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*From January 2008 to December 2013 © 2014 Hilton Worldwide

In the past six years, Hilton Worldwide has opened more than 1,100 new hotels around the world, bringing us to more than 4,000 hotels in 90 countries today.* In Canada, we have 88 hotels open from coast to coast with a growing pipeline of 18 hotels under construction and over 25 fully approved projects. Impressive growth, made possible by our ability to adapt to the world’s increasingly complex business environments. As a result, we’ve developed a wealth of experience creating and operating the most award-winning portfolio of hotels in the industry. Not a bad workout for a 94-year-old.

hiltonworldwide.com

For development opportunities in Canada, please contact Tom Lorenzo, Vice President and Managing Director of Development (+1-203-463-3407, [email protected]), and Je� Cury, Senior Director of Development (+1-514-695-6798, je� [email protected]).

STAYING AGILE IS CRITICAL. FORTUNATELY, OPENING MORE THAN 1,100 NEW* HOTELS HAS KEPT US IN SHAPE.

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MAY 2014 HOTELIER 1hoteliermagazine.com

Contents

Features

10 THE INVESTMENT LOW-DOWN The teams at Hotelier magazine and Starwood Hotels and Resorts partner for the fourth-annual investment roundtable Interview by Rosanna Caira 17 THE NUMBERS GAME Cushman & Wakefield offers an analysis of the relationship between office space and hotel rooms sold in 11 cities across North America By Cushman & Wakefield’s Hospitality & Gaming Group 25 A GOOD YEAR Last year was a memorable one for hotel investments, and 2014 looks strong By Mark Sparrow & Deborah Borotsik, CBRE Hotels 29 HERE WE GROW The future looks bright as the hotel real-estate market flourishes By Robin McLuskie, Colliers International Hotels

33 TAKE YOUR PICK Canada’s West overtakes the East in the minds of many investors, but both have opportunities for growth By Laura Pratt 39 DO YOUR HOMEWORK Understanding everything from finances to design is integral to a successful hotel purchase By Rebecca Harris 43 THE REAL-ESTATE GAME Selecting the best site for a hotel is contingent on a host of issues By Laura Pratt

Departments2 EDITOR’S PAGE3 CHECKING IN48 HOTELIER: Christophe Le Chatton, Langdon Hall, Cambridge, Ont.

Scan to view our website

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ON THE COVER (standing, l to r) Philippe Gadbois, Atlific Hotels and Resorts; Sukhi Rai, PHI Hotel Group; Allison Reid, Starwood Hotels & Resorts (sitting, l to r) Bill Stone, CBRE Hotels; Barbara Mech, Roynat Capital; Scott Duff, Starwood Hotels & Resorts; Brian Stanford, PKF Consulting; and Paresh Raja, Brock Hotels. Photographed at the Element Vaughan Southwest

2 MAY 2014 HOTELIER hoteliermagazine.com

EDITOR’S PAGE

For almost 15 years, Hotelier has dedicated its May issue to the topic of investment (see Investment

Roundtable and stories, starting on p. 10). Clearly, investors are the lifeblood of the industry. They demonstrate confidence in business, allow developers to create new hotel entities and motivate operators to upgrade their properties through renova-tions, refurbishment and expansion. But, as each downturn teaches us, it’s hard to generate investment without strong travel patterns and solid growth.

It’s therefore reassuring for hoteliers to learn that global demand genera-tors show consumer confidence and strength is on the upswing. For example, according to a recent global travel trends survey by global forecaster Oxford Economics, “The global travel industry is poised for a period of sustained growth over the next decade, driven in part by China’s share of global outbound travel, reaching as much as 20 per cent by 2023.”

Oxford Economic’s survey, “Shaping the Future of Travel: Macro trends driving industry growth over the next decade,” predicts an optimistic macro-economic outlook for global travel in the next decade. “The survey shows the [travel] industry is projected to outstrip global GDP by approxi-mately two per cent, growing 5.4 per cent per annum,” states the report.

Perhaps not surprisingly, “China’s growth in outbound travel, which as recently as 2005 was just one per cent, is expected to overtake the U.S. to become the world’s largest outbound travel market this year, with the number of Chinese households able to afford overseas travel set to more than double in the next 10 years to reach 220 million. China will also become the biggest domestic travel market by 2017, driven largely by rapidly increasing GDP, rising employment levels and higher consumer spending,” says the report.

But China isn’t the only nation expected to grow outbound travel. According to the report, forecasts show other large emerging markets such as Russia, Brazil, India, Indonesia and Turkey will each average more than five-per-cent annual growth over the next 10 years, driven largely by rising wealth and changing consumer habits.

Despite recent economic troubles in the Eurozone, Europe is expected to retain the lion’s share of tourism flows, but, perhaps not surprisingly Asia is the fastest-growing region for travel.

As for Canada, with such significant global growth predicted, isn’t it prime time we improved our marketing efforts to tap into this growing body of travellers?

PRIME TIME

For daily news and announcements: @hoteliermag on Twitter and Hotelier magazine on Facebook.

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ADVISORY BOARD: David McMillan, AXIS HOSPITALITY INTERNATIONAL; Bill Stone, CBRE; Anthony Cohen, CRESCENT HOTELS —

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& GAMING GROUP; Scott Allison, MARRIOTT HOTELS CANADA; Ryan Murray, HARBOUR HOUSE HOTEL —

NIAGARA’S FINEST INNS; Drew Coles, OXFORD PROPERTIES; David Larone, PKF CONSULTING; Geoffrey Allan, PROJECT CAPITAL MANAGEMENT HOTELS; Stephen Renard,

RENARD INTERNATIONAL HOSPITALITY & SEARCH CONSULTANTS; Anne Larcade, SEQUEL HOTELS

& RESORTS; Michael Haywood, THE HAYWOOD GROUP; David Mounteer, THE THOMPSON HOTEL, TORONTO;

David Whitaker, TOURISM TORONTO

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THE LATEST INDUSTRY NEWS FOR HOTEL EXECUTIVES FROM CANADA AND AROUND THE WORLD

CERTIFIED SUSTAINABLEThe new Wingate by Wyndham prototype

announced last month will make it easier

for every owner to pursue LEED certifica-

tion. “As a brand, we are committed to

reducing our impact on the environment

and that includes offering hotel owners

options and resources that allow them to

operate in more sustainable ways. This is

why we designed the new prototype to be

LEED-certifiable,” says Bill Hall, brand SVP,

Wingate by Wyndham. Some of the hotel’s

features include LED lighting, low-flow

fixtures and an option to add an outdoor

parking area to accommodate car-

charging stations.

RAISE THE ROOF Economy lodging is taking cues from

the mid-scale hotel tier, with the new

Springfield, Ohio-based Red Roof Plus+

next-generation renovation program

announced earlier this year for U.S.

markets. Renovated properties feature

upgraded amenities and modern design

elements, including flat-screen TVs,

wood-like floors and Rest Suite Beds by

Serta. There are also additional outlets for

guests’ electronic devices and a special

welcome snack box packed with bottled

water, trail mix, juice and granola bars.

Checking In

BUILDING UPNew hotel prototypes with smaller footprints and flexible design are coming to market BY JACKIE SLOAT-SPENCER

In a new hospitality world that’s focused on minimizing investment risk, while creating a luxurious stay for guests, it’s fitting that a slew of economi-cal new-build prototypes have been introduced recently, offering efficient

use of space, flexible design and social-inspired guest amenities.Parsippany, N.J.-based Wyndham Hotel Group recently announced a

new-build prototype for its mid-priced, business-traveller-centered Wingate by Wyndham hotel. The new design offers owners savings of 10 per cent in comparison to its previous model and construction costs of $60,000 per key. The 99-room property is designed to be built on a smaller, two-acre space.

Adaptability is also coming into play to maximize guestrooms and lobby spaces. “We focused on creating a mixed-use atmosphere that better meets the needs of our guests who are looking for a warm and sophisticated environment within the hotel, which is conducive to conducting business or socializing,” describes Bill Hall, brand SVP, Wingate by Wyndham. In merging work and play, developers have brought the business centre into the lobby and added a communal breakfast area, which can be transformed into a bar, event space or an additional seating area during different times of the day.

Meanwhile, Atlanta-based InterContinental Hotels Group (IHG) has intro-duced a new Holiday Inn Express prototype. Designers identified key areas of savings for developers, such as reduced square footage, a modular or pre-fabri-cated approach to building and low-maintenance materials. “We worked very closely with a number of our key owners to develop the updated prototype design for Holiday Inn Express to ensure it is efficient to build and operate and will deliver strong financial returns,” explains Joel Eisemann, chief development officer, IHG.

The Holiday Inn Express brand targets travellers who value efficiency and simplicity, adds Jennifer Gribble, director, Head of Americas, Holiday Inn Express Brand, IHG. It has “check-in pods” instead of a front desk, and guest-rooms sport flexible workspaces and horizontal luggage storage to free up space. The prototype is available to be developed in Canadian and U.S. markets.


BITS AND BYTES

Are you spamming your potential guests? That may be the case if you are electronically communicating with the public. Effective July 1, the Canadian government is enacting comprehensive anti-spam legisla-tion pertaining to “commercial electronic messages,” such as email, text messages, social-networking websites, software appli-cations and blogs. So, if a business doesn’t have “express consent regime” from a person, it can no longer communicate with them electronically. A consumer must now “opt-in” to receive communication from a business. But, companies can rely on implied consent if there is an “existing business relationship.” To ensure compliance with the new law, assess your hotel market-ing activities to establish how commercial electronic messages are being sent and ensure “opt-in” consent is applicable where necessary (before the legislation goes into effect). Databases should also be cleansed to ensure the new requirements are met.

DID YOU KNOW?

Mobile-and-tablet-toting millennials may soon bypass a hotel TV for entertainment. According to “2014 Mobile Personas” — a study conducted by BrandSpark, a Toronto-based branding agency — 77 per cent of millennials own a smartphone and 33 per cent own a tablet. And, they use their tablet to watch videos (52 per cent), movies (33 per cent) and TV (27 per cent).

Warren Markwart is the principal of MK2 Hospitality, Toronto, which specializes in integrating hospitality tech-

nology with revenue-management strate-gies, guest service and business objectives. He can be reached at [email protected].

