continuing to explore alternative methods
of finding financing including mixed use projects such as residential with
hotel and retail. Developers are even still trying to convince investors
that strata hotels are a good buy, even with law suits pending against
the developer�s of several British Columbia hotels. Investment activity
in the Western Canadian Hotel market in 2003 saw a total of 39 transactions.
The largest sale that took place was that of the Sheraton Grande in Edmonton
that was purchased by Sutton Place Hotels for seventeen million dollars.
The Park Hill Hotel in Vancouver�s West End, sold in 2002, and was sold
again in March of 2003. It should open in the spring of 2004 as a Sandman
Inn & Suites.
Probably the most note worthy sale of the year
took place in December when Meristar (the largest US REIT) sold its remaining
Canadian assets in a portfolio sale that included the Holiday Inn Metrotown,
the Holiday Inn Calgary Airport and the Ramada Vancouver Center. A fourth
property, the Sheraton Guildford is scheduled to close in February and
all four properties have been purchased by a single buyer from Toronto.
One of the largest Canadian hotel companies, CHIP REIT, was also active
in 2003 selling off its three Imperial 400 properties in a transaction
that involved CHIP carrying the debt on the properties.
--
Western Canadian Hotel
Sales 2003
.
 Tyne
Hospitality Services Limited is a commercial real estate brokerage firm
specializing in the sale of hotels and resorts in western Canada. For more
information, we invite you to visit our website at www.tynehospitality.com
or contact us by phone, fax or email.
The information contained herein was obtained from sources which
we deem reliable and, while thought to be correct, is not guaranteed by
Tyne Hospitality Services Limited.
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