OLD HOTELS, NEW USES

Condo developers snapping up old hotels
By Garry Marr
Financial Post August 15, 2012

The condominium market seems to be gobbling up a new victim — old hotels.

A new report from Colliers International Hotels suggests more than half the sales activity in the sector can be chalked up to developers buying hotels to convert to alternative use with a large segment going to condo units.

“This theme has been fuelled in part by the strength in the residential condominium market in Toronto and Calgary,” said Colliers, in its mid-year report on transaction activity.

Alam Pirani, executive managing director of Colliers Hotels, said the conversion of hotels to alternative use has become a national story.

“We are not just talking about Toronto, it’s across the board. There are two hotels in Calgary, one sold for apartment the other for retail,” said Mr. Pirani. “The trend here is hotels for alternative use.”

In its report, Colliers said there was $627-million in sales activity over the first six months of the year. That amount was up from $599-million a year earlier. Of that figure, 53% of the transactions, worth about $335-million, were for new development.

The trend comes as a slew of new high end hotel/condominium developments hit the market like Trump Tower, Ritz-Carlton, and Shangri-La in Toronto.

“We will continue to see the conversion of hotels that have a higher and better use for residential and in some cases retail,” said Mr. Pirani. “That conversion has made way for some of the new product that has come in. The good news from a supply perspective is the older product is converting which is creating less of a strain on supply. Everyone is concerned about the number of new luxury hotels opening up but the flip side is you have conversion to alternative use.”

Colliers said the demand for existing hotels from developers helped push sale prices in the first half of the year to $125,000 per room, a 19% increase from a year ago. The market did slow down to a degree in the second quarter with the $253-million in sales activity about 40% of the year to date number.

Hotel conversion activity comes after 2011 was a relatively weak year for that type of sale with only about 7% of transaction last year going towards redevelopment opportunities.

There have been some high level defections to the condo market like the Sutton Place Hotel but also smaller deals like a Travelodge in Calgary which was sandwiched between some great retail opportunities making it a prime target to be converted to shopping space.

Colliers is expecting alternative use strategies for hotels will continue the rest of the year and expects that be good news for the overall market.

“Looking through the second half of the year, we expect sales activity to remain robust, given a good mix of institutional-quality urban and suburban assets currently on the market and being met with strong buy-side demand,” Colliers said in its report.