HOLISTIC HOSPITALITY

Stamford, Conn.’s Westin is taking its wellness mandate to the next level, partnering with Venice, Calif.-based Headspace meditation and introducing a year-long, $15-million wellness initia-tive, dubbed the Westin Well-being Movement. Headspace’s founder and meditation expert, Andy Puddicombe will be a big part of the initia-tive and will participate in

an Advisory Board of wellness “thought leaders” appointed to guide new initiatives. “At Westin, our mission is to be a partner in our guest’s well-being before, during and after their stay, and this is the motivation behind this movement,” said Brian Povinelli, global brand leader for Westin Hotels. “We are proud to partner with some of the world’s premier wellness brands and experts to provide innovative, personalized offerings at our hotels around the world, with the goal of inspiring and empowering our guests and associ-ates.” The hotel company kicked off the launch across its properties with five-kilometre runs, mini-spa appointments, juice bars and group yoga sessions for members of the public. New programs will roll out in the coming months.

©2014 Choice Hotels Canada Inc. All rights reserved.

Choice Hotels® has redefined andredesigned our Comfort Inn® prototypesaroundwhat guests value and developersneed. With you as our architects, wecreated a new prototype to maximizespace, materials, human resources anddécor at a low cost with a single goal inmind: attract more guests. It's a designthat will help you provide a higher-endexperience, without a higher-end price.So focus your money where it mattersmost. Build now and experience thebenefits that come with Choice Hotels.

Call 905.206.7316 or go toChoiceHotelsFranchise.ca to learnmore

A BETTER PROPERTY.AN EVEN BETTEROPPORTUNITY.

ChoiceHotelsFranchise.ca

hoteliermagazine.com

CHECKING IN TO BANFF

Banff’s towering mountains and lush national park served as the background for the 94th annual AHLA Convention and Trade Show, held last month at The Banff Centre in Alberta. Organized by the Alberta Hotel & Lodging Association (AHLA), the show featured three jam-packed days filled with networking opportunities and awards ceremo-nies recognizing industry-leading housekeeping across the province. Industry leaders, along with members of the gov-ernment and post-secondary institutions, also met during a Town Hall Meeting, where they discussed strategies to solve the upcoming labour shortage in the hospitality industry. Meanwhile, break-out sessions informed operators on how to better optimize hotel booking channels, raise housekeep-ing standards and manage their online reputations. When members weren’t learning, they were checking out the nearly 90 hospitality exhibitors showing a range of products, from technology to textiles.

InBrief

Members of Ottawa’s Hotel Association of Canada (HAC) met with the Parliamentary Tourism Caucus last month to advocate for a “Connecting America” tourism campaign to attract more travellers to Canada. “We need to get Canada to five-per-cent annual inter-national growth, which means continuing to work in emerging markets and reconnecting with our friends south of the border,” Tony Pollard, president of HAC, told the group...Atlific Hotels is now managing the 224-room Radisson Plaza Hotel in Regina — the Montreal-based company’s fourth in Saskatchewan...Extended-stay boutique hotel accommodations are aligning with condo living at the SoHo Metropolitan Residences Ottawa, which comprise the upper two

floors of the SoHo Lisgar Condominium...Motel 6 Stony Plain in Alberta has been overhauled; its 72 guestrooms now have new bedding, 40-inch flat-screen LCD TVs and a new coat of paint...Toronto’s Palm Holdings Canada now owns the 126-room Travelodge London South in London, Ont. and the 103-room Travelodge Chatham, in Chatham, Ont…Mississauga, Ont.’s Manga Hotels has recognized the management of the Radisson Suite Hotel in Halifax for overseeing the revitalization of the property; it presented the team with the Renovation of the Year Award. The $7.5-million revamp included the addition of 16 new suites and the creation of a modern lobby space, two meeting rooms, refurbished fitness facilities as well as a pool and whirl-pool…The new Grill & Vine restaurant inside The Westin Resort & Spa in Whistler, B.C. has received culinary kudos from Where magazine, which dubbed it one of Canada’s Best New Restaurants…Touchscreen “Neighbourhood Guides” are popping up in Hotel Indigo properties around the U.S. The guides feature a list of community attractions, a map function and a space to upload pictures and comments...The Wakefield, Que.-based Eco River Lodge at the Wakefield Mill and Spa has received LEED certification by the Canada Green

Building Council. It’s been recognized for its energy efficiency through geo-thermal exchange, high- efficiency water delivery systems and eco-friendly building materials.

People

Wyndham Hotel Group president and CEO, Eric Danziger, left the company last month. Geoff Ballotti, previously president and CEO of the company’s Exchange and Rentals division, has taken the helm. In related news, Gail Mandel, CFO of Wyndham Exchange & Rentals, will become

COO of the division…Jayne O’Brien is overseeing brand strategy at InterContinental Hotels Group as the new

Geoff Ballotti

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MAY 2014 HOTELIER 9

SVP of Global Brands. She was previously chief marketing officer for Dubai Properties Group...Achim Lenders, former executive chef and corporate SVP of Food and Beverage for Hyatt Hotels Corporation, has moved to Starwood Hotels & Resorts to become VP of Global Food and Beverage for the company’s nearly 1,300 restaurants and 930 bars globally... Christo-pher Norton has been promoted from the role of president of Hotel Op-erations, Europe, Middle East and Africa to EVP, Global Product and Op-erations for Four Seasons Hotels and Resorts...Eric

Watson has been named the COO of Calgary’s Master-Built Hotels Ltd. Watson was previously VP of Superior Lodging Corp...Garrett Turta has become the GM of the Fairmont Macdonald Hotel in Edmonton.

SupplySide

Choice Hotels International’s new world headquarters, at Foulger-Pratt’s Rockville Metro Plaza II, in Rockville, Md., is now LEED-certified…A British sensibility is arriving in Canadian hotel loos, since Gravenhurst, Ont.-based Swisssol Inc. Creative Body Care is now supplying British soapmaker Bronnley’s luxury Honey Blossom body wash, lotion, hair shampoo and condi-tioner to the Canadian hotel market...Stoddard, N.H.-based Carlisle Wide Plank Floors has opened its first showroom in Mississauga, Ont…Saint-Damase Hotel Furniture has announced Walter Bossé is the new VP of Business Development for the St-Damase, Que.-based brand...Ken Default has joined the team at Sioux Falls, S.D.-based Sonifi Solutions as its new senior director of Hospitality Product Marketing.

Gail Mandel

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Visit hoteliermagazine.com for video clips from the investment roundtable


INVESTMENT ROUNDTABLE

THE INVESTMENT LOW-DOWNThe teams at Hotelier magazine and Starwood Hotels and Resorts partner for the fourth-annual investment roundtable

INTERVIEW BY ROSANNA CAIRA

Rosanna Caira: What type of year was 2013 for your company, and how is 2014 shaping up? Bill Stone: It was a big year across the board, skewed by a very large transaction — the acquisition by Starwood Capital of the Westins, but if you strip that out, it still continues to be active, and it is something we see going into this year.Paresh Raja: Ontario has done quite well, too. The markets we’re in increased occupancies, not as strong as out west, but we’re seeing good growth, and we are looking forward to a really positive 2014 in both occupancy and ADR.Philippe Gadbois: We’re coming out of the first quarter with pretty good numbers, but strip out Alberta and Saskatchewan and [the industry’s] performance is ho-hum. Barbara Mech: Since 2009, we have seen consistent growth and improvement year-over-year. I would agree that much of the growth we have seen has been in Alberta and Saskatchewan, particularly with respect to ADRs. We have enjoyed very stable, favour-able interest rates for the past few years and that’s continued, so it’s been a very good environment that’s expected to continue.

DEVELOPMENTCaira: Where is the focus in terms of new builds and conversion?Scott Duff: We are probably evenly split in Canada. The West has been the focus for

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THE PANEL (back row, l to r) Paresh Raja, president, Brock Hotels; Bill Stone, EVP, CBRE Hotels; Philippe Gadbois, SVP, Operations, Atlific Hotels and Resorts; Rosanna Caira, editor and publisher, Hotelier (front row, l to r) Scott Duff, senior director of Development Canada, Starwood Hotels & Resorts; Brian Stanford, national managing director, PKF Consulting; Allison Reid, SVP- Development & Acquisitions, North America, Starwood Hotels & Resorts; Sukhi Rai, CEO, PHI Hotel Group; and Barbara Mech, regional director – GTA Region, Roynat Capital. Photographed at the Element Vaughan Southwest



new construction, although we’ve had conversion there as well; Atlan-tic Canada, those have been all conversions.Allison Reid: In 2000, we signed 200 deals globally, a lot of those were new builds, and they never happened. In 2013, the majority of our deals were conversions. [The hotels] were open, so 2013 will be our highest develop-ment year so far because they will open. In 2014, we are seeing a lot more new builds coming back into that mix, a lot of conversions and a lot of repositioning.Mech: From what I see, a lot of the projects are with experienced opera-tors who have a track record and have owned a number of hotels and operated them successfully, and perhaps had some new builds in that mix — branded hotels, as opposed to the motel style — and typically they are looking for leverage around the 50- to 60-per-cent mark. Sukhi Rai: We have 14 properties through B.C. and Alberta. We have two under construction — one in Spruce Grove [Alta.] and in Kamloops, B.C. We’re doing a lot of development in the suburbs. We’ve got eight hotels in the pipeline. So, we’re focusing on new development. Brian Stanford: Alberta, Saskatch-ewan, Newfoundland have a much different component, but we’re seeing more interest in Central Canada, Ontario, Quebec on the conversion side. In large part because there are a lot of underperforming assets that are under branded, that can be acquired at relatively low capital cost. It’s a little tougher in Western Canada, because even if the asset is not performing well, the starting point can be pretty high in terms of getting in. So, seeing those conversions, the problem is that nine times out of 10, it’s around an acquisition.

SEGMENT TRENDSCaira: What segments are most appealing from a consumer and development point of view?

Reid: The number-1 thing we’re dealing with is how [to] limit risk. So, select-service products have limited risk in that they’re quicker to build, they’re cheaper to build, they’re more efficient, and there is a bigger pool of potential take out opportunities. And, the group business has changed in the big boxes. Group business is down. Generally speaking, travel-lers are more efficient with how they travel, and I don’t see that going away for a while. What is new is this focus on luxury, which has come back in the last six months, where projects are starting to get done.... The full-service is pretty much only going in now if there’s a municipality that’s looking to compete, from a conven-tion centre standpoint.Gadbois: In today’s environment, the biggest risk, because it’s the most expensive and you’re not seeing the lift on rate, is typically the traditional full-service downtown box. Where you can see rate lift in certain markets in Canada — not all — is in luxury, and you’re seeing that a little bit in Toronto, maybe starting inVancou-ver, Montreal. After that we’re sort of tapped out — maybe Calgary? But there’s an announced three-million- foot project in Calgary on an A-plus site…. And everybody can wrap their head around the commercial, retail, the parking — no one can wrap their head around the hotel component — because it will cost.Stanford: [Select-service is] the easiest point of entry from a development perspective. The only thing I might add is that whether we’re in Eastern Canada or Western Canada, we still have some challenges on new builds. In Western Canada, the issue’s not getting occupancy, it’s can I develop it at a reasonable cost?.... In Ontario, we are struggling with less occupancy and more of a rate issue.

INDUSTRY TRENDSCaira: What are the biggest hotel trends? Duff: Technology is huge. Travel-



lers, many of them younger, are very sophisticated from a technology point of view. We are introducing keyless check-in into hotels; [it’s] your own 24-hour stay, it doesn’t have to be in at 3 p.m. and out by 11 a.m. [It’s] being introduced at the Aloft Cuper-tino [Calif.], across the street from the Apple headquarters. Reid: Lobbies are back to being social-izing spaces, but it’s not the way it was 30 years ago when we went to the bar and had a few drinks. [Guests would] rather sit in the lobby with their iPad than in their guestroom by themselves staring at a wall.... That’s how we came up with the Aloft — [guests play] pool, there’s a bar, but there are also little alcoves to sit and read a book.Gadbois: [There’s] the evolution of the full-service Marriott bedroom — where the full-service bedroom doesn’t have a desk anymore, doesn’t have a desk chair anymore, because Gen-Y wants to work from the loung-ing chair, from their bed, so they have a table that floats, open closets.... The expectation today, even for someone who is not Gen-Y, is for something that’s a little less safe.

TRANSACTIONSCaira: How is 2014 shaping up in terms of how many assets are going to be

sold this year?Stone: Other than the blockbuster big merger deals, I think it’s going to be very consistent with the last few years. So, again, stripping out the sale of the five Westins, probably we will be somewhere between $1.2 and $1.5 billion. That deal alone was just under $800 million. What’s in the market changes quickly; there are going to be further large assets on the market that will skew those numbers very quickly.

Caira: Is there still a lot of foreign capital coming into Canada?Stone: We’ve seen way more legiti-mate interest in the last couple of years than we have in the last 25. The legitimate [interest] is people spend-ing time underwriting, flying over, looking at it. These are groups that are very forthright; they identify their capital source and their motivation — having said that, it’s also a big step from those warm and fuzzy conver-sations to closing a transaction. But it is, in my view, escalating. It started with the Americans, but we’re dealing with European groups now for an asset in Montreal. We’re in the throes of doing a couple of resorts out west with Asian groups, and there’s everything in between.Caira: How is the current exchange

rate influencing what’s going on in the marketplace? Stone: I don’t think, surprisingly, it’s a big factor. Somebody said that to me years ago; they said we’re smart enough to assess a market or the potential of a property — we’re not smart enough to factor in currency. So, we’re going to go in, we’re a long-term hold, and hopefully we’ll be lucky enough the currency won’t be a big factor. But, I don’t think it’s an incentive to get people to buy in.

Caira: How much are properties being sold for, and how do the rates compare to past years? Stone: We’re a small market. We have 100, 120 hotels that sell in a given year, so it’s hard to take that average and say things are up or down. But I do think we’re at the top end of the range. The last frothy period was 2006 and ’07, and for big urban assets, the pricing is excep-tionally strong. Toronto is a great example of two different markets within a 30-minute cab ride. In downtown Toronto, we’re seeing very high prices, anywhere from $200,000 to $600,000 a key. Looking at Toronto airport, it’s not as strong. And there have been examples of deals getting done around the airport, service transactions of $100,000 to


$110,000 but there’s also … others that are getting done at $30,000 to $40,000 a room.

Caira: Is the hotel industry still viewed as a very risky endeavor?Stanford: Most lenders who were in the game in ’06 and ’07 had a few properties that got on the wrong side of the balance sheet, but not all that many. So a lot of the new players in Canada may be looking at it and saying, ‘Yes, it may be riskier than [investing in] an office, but it’s not as

bad as we may have perceived it.’

FINANCINGCaira: What are primary sources of financing?Rai: We’re still going to our banks, because we have an existing portfo-lio. But, recently, just the last couple months, we were getting amortization for 25 years with some of these banks; they’re cutting down to 18 to 20 years now. Some banks aren’t exceeding 15 per cent, 15 years.... The rates are still at the same picture, but on our existing properties that are older than four or five years that have a good performance, there’s lenders coming to us and saying ‘turn it around with us, and we’ll give you these rates’ and they’re phenomenal rates. On the new development side, there’s only a few banks that are giving that 60 per cent or 55 per cent and giving us 20 to 25. Right now, as of the last

couple of months, we’re not even at 25 amortization. Caira: Why is that?Rai: There’s a lot of supply coming in a lot of these places, especially in the West, Calgary airport. Everybody’s there, everybody’s trying to get there. So the banks want to push back. Raja: We’ve had multiple bids on our recent projects. [We] recently purchased a hotel [with] 30-day due diligence, 30-day close; we didn’t even approach a lender until after due diligence, and I had multiple ones ready to close, impressive rates, 25 years still. This was Ontario; we found the same thing in Manitoba, so we found aggressive rates, 25-year ams, and multiple bids on every project so far. But, debt to equity is also pretty high on our end, so we’re putting a bunch of money down, and that’s where risk is eliminated. That’s where you get the aggressive lenders, and



they are across the board, from sched-ule A to credit unions, to private equity. The rates are great, covenants are great, so we’ve been surprised at how much money there is out there and how aggressive lenders are.

TRAVEL & TOURISMCaira: Do you think the dollar will increase demand for tourism? Duff: I wouldn’t see it hurting it. It may even keep more Canadians at home as well, as it becomes more expensive to travel in the U.S.Stanford: What gets us more optimis-tic is the travel forecast. We’re looking at domestic business and domestic leisure travel forecast going up between 2.5 to three per cent per annum over the next three to four years. And that’s assuming a stable economy globally and nationally. [In] the U.S. market, the numbers are only a fraction of what they were

10 years ago, but last year was the first year we saw positive growth, and we’re talking the U.S. market growing by two to 2.5 per cent over the next two to three years. So, from a baseline perspective, that bodes well in terms of occupying room nights.... We’re starting to cap out relative to huge supply increases. And we’re going to fall back into that 1.5-per-cent supply growth, that’s 5,000, 6,000 rooms nationally. So that’s going to allow a lot of those markets’ demand to catch up, which helps rates, which helps profitability. Other than certain markets, where maybe there’s been huge development interest, you’ve got a short period of over-building, that fundamental supply demand drives profitability, and it drives investment, and all those things look good for the next three to five years. Raja: I echo Brian’s sentiments, but.... I am concerned about the govern-

ment’s lack of funding of the Canadi-an Travel Commission. The fact that this country does not promote itself in the U.S. is criminal. So, as an industry, we need to keep lobbying to increase those efforts, because it’s fine that we will grow that inbound U.S. market by two, 2.5 per cent, but we’ve lost 20. Caira: Travel and tourism provides 4.5 per cent of the GDP to the Canadian economy, but when you compare it with global travel and tourism, it contributes 9.5 to the world economy. So we contribute much less from a travel and tourism perspective to the world. So there’s some great potential for us to catch up, but whether or not we have the funding and the wherewithal to push this, that becomes a question [for] the govern-ment. Are we spending enough time and energy promoting Canada as a destination? u


HOTEL DEMAND

Cushman & Wakefield (C&W), in Toron-to and New York, is pleased to present the results of our analyses of six cities in the U.S. and five cities in Canada, aimed at assist-ing our hospitality sector clients in making

strategic decisions by showing correlations between hotel and commercial real-estate markets. In markets where there is substantial office development, we demonstrate that measuring office supply, absorption rates, vacan-cy rates and other such factors can help forecast hotel demand.

Drawing from C&W’s extensive office market research, with data dating back to 1999, and data on hotel demand from the Henderson, Tenn.-based Smith Travel Research, we calculated the number of occupied hotel rooms per 1,000 sq. ft. of occupied office space in each market to determine the correlations between sector performanc-es. This business briefing provides an overview of our findings.

DEMAND DYNAMICSThose involved in the investment side of the hotel indus-try continually strive to understand the innumerable factors that influence the demand for transient accommo-dation. We recognize that individual hotel performance is linked to a broad range of factors such as location, quality, size, brand, level of service and price points that all contribute to a property’s ability to capture a larger share of the market.

However, it is also important to examine the broader market in which a hotel operates to gain an understanding of the market’s long-term prospects. In airport locations, for example, demand is influenced by such factors as the volume and nature of air passenger activity as well as the amount of commercial and industrial development in the area. Whether activity is in expansion or decline will strongly influence the success of the surrounding market and hospitality properties. Taken as a whole, the performance of a market’s commercial assets — such as

THE NUMBERS GAMECushman & Wakefield offers an analysis of the relationship between office space and hotel rooms sold in 11 cities across North America

BY CUSHMAN & WAKEFIELD’S HOSPITALITY & GAMING GROUP


HOTEL DEMAND

warehouses, offices and manufacturing facilities — has a direct bearing on the performance of each hotel in the area and must be accounted for in making strategic business decisions.

To gain a unique understanding of the demand dynam-ics in major urban centres, our team examined the corre-lation between the number of occupied hotel room nights and occupied office space in select cities across North America. We uncovered clear evidence that hotel demand and occupied office space are linked, as shown in this briefing’s tables and graphs. In fact, in many markets, the year-over-year consistency between the performance of the two asset types holds very steady, though notable differences exist in the extent of hotel demand generated between markets.

OCCUPIED OFFICE SPACE AND HOTEL DEMAND – U.S.Table A summarizes the relationship between occupied hotel rooms and occupied office space in key U.S. cities. This data show significant discrepancies between major markets, ranging between 69 occupied hotel rooms in New York to 1,092 occupied rooms in Los Angeles per 1,000 sq. ft. of occupied office space. Also, the year-over-year deviations tend to be quite high in some cities, particularly in Atlanta and Los Angeles.

TABLE A

COMPARISON OF OCCUPIED HOTEL ROOMS TO OCCUPIED OFFICE SPACE

MARKET ROOMS PER STANDARD 1,000 SQ. FT. DEVIATION OFFICE SPACE Boston 77 5Chicago 230 12Atlanta 560 38Washington 275 14New York 69 8Los Angeles 1,092 61

Table B examines Boston and the relationship between hotel demand and occupied office space over time. While Boston benefits from other demand sources such as leisure tourism, these findings suggest that hotel demand gener-ated by occupied office space in this city is quite low compared to some other cities in the U.S. The average number of occupied rooms generated each year per 1,000 sq. ft. of occupied office space is 77, with a deviation of five over the past 14 years. However, it is also important to recognize that the ratio of hotel demand to occupied office space in Boston is trending upwards, from 70 to 73 rooms in the initial years of this analysis to 84 to 86 rooms in the last three years.

TABLE B

BOSTON: CORRELATIONS BETWEEN HOTEL & OFFICE SPACE

YEAR OCCUPIED OCCUPIED OFFICE ROOMS PER HOTEL ROOMS SPACE SQ. FT. 1,000 SQ. FT. 1999 10,423,848 149,388,062 702000 11,372,284 156,870,519 722001 10,204,084 140,442,848 732002 10,298,688 135,886,355 762003 10,232,553 137,064,574 752004 10,967,771 141,176,143 782005 11,173,649 145,997,662 772006 11,716,287 151,631,421 772007 12,122,052 156,293,237 782008 12,079,051 155,215,874 782009 11,443,006 148,371,226 772010 12,570,959 148,575,303 852011 12,996,175 151,908,101 862012 13,208,958 156,609,332 84AVERAGE 77DEVIATION 5

Table C shows the city with the strongest hotel/office space correlation — Los Angeles. The number of occupied rooms for every 1,000 sq. ft. of occupied office space is not only much greater than in Boston but has varied much more from year to year, with a devia-tion of 61. This suggests that office developments in Los Angeles are generating 13 times as much hotel demand as the equivalent amount of office space in Boston; there-fore, hotels in Los Angeles have a much lower reliance on other sources of demand, such as leisure travellers, meetings and convention attendees.

TABLE C LOS ANGELES: CORRELATIONS BETWEEN HOTEL & OFFICE SPACE

YEAR OCCUPIED OCCUPIED OFFICE ROOMS PER HOTEL ROOMS SPACE SQ. FT. 1,000 SQ. FT.

1999 23,296,738 21,995,643 1,0592000 24,623,325 21,448,672 1,1482001 22,999,365 22,543,398 1,0202002 22,923,575 21,806,227 1,0512003 23,751,496 21,994,014 1,0802004 25,043,483 22,535,903 1,1112005 25,851,035 23,254,254 1,1122006 25,407,094 22,710,707 1,1192007 25,225,182 23,360,809 1,0802008 24,344,050 23,394,172 1,0412009 22,507,129 22,604,498 9962010 24,237,583 22,360,543 1,0842011 25,667,072 21,937,518 1,1702012 26,636,104 21,788,777 1,222AVERAGE 1,092DEVIATION 61

Having shown the differences in occupied rooms and deviations in two U.S. cities, the following graph looks at the results of all six American cities that were surveyed. Boston, New York, Washington and Chicago all show a similarly low volume of occupied hotel rooms for every 1,000 sq. ft. of occupied office space and a fairly small

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HOTEL DEMAND

deviation from year to year (as shown by the relatively flat trend lines). On the other hand, Atlanta and Los Angeles show a much higher ratio of occupied hotel rooms and a less consistent trend line. A closer examination of these results reveals that Boston and New York follow an almost identical trend year over year, differing by only a few room nights (the results are so similar that the graph lines are difficult to distinguish).

OCCUPIED OFFICE SPACE AND HOTEL DEMAND – CANADAIn Canada, we examined the relationship between hotel demand and office space in five cities — Vancouver, Calgary, Toronto, Ottawa and Montreal. As shown in Table A, the ratio of occupied hotel rooms to occupied office space found in four of the Canadian cities was notably lower than most of the U.S. cities we examined. Interestingly, Vancouver, with many of the same charac-teristics as Los Angeles, but much smaller in size, received only 144 occupied hotel rooms per 1,000 sq. ft. of occupied office space compared to Los Angeles at more than seven times the volume.

TABLE A

COMPARISON OF OCCUPIED HOTEL ROOMS TO OCCUPIED OFFICE SPACE

MARKET ROOMS PER STANDARD 1,000 SQ. FT. DEVIATION OFFICE SPACE Vancouver 144 8Calgary 60 4Toronto 56 2Ottawa 77 3Montreal 84 2

Table B shows the relationship, by year, for Toron-to, the largest market in Canada. While Toronto, like other cities, benefits from demand sources other than occupied office space, the relationship between occupied office space, business travel and hotel demand remains very strong. In Toronto, an average of 56 room nights has historically been generated for every 1,000 sq. ft. of occupied office space. The deviation of this average is two, meaning that the annual number of room nights gener-ated is likely within 54 and 58 per 1,000 sq. ft. of occupied office space.

TABLE B

TORONTO: CORRELATIONS BETWEEN HOTEL & OFFICE SPACE

YEAR OCCUPIED OCCUPIED OFFICE ROOMS PER HOTEL ROOMS SPACE SQ. FT. 1,000 SQ. FT. 2001 8,189,054 143,142,062 572002 8,024,282 138,457,028 582003 7,019,665 139,705,096 502004 7,988,191 143,824,421 562005 8,184,361 147,949,155 552006 8,409,479 149,711,625 562007 8,592,892 152,669,590 562008 8,545,979 153,530,691 562009 7,981,273 153,825,446 522010 8,709,440 154,455,991 562011 8,936,963 157,221,354 572012 9,004,615 157,689,375 57AVERAGE 56DEVIATION 2

The following chart shows the relationship between occupied hotel rooms and occupied office space for each of the five Canadian markets. It is interesting to note the similarities presented within these markets, with Calgary, Toronto, Ottawa and Montreal showing a consistent pattern and Vancouver showing slightly more volatility. Furthermore, Toronto and Montreal mimic each other in

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

LOS ANGELES ATLANTA WASHINGTON

CHICAGO BOSTON NEW YORK

1,400

1,200

1,000

800

600

400

200

0

OCCUPIED HOTEL ROOMS/1,000 SQ. FT. OCCUPIED OFFICE SPACE MAJOR U.S. MARKETS

OCCUPIED HOTEL ROOMS/1,000 SQ. FT. OCCUPIED OFFICE SPACE MAJOR CANADIAN MARKETS

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

VANCOUVER MONTREAL OTTAWA CALGARY TORONTO

180

160

140

120

100

80

60

40

20

0


HOTEL DEMAND

the ebb and flow of occupied hotel rooms, showing almost parallel graph lines for the two cities, albeit Toronto has trended below 60 hotel rooms per 1,000 sq. ft. of occupied office space, while Montreal has trended at more than 80. It is also interesting to note that Toronto has almost 158 million sq. ft. of occupied office space while Boston has an almost identical 157 million sq. ft. However, whereas Boston captured more than 13-million room nights of hotel demand, Toronto hotels captured only nine-million room nights.

TOTAL CITY AND CENTRAL BUSINESS DISTRICT COMPARISONSA major city in both the U.S. and Canada was chosen to compare the relationship between hotel demand and occupied office space in the Central Business District (CBD) and the overall city. As shown in the table below, the CBD of Boston has a slightly higher standard devia-tion than the overall city. This suggests that the relation-ship between hotel demand and occupied office space is slightly more unpredictable in the downtown core than the overall city; however, it still remains a strong indicator of future hotel demand.

BOSTON TOTAL MARKET

YEAR OCCUPIED OCCUPIED OFFICE ROOMS PER HOTEL ROOMS SPACE SQ. FT. 1,000 SQ. FT. 2001 10,204,084 131,578,355 78 2002 10,298,688 116,472,425 88 2003 10,232,553 121,983,828 84 2004 10,967,771 126,538,252 87 2005 11,173,649 142,721,636 78 2006 11,716,287 147,890,518 79 2007 12,122,052 153,258,735 79 2008 12,079,051 153,196,018 79 2009 11,443,006 146,348,594 78 2010 12,570,959 145,111,979 87 2011 12,996,175 150,738,911 86 2012 13,208,958 156,513,718 84 AVERAGE 82 DEVIATION 4

BOSTON CBD


In Toronto, the trend for the downtown core very closely mirrors the results of the larger city-wide market. As shown in the Toronto table, not only is there remark-able similarity between the actual number of occupied rooms and the level of deviation between the two markets but they also demonstrate almost identical patterns of increase and decrease.

TORONTO TOTAL MARKET

YEAR OCCUPIED OCCUPIED OFFICE ROOMS PER HOTEL ROOMS SPACE SQ. FT. 1,000 SQ. FT. 2001 8,189,054 143,142,062 57 2002 8,024,282 138,457,028 58 2003 7,019,665 139,705,096 50 2004 7,988,191 143,824,421 56 2005 8,184,361 147,949,155 55 2006 8,409,479 149,711,625 56 2007 8,592,892 152,669,590 56 2008 8,545,979 153,530,691 56 2009 7,981,273 153,825,446 52 2010 8,709,440 154,455,991 56 2011 8,936,963 157,221,354 57 2012 9,004,615 157,689,375 57 AVERAGE 56 DEVIATION 2

TORONTO CBD



HOTEL DEMAND

T h e a m o u n t a n d composition of hotel demand varies greatly by city and is generated by a number of differ-ent factors described in this briefing. Demand is also very susceptible to economic swings and extraordinary events such as terrorist attacks, politi-cal unrest and natural disasters. Evidence of this can be seen in stats from 2001 through 2003 (for example, the Gulf War, 9/11, the Iraq war, SARS, et cetera), as well as in the boom that lasted through 2007 and then the economic downturn that started in 2008.

Forecasting these events and determining how long they may impact hotel demand is generally impossible. However, in many major urban markets where it can be shown that commercial real-estate demand and hotel demand are closely related, it may be possible to forecast future hotel demand based, in part, on present and projected activity in the real-estate sector.

Unlike the hotel sector where the lead time for the sale of guestrooms tends to be very short-term and very unpredictable, office space is normally associated with much longer lease terms — generally months or years. This more stable environment enables analysts to take a more reliable and longer-term view of the health of the office market. In markets where there is substantial office development, we believe measuring office supply, absorption rates, vacancy rates and other such factors can be of assistance as a means of forecasting hotel demand.

In this analysis, we found some markets have little year-over-year volatility and a standard deviation that is low, enabling hoteliers to have a reasonable level of confidence as they weigh the influence of the office market in their assessment of future hotel demand. However, other markets show much more volatility, underscoring the need to be more cautious in the use of office research as a measure of long-term hotel demand and indicating the need to delve deeper into the many other factors that contribute to performance. u

Cushman & Wakefield is a real-estate firm with 227 offices world-wide. Its Hospitality & Gaming Group specializes in the hospitality industry, providing a range of advisory, appraisal and transactional services. For questions regarding this report, or to speak to one of their hospitality professionals, call 416-359-2407.

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Colliers International Hotels has proudly served as advisor in over 75 hotel transactions in excess of $1.25 billion in the past 36 months on behalf of a wide variety of private, public and institutional clients.

Some of our recent Canadian experience includes the following:

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Featured 2013/2014 transactions, L-R top row: Courtyard by Marriott Toronto Markham & Residence Inn Toronto Markham (sold as part of the 632-room Toronto Courtyard & Residence Inn Marriott Portfolio), Stage West All-Suite Hotel & Theatre Restaurant, Hilton Windsor (sold together with the Riverside Windsor), Homewood Suites by Hilton Cambridge-Waterloo & Hampton Inn by Hilton Toronto Airport Corporate Centre (together as part of the 578-room Toronto Area Hilton Extended-Stay/Select-Service Portfolio recapitalization).

L-R middle row: Hilton Toronto Airport, Fairmont Château Laurier, Courtyard by Marriott Toronto Downtown.

L-R bottom row: Fairfield Inn & Suites Toronto Airport, Holiday Inn Express & Suites Nepean, Comfort Inn Chilliwack, Best Western Abercorn Inn Richmond, Waterfront Burlington (debt placement), Coast Vancouver Airport.

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acted on hotel industry transactions

valued at more than $ 1 billion in 2013.


REAL ESTATE

It looks like 2013 is the year to beat in Canada’s hotel investment sector since transaction volume approached $2.1 billion and represented the third-strongest year ever recorded. Transaction volume has only surpassed this threshold during the height

of unprecedented merger and acquisition activity in 2006/2007 when annual volume averaged $3.8 billion. Activity this past year was fuelled by strengthening operating fundamentals, relatively stable cap rates in most markets, an abundance of equity capital, availability of diverse product and the relative ease of obtaining low cost debt financing. Solid domestic fundamentals mitigated global market concerns, including a rising U.S. dollar, volatility in European capital markets, hesitant growth projections in Asia-Pacific and the threat of escalating

global conflicts such as the Ukraine crisis.But, the hotel investment sector is cyclical, and moving

into Q2 2014 there are signs Canada is past the peak of the cycle, with preliminary Q1 2014 volume at approxi-mately $205 million, half of its total in Q1 2013. This shift is increasingly evident with limited product on the market, prolonged timelines for deals to close, increased seller/buyer pricing spreads and moderately constricting lending parameters. Investor risk tolerance has waned and will undoubtedly lead to widening yield spreads for trophy versus traditional hotel assets. And, The Real Proper-ty Association of Canada and FPL Advisory Group’s “Canadian Real Estate Sentiment Survey” — which measures executives’ current and future outlook for overall real-estate conditions, asset values and the availability of IL

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A GOOD YEARLast year was a memorable one for hotel investments, and 2014 looks strong

BY MARK SPARROW & DEBORAH BOROTSIK, CBRE HOTELS


REAL ESTATE

capital — shows numbers fell to their lowest level since 2009 in Q4 2013. The good news is there has been an uptick to the survey in Q1 2014, and longer term investor optimism remains. While Canada will no doubt experi-ence lower levels of hotel investment activity in 2014 relative to last year, CBRE Hotels predicts investment will remain well within historical norms, averaging between $1.2 billion to $1.5 billion annually.

TRANSACTION ACTIVITYCanadian transaction volume increased 87 per cent in 2013, from approximately $1.1 billion in 2012 to $2.1 billion. While there was a wide spectrum of deals complet-ed, the largest was the five-hotel Westin portfolio acquired by Starwood Capital and a Middle Eastern Fund in Q3 for $765 million. This represented 36 per cent of total trans-action volume and helped push per-room pricing for the year to $129,000, an increase of 23 per cent over 2012. Even when this significant portfolio is removed from the analysis, volume of $1.3 billion still exceeded 2012 by 19 per cent. Preliminary Q1 2014 transaction volume is approximately half of what it was at this time last year, with per-room pricing at $75,000 compared to approxi-mately $120,000 in Q1 2013.

REGIONAL REVIEWLast year’s transaction activity was heavily skewed to Central Canada (Ontario and Quebec), accounting for 54 per cent of the total as volume topped $1.1 billion.

This was partly due to an abundance of product that came to market — particularly within the Greater Toronto Area — that led to the year ending with 21 hotel sales, comprising almost 60 per cent of the aggregate volume reported within Central Canada.

Western Canada (British Columbia, Alberta, Saskatch-ewan, Manitoba and Yukon) continued to report robust investment activity in 2013. Transaction volume of $872

million represented an increase of 65 per cent over 2012 but was largely attributed to the Westin hotels located in Vancouver, Edmonton and Calgary, which totalled $429 million. Without these trades, volume in Western Canada slipped 16 per cent year-over-year; however, this is believed to be a direct result of limited inventory and not waning investor

MILLION$872

PER ROOM$146,000

TRANSACTIONS57

WE

STE

RN

MILLION$100

PER ROOM$141,000

TRANSACTIONS5

EA

STE

RN

BILLION

$1.1

PER ROOM$119,000

TRANSACTIONS65

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54%

5%

41%

WESTER

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NO

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CEN

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L BILLION$2.1

NATIONAL VOLUME

REGIONAL TRANSACTIONS by the numbers

“CANADIAN TRANSACTION VOLUME INCREASED 87 PER CENT IN 2013”

RegionalVolume

59%NationalVolume

32%

MILLION$672DEALS21

ROOMS5,513

GREATER TORONTO AREAby the numbers


REAL ESTATE

interest.While Central and Eastern Canada have experienced

tempered RevPAR growth, Western Canada’s RevPAR growth continues at a strong pace, particularly through-out the Prairies, northern Alberta and urban markets in British Columbia, comprising nine out of the top 10 Canadian RevPAR growth markets. The Western invest-ment climate is built around cash-flow driven region-al hotel investment companies, private investors and public companies looking to expand their position. British Columbia continues to see a steady flow of offshore capital predominantly through direct investment in the Vancou-ver and Vancouver Island regions.

Transaction activity grew immensely in Eastern Canada in 2013, due to Temple REIT’s strategic acquisition of the $87.5 million Centennial Portfolio; there were only two small deals in Eastern Canada in 2012.

PORTFOLIO TRANSACTIONSThree significant portfolio sales in 2013 accounted for approximately $923 million, or almost half of total trans-action volume, a significant change from the previous year when just one portfolio sale — representing only five per cent of total volume — occurred. Portfolios in 2013 included: the Westin portfolio (five hotels/$765 million); Concord Hospitality GTA select-service portfolio (five hotels/$70.5 million) and the Centennial Hotel portfolio (three hotels/$87.5 million).

PER-ROOM PRICINGPer-room pricing in 2013 of $129,000 was fuelled not only by the Westin portfolio but also other landmark deals, including the 600-room Hilton Toronto ($233,000 per room) and 549-room Centennial Hotel Portfolio ($159,000 per room). Western Canada led at $146,000 per room, reflecting a premium over the national average of approximately 13 per cent. Central Canada averaged $119,000, some eight per cent below the national average, while Eastern Canada achieved $141,000 per room,

primarily from the Centennial hotel portfolio. The price gap between Western and Central Canada is primarily a function of a larger proportion of smaller deals occur-

ring in Ontario and Quebec. As a point of reference, 34 per cent of the deals in the West exceeded $100,000 per room and just 14 per cent fell below $50,000 per room. This compares to Central Canada, which had only 23 per cent of its trades above the $100,000 threshold, with 41 per cent falling below $50,000.

ALTERNATIVE USENine hotels were purchased for redevelopment to alterna-tive uses in 2013, representing five per cent of transaction volume, compared to 14 trades in 2012, which accounted for 39 per cent of total volume. But, this trend is reversing, with sales pegged for alternative use in Q1 2014, includ-ing Hôtel des Seigneurs (Saint-Hyacinthe, Que.), Loews Hotel le Concorde (Quebec City), Holiday Inn & Confer-ence Centre (Brampton, Ont.) and Holiday Inn Montreal Midtown (Montreal), accounting for just under half of total preliminary Q1 volume.

BUYERS AND SELLERSInstitutions/equity funds dominated investment activity in 2013, followed by private investors at 44 per cent and 20 per cent, respectively. In total, non-Canadian buyers represented just under half of all transaction volume, largely skewed by the Westin portfolio. Similarly, institu-tions/pension and equity funds were the dominant seller group at 50 per cent of total volume, based on only eight transactions. Approximately 68 per cent of all trades

MILLION$923

HOTELS13

ROOMS4,106

PORTFOLIO TRANSACTIONSby the numbers

MILLION

$2,100

DEALS

130

ROOMS

17,351

NATIONAL TOTALPORTFOLIO TOTAL

“THREE SIGNIFICANT PORTFOLIO SALES IN 2013 ACCOUNTED FOR APPROXIMATELY $923 MILLION, OR ALMOST HALF OF TOTAL TRANSACTION VOLUME”

were priced below $10 million, further demonstrating the impact of smaller, private investors. In contrast, private investors sold 75 assets (58 per cent of total assets sold) and comprised just 17 per cent of total volume.

DEBT FINANCINGDebt has remained readily available for most hotel asset types due to moderate increases in bond rates, stable to declining spreads and a mix of lenders. Interest rates for hotels range from 250 to 350 basis points over five-year Canada bonds (1.7 per cent at the end of Q1 2014), although slightly lower rates for relationship lending have been noted. Comparatively, urban assets in prime markets warrant interest rates at the low end of the spectrum, while assets in secondary/tertiary markets and those that are limited-service in nature would be at the upper thresh-old. Typically, loan-to-value ratios are 50 per cent to 65 per cent with an amortization period of 18 to 25 years, depending on the age and condition of the property.

THE 2014 OUTLOOKCBRE’s 2014 outlook is based on trends that are expect-ed to influence the motivations of sellers and buyers. Predictions include: limited hotel product actively on

the market; stable cap rates, unless interest rates creep upwards or new supply threatens a market; an anticipated drop in the Canadian dollar to below the 90-cent thresh-old; tempered supply growth in most markets; abundant buyers, particularly private equity and private investors; low cap rate and turnaround deals may need a level of seller participation to facilitate the transaction; active debt financing in most markets; highly comprehensive buyer due diligence that could prolong timelines; and modest increase in the number of distressed sales.

Although hotel investment is unlikely to reach 2013 levels, all indications suggest activity will remain at very healthy levels in 2014. u

CBRE Hotels is a commercial real-estate brokerage firm, specializing in hotel sales, consulting and advisory, with offices in Toronto, Calgary

and Vancouver. Mark Sparrow ([email protected]) is director of Hotels, Western Canada and associate VP; Deborah Borotsik ([email protected]) is VP.

REAL ESTATE


Thoughts of the global financial crisis moved to investors’ rear-view mirrors in 2013 as exhibited by the strong demand for a variety of assets. The proof is in the numbers as hotel transaction volume rose to more than $2 billion in 2013.

Last year, the market was flush with capital, and the strong and diverse rotation of buyers and sellers took advan-tage of current conditions. Improvements in the lending environment were exhibited throughout 2013 and into 2014, aided principally by the all-time low cost of credit and an expanding universe of lenders attracted to the Canadian lodging industry. Below is a list of 10 reasons why it’s the optimal time in the Canadian hotel invest-ment market for both capital flows and debt availability.

ROBUST TRANSACTION ENVIRONMENT Entering 2014, there’s a variety of product available for sale and a strong cross-section of buyers. We estimate $1.25 to $1.75 billion in transaction volume for 2014, given favourable market conditions and deal pipeline channel checks. There is a trend in growing transaction size represented by deals over the $10-million threshold, accounting for approximately 86 per cent of full-year volume in 2013. Average price per room has also seen healthy growth levels, increasing to $133,000 in 2013, representing a 59-per-cent increase from 2012; similar levels are anticipated in 2014.

GROWING OPERATING METRICSHealthy RevPAR gains across the country are spurring investor interest. RevPAR is forecast to grow by 4.1 per cent in Canada for 2014, reports PKF Consulting, much higher than the 10-year running average of 2.9 per cent.

FAVOURABLE DEBT CONDITIONSThe bullish transaction market described above is welcomed by a healthy list of Canadian, U.S. and inter-national lenders eager to fund prime, institutional-grade hotel assets brought to market. Borrowers will continue to be pleased with the ample supply of debt capital available for hotels, which encourages lenders to be more aggressive on both underwriting standards and pricing. For larger full-service urban assets, the active lenders are insurance companies as well as foreign banks and U.S. institutions. GE Capital, credit unions, the Business Development Bank of Canada and other regional banks are very active for select- and focused-service assets. The landscape is quite different from west to east, with additional competi-tion in the resource-rich markets of Alberta and British Columbia given the strength of their economies.

DEFAULT RISK IS LOWCanada has benefited from a significantly smaller amount of lender-driven scenarios than the U.S. This trend will continue into 2014 as we expect to see even less

HERE WE GROWThe future looks bright as the hotel real-estate market flourishes

BY ROBIN McLUSKIE, COLLIERS INTERNATIONAL HOTELS

REAL ESTATE

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With a portfolio of 65 hotels and strong growth momentum, Starwood Hotels & Resorts continues to expand its presence in Canada. With nine distinct lifestyle brands and the award-winning Starwood Preferred Guest® loyalty program, Starwood is well positioned to drive results for our partners.

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Thom KillingsworthREGIONAL VICE PRESIDENT, OPERATIONSPACRIM HOSPITALITY SERVICES INC.

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top Four Diamond hotels. Together, we also brought the

communities we serve. Starwood’s solid global sales guest and shareholder satisfaction. It was also obvious

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GDG14021_CanadaTestim_Hotelier.indd 1 4/17/14 4:50 PM


REAL ESTATE

distress than last year’s meagre $65 million in dollar volume. There is a significant amount of capital from private investors and hotel invest-ment companies in Canada who are comfortable putting substantial equity into deals and are therefore more conservative from a leverage standpoint. This bodes well for the hospitality industry where limited lender-driven distressed sales impact pricing and overall metrics.

NEW SUPPLY REMAINS LOWThe new supply of guestrooms will remain below historical norms (two per cent to 2.5 per cent) and should average 1.5 per cent to two per cent in 2014, according to Colliers. Ensuring new supply is in check is a critical component of maintain-ing an active transaction market. Lenders tend to look closely at this before financing an existing hotel as the negative impact on the older properties can be quite meaningful once a new hotel opens. However, for the most part, the markets seeing new supply have strong economies that can absorb the new rooms.

INSTITUTIONAL CAPITAL CHECKS IN The availability of rarely offered prime city centre hotels in Canadian gateway cities will continue to attract institutional capital. When the right product is available for sale, it attracts a diverse array of cap-ital sources such as pension funds, private equity firms, hedge funds and other public vehicles such as REITs, helping to further legitimize hotels as an institutional grade asset class.

ACQUISITIONS FOR ALTERNATIVE USEAlthough this theme has slowed in the last 18 months, the appetite for conversion to student residence or redevelopment to residential or retirement home still exists, taking non-performing hotels out of inven-tory and helping the existing stock of

inventory in select markets. Where an asset has reached the end of its life as a hotel, converting to an alter-native use often makes the most economic sense.

CAP RATE STABILITY (& COMPRESSION)It’s tempting to say cap rates should trend upwards, but the market seems stable overall with contin-ued compression in gateway markets (more capital, more competition equals a great outlook). Overall, cap rates averaged 8.5 per cent in 2013, which is still more attractive than other real-estate classes, such as office, where cap rates can be as low as sub five per cent.

INTEREST RATES/FOREIGN EXCHANGEThe Bank of Canada has reported plans to keep its prime rate at one per cent through 2014, and perhaps much of 2015, resulting in a contin-ued record-low interest-rate environ-ment. Coupled with a Canadian dollar that’s forecast at 90 cents U.S. for 2014 (per BMO Capital Markets), this should generate inter-est from cross-border capital.

BEHIND-THE-SCENES ACTIONThere’s been a substantial market for partnership buy-outs, refinancings and new joint ventures. These don’t register as market transactions but are significant and representative of a healthy investment market. u

Colliers International Hotels is an active hotel brokerage, having been involved in more than 300 Canadian hotel and resort property transactions with an aggregate asset value of $6 billion.

Robin McLuskie is the VP of Hotels and is based in Toronto. She can be reached at [email protected].


REGIONAL OVERVIEW

Canada’s investment landscape offers an inter-esting dichotomy, as it’s difficult to avoid characterizing the current and pending level of hospitality investment in the West as more thriving and promising than in the

East. But there are pockets of strength and weakness scattered throughout the country, and both regions have inherent and unique challenges. So, let’s examine both sides of the coin.

IS THE WEST BEST?“From a 5,000-foot standpoint, it’s pretty simple,” says Philippe Gadbois, SVP, Operations for Montreal’s Atlific Hotels, speaking of the West Coast. “Hotels there are running in a very strong, growing environment. That means, because there’s more demand, we can charge more money. And, because we get more money — because there’s more demand and people pay more for the rooms — it’s a double beneficial whammy.”

“It’s generally better in the West than in the East,” sums up Robert Pratt, president of Vancouver’s Coast Hotels, which operates 40-something properties in the West. Regardless, he also notes that some western markets are seasonal and aren’t very strong. And these factors have a profound influence on investment, valuations and cap rates, to say nothing of how hoteliers operate and structure hotels there.

Nonetheless, the thriving resources economy in the West kisses everything it touches with good fortune. As long as oil and gas exploration is thriving, asserts Pratt, the hotel business will accommodate it. It’s why Coast is planning “significant investments” in its assets in the region. It’s also why Western Canada leads pricing. At $160,000 per room, on average, that represents a 23-per-cent premium over the national average, accord-ing to Mark Sparrow, director of Hotels, Western Canada, CBRE Hotels in Vancouver. Indeed, if you’re comparing Super 8s alone, the room rates in the resource markets are

TAKE YOUR PICK Canada’s West overtakes the East in the minds of many investors,

but both have opportunities for growth

BY LAURA PRATT

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REGIONAL OVERVIEW

probably 50-per-cent higher than in other markets, says Carrie Russell, managing director of hotel consulting giant HVS in Vancouver. You’d pay more for a midweek bed in Estevan, Sask. today than you would for one in downtown Vancouver. In fact, the current rate of $190 for a room at the Fort McMurray Super 8 in Alberta is the highest of any in the brand’s system, globally.

It’s why the oil-patch hub of Calgary had a great year, why oil-and-gas staging town Edmonton is booming, why exploration heart Fort McMurray, Alta. is golden and why various towns in Saskatchewan — where potash, Bakken Oil, natural gas and forestry activity is coming to life — are drawing crowds. “You almost don’t have to do anything to succeed in these markets,” says Russell.

But it’s not all idyllic. The fall-off in U.S. traffic and convention action dragged down trade in downtown Vancouver and Victoria (though it’s recently picked up in the latter city). Business in B.C.’s Fraser Valley, the seasonal Lower Mainland and in some parts of the province’s interior hasn’t been robust, either, possibly a consequence of recent supply augmentation to which demand has yet to catch up.

And the fallout from a heated up local economy means construction costs are also on fire. “It’s more expensive to build in Western than in Eastern Canada,” says Russell, “and labour is hard to come by.”

Indeed, says Ryan McRae, VP, Acquisitions and Devel-opment for Vancouver’s SilverBirch Hotels & Resorts, developers looking for higher-quality, more institutional-level assets might be hard pressed to find them here, simply because there hasn’t been a lot of that develop-ment activity in the last 20 years.

And, since people are paid quite well for basic construc-tion jobs and work associated with oil and gas devel-opment, the hospitality industry can’t compete and is facing labour woes. “Finding room attendants, guest clerks or restaurant servers is a huge challenge,” says Atlific’s Gadbois.

Seniors’ residences and work camps in the resource-buzzing areas, both of which have a reputation for poach-ing service-minded resources from the lodging sector, aren’t helping matters. Foreign worker programs are taking some of the pressure off, but some operators have other solutions. “Hire right and take care of your people. It seems such a no-brainer, but so many companies don’t [do it],” says Coast’s Pratt.

More than that, access to financing is becoming a challenge in the West, particularly in the full-service sector, since the bulk of development is in limited-service where construction costs aren’t as high. “We’re starting to see a slight pullback from regional banks,” says CBRE’s Sparrow.

Still, the director of the commercial real estate firm says,

financing has always been pretty readily available for the Western Canadian hotel world and a prominent key to its growth. It’s typically priced 100 to 150 basis points lower than in Central and Eastern Canada, but he says that is due to optimism from regional banks and credit-union syndicates.

Looking ahead, 2015 shows no signs of flagging. The resource activity continues to prosper, with lots more hinging on the government’s decision to allow pipelines along the coast to funnel resources to China (particu-larly in spots such as B.C.’s Fort St. John, Prince George and Terrace). Additionally, a growing U.S. economy is sending more convention business to Vancouver.

“We’re quite optimistic about the demand forecast,” says HVS’s Russell, who believes the challenge will be new supply. With only a half per cent Canada-wide growth in supply in the last two years, compared to an historical average of 1.2-per-cent growth, a lot of supply languishes in the planning pipeline.

“We believe the Western Canadian hotel investment market will continue to remain robust,” echoes CBRE’s Sparrow. The West’s share of the country’s overall trans-action volume has dropped from about 61 per cent (of $2 billion) in 2012 to just under 39 per cent (of $1.1 billion) in 2013, but Sparrow acknowledges that was largely driven by Central Canada having a “really strong year” and the availability of product there. He maintains that a lot of activity still remains in Western Canada.

SilverBirch’s McRae affirms that resource-based markets may have short- and medium-term volatility, but they have long-term gains. “If we do a 20-plus year review of those markets, we see continued strength and desirability. In the long term, we’re very confident these markets will be good investment plays,” he says.

WHAT ABOUT THE EAST?Resources factor into the more limited opportunity in the Eastern Canadian hotel market, too. St. John’s, N.L. is an example of a market where development is surging to match supply with demand. That said, the activity in the East is more about conversions than new builds and more about secondary and tertiary markets, such as Kingston, Ont. and Sudbury, Ont. “The big markets are pretty well covered in Eastern Canada and have been quite dynamic in the last decade,” says Serge Primeau, VP of Operations and Development for Canada at Urgo Hotels, a Bethesda, Md.-based hotel development, ownership and manage-ment company. “Everything got built, and now it’s more about looking at repositioning existing buildings to get better performance from them than building from the ground up.”

Still, since construction costs are just as high for a three- as for a five-star hotel, and the rate doesn’t compen-

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REGIONAL OVERVIEW

sate for the price, you have to make the numbers work for your company. “There are opportunities, but they aren’t as obvious as they used to be. You need to monitor the markets carefully, manage your costs tightly and be clever,” says Primeau.

And brand recognition is an issue, because there’s limited development in the suburban markets, Primeau adds. “For developers like us who are associated with branded products that have standards and costs that need to be justified with a return on investment, you have to be careful to associate yourself with the proper brand.”

Overall, says David Larone, national managing director for PKF Canada in Toronto, it makes sense to character-ize Eastern Canada as you would the Canadian econo-my overall. “We’re looking at a relatively low-growth, low-interest-rate environment.”

And, while the Newfoundland economy is doing quite well, Ontario and Quebec are still recovering from the 2009 hit to their manufacturing sectors. The political volatility and legacies of the federal government’s auster-ity measures in these two provinces aren’t helping matters, Larone says. New Brunswick and Nova Scotia are also experiencing slower growth, damaged by the decline in

U.S. leisure travel over the last several years. “There are lots of things that are weighing on the

Central and Eastern Canadian economy that aren’t weighing on the Western Canadian economy to the same extent,” says Larone.

But there is still good news in the Eastern end of Canada, Larone hastens to confirm. Along with the oil projects in Newfoundland, there are various infrastructure and utility initiatives on the East Coast, including Shell’s investment in offshore exploration in Nova Scotia and ship-building contracts in Halifax. Then, says Larone, there’s the four-per-cent RevPAR growth in 2014 for Toronto, Quebec City and Montreal; and the 73-per-cent occupancy, $153 ADR and $111 RevPAR in St. John’s, N.L., the highest in Central and Eastern Canada.

“There’s lots of reason to feel optimistic about the investment environment in Eastern Canada being strong and getting stronger,” says Luke Scheer, director of Eastern Canada for CBRE Hotels in Toronto. “As a hotel brokerage firm, we communicate with investors across the country, and we’re seeing a ton of interest from groups who [want] to establish a presence there.”

“We’re moving in the right direction,” adds Larone. u

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DUE DILIGENCE

Due diligence has always been essential to any hotel purchase, but the process is (or should be) far more intensive today. With tighter lending requirements and increased aware-ness about environmental issues, buyers need

to arm themselves with more and more information before they sign on the dotted line. Four experts from different sides of the hotel sector weigh in on what investors need to know.

THE FINANCIAL COMMITMENTTimes have changed, and lenders are requiring more information than they ever did before, an outcome of the economic downtown of 2007/2008.

“There’s more detail required and a lot of that is driven by compliance requirements across the board,” says Ian Ricci, a senior account manager at GE Capital who specializes in hotel finance. “You have to be more sure now. You have to be absolute and ironclad in terms of

having all the right information.”Being organized and prepared is key. For example,

buyers should have monthly financial statements organized and available in advance. “[Lenders] want to see trailing 12-month periods, whereas before it might have been OK to just use an annual statement,” says Ricci. “There’s more granular analysis.”

It’s also important that internal statements and account-prepared statements match up. “Sometimes they don’t,” says Ricci. “And, if they don’t, you have to under-stand why, because that question will come up.”

Ricci’s checklist for potential buyers looking to appease lenders also includes: understanding the financial performance of the hotel; understanding the competi-tive landscape in which the hotel operates; and, if there’s an existing franchise, understanding the situation of the franchise and the requirements for the next 12 to 18 months.

All this information is needed quickly. “Time can kill

DO YOUR HOMEWORKUnderstanding everything from finances to design is integral to a successful hotel purchase

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things, so speed and access to information is really impor-tant,” says Ricci. “The faster you can respond to certain questions, whether it’s about ownership structure or a period in the financial statements where things look differ-ent, [the better].”

THE CARBON FOOTPRINTEnvironmental issues are now front and centre in the due-diligence process, as investors want to know exactly what they’re buying and what they need to fix. They want to know whether the hotel has mould and if there is waste storage that could cause a damaging spill.

“They know [these issues] can cost a lot, and they know the health implications to their guests and employees are significant,” says Rob Watters, president and CEO at Toronto-based Watters International, which conducts environmental assessments for companies, including hotels.

Many operators are now spending up to tens of thousands of dollars on an environmental assessment to minimize potential costs. For example, older hotels sometimes require substantial repair to meet the current regulations for asbestos. “If you’re buying a hotel and you

have to fix asbestos, you need to know that before you buy it,” says Watters.

Another reason for increased due diligence is growing consumer awareness about other similar environmental issues that affect air quality. “The public is demand-ing higher standards than in the past,” says Watters. In addition, employees are demanding a safer working environment. “It’s all positive, because we don’t want people staying or working in a building that’s compromis-ing their health.”

And, while it’s important to understand the environ-mental condition of a site, due diligence doesn’t end when the assessment is done and the deal is closed. Issues such as dealing with mould or making sure swimming pools meet health and safety standards at all times become ongoing operational issues.

“There is a lot of responsibility for due diligence on behalf of the hotel owners and operators to not just say they’re doing something but prove it,” says Watters. “And we’re starting to see hotels being visited by regulators more frequently.” That means it’s important to have systems and processes in place and keep meticulous records. “If you do that, you’re gold,” adds Watters.

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DUE DILIGENCE

THE PERSONNEL ELEMENTTraditional due diligence is centered on financial, build-ing and environmental conditions, but lately investors have been increasingly focused on employee liabilities due to the significant costs that can result from terminat-ing employees, for example.

“Understanding things like vacation, pension and retirement are [also] critical these days when you’re doing due diligence,” says Jeff Hyslop, director, Asset Manage-ment, Westmont Hospitality Group, a hotel owner and operator in Mississauga, Ont.

On the brand side, finding out if there are encum-brances on the property, the capital costs of maintaining the brand and the cost of terminating the brand are issues buyers should consider. “But conversely, as a seller, you need to strategize on how you’re going to deal with these issues,” says Hyslop. For example, if a seller decides to market the asset as unencumbered, they’ll have to cover the cost of getting rid of the brand and any encumbrances.

Brand liabilities have always been taken into account, but as more investors look at alternative uses for build-ings, such as student residences or condos, brand liability becomes a bigger issue. Employee issues tie into this as

“UNDERSTANDING THINGS LIKE VACATION, PENSION AND RETIREMENT ARE CRITICAL THESE DAYS WHEN YOU’RE DOING DUE DILIGENCE”Jeff Hyslop, Westmont Hospitality Group

Amsterdam BrewHouse Mackay Wong Strategic Design

YOUR HOSPITALITYBUILDING PARTNER416.755.2505 ext. 22bltconstruction.comToronto - Vancouver

Photography: David Whittaker


DUE DILIGENCE

well, so if a building is converted, the owner will have to terminate the hotel employees’ jobs at a huge cost.

While there are many opportunities for hotel acquisi-tions, the perfect deal or property is hard to find. “You can always find reasons to kill a deal,” says Hyslop. “The important thing as a buyer is to understand your risks and liabilities. Know what you’re getting into and what the worst possible outcome could be, and have a measured understanding of the liabilities going into a deal.”

THE DESIGN QUESTIONFor Gordon Stratford, director of Design at HOK’s Toron-to office, due diligence is about being proactive, so buyers can avoid being surprised by potential design and structure problems. “It’s the ability to get more upstream in under-standing the condition of the building and being able to more proactively plan and anticipate costs,” he says.

Buyers preparing to take over a building, re-flag a property or refresh it should request the ‘as-built’ drawings — existing drawings that reflect the current condition of the building.

With these drawings, owners will have a better under-standing of issues such as the hotel’s mechanical, heating

and cooling as well as plumbing systems. “Ideally, [you should] find out the age of equipment and what changes have been made so you can identify parts that are going to need to be replaced,” says Stratford.

Getting the as-built drawings are especially relevant now, as the sustainability trend means more investors are using existing buildings rather than building new ones. “People are increasingly aware that it takes a lot of effort, energy and cost to create new buildings,” says Stratford. “It depends on the location and the condition, but it may make more sense to retain existing buildings than it would to create new ones.”

It’s also essential for potential buyers to create a master plan, which gives stakeholders a big-picture view of the hotel, says Stratford. For example, the as-built drawings (or even a building assessment) might reveal that the cooling system is 10 years into its 20-year lifespan. So, the master plan should include a plan to replace the system in year 10.

“Due diligence is such an important part of the process,” says Stratford. “[It] will help all parties concerned have a healthier investment, a healthier return and perhaps fewer sleepless nights.” u

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SITE SELECTION

Thanks to an overload of online reserva-tions and loyalty programs on the hospi-tality scene, investing in a hotel location involves different considerations than it did a generation ago. That means a

prominent spot along the edge of a busy highway isn’t the prime real estate it once was, and brand loyalty plays a big part in a consumer’s decision about which hotel to patronize. It also means hotel companies and development firms have reworked the game plan when it comes to site selection.

Still, choosing where to open a hotel is “not rocket science,” says Stuart Laurie, IHG’s director of Franchise Sales and Development for Canada in

THE REAL-ESTATE GAMESelecting the best site for a hotel is contingent on a host of issues

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SITE SELECTION

Mississauga, Ont. Certain consid-erations don’t change, including access, visibility, an area’s growth potential, proximity to comple-mentary retail and a ready supply of potential customers. As a franchi-sor, IHG executives regularly put themselves in the customer’s shoes when considering a site and ask: would we stay here?

And, where is here? Sometimes a build-from-the-basement initiative can make more sense than an acqui-sition; sometimes, it’s precisely the opposite. The decision depends on a multitude of issues: does the brand in question allow conversions, what is the physical state and location of the hotel, and what is the quality of competing hotels in the region?

But the essential consideration when wrestling with the build-or-convert conundrum is a site’s

relevance in a market. If demand generators have moved away from a hotel, the product left behind may now be obsolete.

In some of the larger markets in Canada, a modest new construc-tion project can cost more than $3 million before a shovel is even put in the ground, and the price per key is $100,000 and up, says Eric Watson, COO for MasterBuilt Hotels in Calgary. “And yet in a few of these same markets you can pick up exist-ing hotels with definable operating results for under $40,000 a key. Does it make sense to develop new when you can buy a resale property for so much below replacement cost?” he asks.

But sometimes it can cost more to retrofit a property than build new, notes Brian Flood, VP, CBRE Hotels, Valuation and Advisory Services in Toronto. Examples of this persist in Southern Ontario, the Maritimes and the lower half of B.C., where the economics are extremely tilted toward buying existing hotels instead of starting from scratch, adds Manlio Marescotti, VP, Lodging Development, Marriott International in Mississauga, Ont.

But, a hotel’s construction, layout, mechanical systems and plumbing, or the existence of hazardous materials, may exclude it from being adapted. And hotels that have been grandfa-thered might prove too costly for the retrofit option. “They might have asbestos or other structural issues,” says Charles Suddaby, VP and practice leader of the Hospitality and Gaming Group from the Toronto office of the global real-estate firm Cushman & Wakefield. “Better to demolish the site and start again.”

That said, since hotel operators are competing with other commercial developers, land is more expensive than ever before. “So where there may have been three hotels in a market before, now all of a sudden there are five or six, with develop-

44 MAY 2014 HOTELIER

“WHERE THERE MAY HAVE BEEN THREE HOTELS IN A MARKET BEFORE, NOW ALL OF A SUDDEN THERE ARE FIVE OR SIX, WITH DEVELOPERS INFILLING TO STEAL BUSINESS FROM THE ORIGINAL THREE”Charles Suddaby, Cushman & Wakefield

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SITE SELECTION

ers infilling to steal business from the original three,” says Suddaby. “That, in turn, has forced up the value of devel-opment land for hotels. And now I wonder at what point the developers really start to back away.”

Suddaby cites “a very rough rule of thumb” dictating the pricing of a hotel room, explaining that investors should spend approximately $100,000 in a market that can support a $100 average room rate; that generally equates to a $1-charge-per-$1,000-spent ratio. It’s a reasonable guideline that might steer a developer away from laying $250,000 on a property that can only attract a room rate of $110 a night.

So, if a new build is the answer, consider the best location, rather than the best price. “When you’re looking for a hotel location, you can’t risk being second choice or [being] passed by,” explains IHG’s Laurie. “If you took a B location over an A location, there’s the risk of someone coming into the A location and adding supply — so better to pay for the A location.”

Watson agrees. “Start with the market first. If you don’t have a good, strong market, there’s probably no point,” says the COO for MasterBuilt Hotels. “[MasterBuilt] will go anywhere in search of the best returns. And if we don’t

“WHEN YOU’RE LOOKING FOR A HOTEL LOCATION, YOU CAN’T RISK BEING SECOND CHOICE”Stuart Laurie, IHG


SITE SELECTION

believe we can fill Monday-to-Thursday night at a really strong rate, we won’t do construction.”

Finding a piece of land that is a specific size is another hurdle in today’s jammed-to-the-gills market. It means an hotelier developing a limited-service hotel that requires a minimum of two acres might find himself scratching his head over an A location on five acres. That, says Laurie, is why it’s not uncommon for devel-opers to build two hotels on one piece of land — each with a different set of experiences. Such “combination deals” are more common in urban environments where land prices are higher and it’s necessary to maximize the available square footage — but they require a fair piece of capital to carry them.

Yet, trying to shoehorn a project into the wrong site is among the most common mistakes a hotel devel-oper makes, says Cushman & Wakefield’s Suddaby. “You probably don’t want to build a resort, whose aim is to allow people to relax and escape from their urban life, right beside a railway track or a landfill,” he offers.

Often, the difference between a good site and a great one depends on the intangibles. “In the discussions I have with our franchisees and developers, I’m always concerned [about] what’s beneath the surface,” says Laurie. “Is the site ready to go? What are the soil condi-tions? Does its foundation support the building’s weight load? Is it ready for development permit approval? Is the city prepared to work with us?” In his opinion, a great site is flat and zoned and doesn’t need a lot of work. So, construction crews can immediately pour slab and start building. Alternatively, an operator may have to wait for approvals and pay carrying costs.

To avoid this, find out if a site is poised for growth by talking to existing property owners and hotel consultants in the area. Then stick your head into the city’s planning department. “There’s a wealth of information there,” says Laurie. “You can find everything you need to know, whether it’s [about] projects that have already been approved or projects that are [pending approval].”

Poll the market’s demand generators, too. “People don’t think about that, but just walking into a company in the immediate area can reveal a lot about it,” says Laurie. “I’ve done that on numerous occasions when I’ve had some doubt. [I’ve] asked, ‘Would your people stay in this location?’”

“Demand generators are the most important consider-ation,” agrees Marriott’s Marescotti. If there isn’t critical supporting infrastructure such as a restaurant, he suggests buying a slightly larger site and carving out a restaurant pad on the premises. Draw from a larger area if the access to your site is good (close to a highway, for example).

“Fundamentally, you have to dig down and understand who’s going to generate room demand for your hotel,”

says CBRE’s Flood. “The old full-service hotels that had rooms, an indoor pool, lots of meeting space, a big restaurant, a fine-dining room and maybe a disco don’t exist anymore.” Today’s hotels are much more targeted. As such, hoteliers need to focus on building in the midst of the right demand generators for the hotel in question.

It’s also important to consider the current and future competi-tion in a particular geographi-cal area. “A market can go from performing well to being oversup-plied in fairly short order,” says Flood, pointing to Grand Prairie, Alta., as well as the Calgary and Winnipeg airports as examples. Unfortunately, building may be underway before it’s determined that other hotels are entering the market. But, that, after all, is part of the real-estate game. u


SITE SELECTION

“THE OLD FULL-SERVICE HOTELS THAT HAD ROOMS, AN INDOOR POOL, LOTS OF MEETING SPACE, A BIG RESTAURANT, A FINE-DINING ROOM AND MAYBE A DISCO DON’T EXIST ANYMORE”Brian Flood, CBRE

The Société des établissements de plein air du Québec is seeking a promoter interested in designing, financing, building, and operating a hotel at the Parc de la Chute-Montmorency, the second most visited tourist site in the Québec City region. Combining the operation of the Manoir Montmorency, an elegant villa with a long history, overlooking the western cliff of a waterfall that is 83 metres in height, the future hotel will feature a unique site for its clients, which is also a marvel due to its natural environment and its unobstructed view of Québec City, the Island of Orleans and the St. Lawrence River.

For more details about this unique business opportunity, contact sepaq.com/proposals

OCTOBRE 10, 2014 AT 3:00 PM (EST)Proposals will be accepted until

UNIQUE BUSINESS OPPORTUNITY

INVITATION FOR PROPOSALS - QUÉBEC CITY REGION

NEW HOTEL AT THE SUMMIT OF THE MONTMORENCY WATERFALL

PCM_hotelier.indd 1 14-04-22 10:16


HOTELIER

Christophe Le Chatton is no stranger to change. In fact, he thrives on it. For years the charming French-born

hotelier was a fixture at Fairmont Hotels & Resorts where he worked in various capacities at several of the company’s iconic properties, including Toronto’s stately Royal York. Then, a few years ago, looking to grow his poten-tial, the hotelier made the trek from English Canada to the French capital with his young family in tow to become GM of Quebec City’s majestic Château Frontenac. To many, the feat might have proved daunting, but it didn’t faze the leader or his supportive wife, Lisa.

So, when a new opportunity beckoned a few years later, this time to move to the American southwest to take the reins of the Fairmont Scotts-dale, Le Chatton et famille didn’t flinch. In 2012, after spending several years leading the charge in the desert oasis, Le Chatton transferred to Shanghai where he spent a few years honing his hospitality skills while working in the customer-service capital of the world.

Now, after a decade of adven-ture, the passionate GM is happy to be back home, comfort-ably ensconced at the five-star Langdon Hall in Cambridge, Ont. “This Relais & Chateaux property is unique because of its geographic location in the heart of the Carolinian Forest. It’s the perfect luxurious escape from the city. With five million potential customers within an hour’s drive from Langdon Hall, we aim to

offer an all-inclusive unique personalized luxurious experience in a relaxing environment,” he says.

Le Chatton oversees 175 employees, who tend to 53 rooms located within three buildings. “Forty-eight rooms are equipped with wood-burning fireplaces. The main house guestrooms feature the uniqueness and heritage of the property with vaulted ceilings, archi-tectural beams and large windows overlooking the

extensive grounds,” he says.It’s smaller than the other hotels Le Chatton has

commandeered, but it’s just as well regarded. “The hotel encompasses every aspect of a five-star opera-tion and more,” boasts Le Chatton, who was recently conferred “fellow” status by the Ontario Hostelry Institute. “Each of the rooms is individually decorated; the restaurant is the only Five-Diamond restaurant in Ontario, and there is also a bar, an event centre, a spa, an outdoor pool facility, a garden and 10 km of trails located on 200 acres.”

In operation for 25 years, the hotel is constantly evolving. “We have just completed a large expan-sion to both our kitchen and our restaurant. Thirty seats have been added to our award-winning dining room, and we doubled the size of our kitchen with state-of-the-art equipment that sparkles as brilliantly as our Five Diamonds from the CAA/AAA,” says the hotelier. Over the next few months, an additional wing will be added to the hotel’s Cloister building, featuring nine new guestrooms, a newly designed spa with 20 treatment rooms and a venue to host meetings and weddings.

It all complements Le Chatton’s customer service ethos. “Hotels today need to connect with guests. They must anticipate needs and wishes and deliver them seamlessly and effortlessly,” says the GM. u

QUICK QUIPS: First hotel job “I was a com-mis chef at the Hotel Lutetia in Paris. I loved the energy in the kitchen” What makes you successful? “I plan ahead, innovate, be original, develop and inspire leaders” How do you cope with stress? “I exercise regularly, bike, read and [take] family trips”

Christophe Le ChattonGM, Langdon Hall, Cambridge, Ont.

BY ROSANNA CAIRA

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