Fewer visitors and investors, hardball financing among challenges facing developers this season

BY PETER MITHAM/FRANK O'BRIEN

Resort development faces several challenges in B.C., but the veteran developers on the closing panel at October's Western Canadian Hotel and Resort Investment Conference in Vancouver emphasized that paying attention to buyers is fundamental to success.

"We don't make a market, we respond to a market," said Mike Grenier, president of Pagebrook Inc. and developer of the 1,000-acre Tobiano project in Kamloops.

Protections for agriculture land and unresolved land claims make B.C. a challenging environment for developers, but negotiating the hurdles of the Agricultural Land Reserve and arranging compensation to local First Nations that allowed the development to get started are nothing compared with shifting economic conditions - especially those of the past three years.

"You want to build in flexibility," Grenier said, urging future developers to seek comprehensive zoning for projects that allow them to reconfigure what they're offering with minimal hassle.

"When markets change, we're going to have to change price, we're going to have change planning, we're going to have to change design, and I think you want to build a [project] design that allows you to do exactly that." Tobiano slashed prices by as much as 50 per cent on its building lots when the downturn hit.

The recession also tripped up many inexperienced developers, said Ed Romanowski, president and CEO of Calgary-based Bellstar Hotels and Resorts Ltd., which is proceeding with Canyon Desert Resort in Oliver as well as Spirit Ridge Residence Club, a 40-unit expansion of its Spirit Ridge Vineyard Resort in Osoyoos.

Romanowski said Bellstar turned conservative when the first chills began rippling through real estate markets in 2006.

Matching the market

"We decided to request 20 per cent down payments on our recreational real estate back in 2006. And boy, were our sales people upset about that, especially when the guy down the street was asking for 5 per cent or 10 per cent," he said. "When it came time to close in 2008 or 2009, we were extremely thankful, because [20 per cent down] was enough of a deterrent for people to not walk away from their sales. So 2009 was a great year for us in terms of sales that actually closed."

He feels many developers paid more attention to building a special place than basic economics.

"They weren't prepared to grind the trades and grind the suppliers and the contractors to keep those costs down for fear their projects wouldn't get built," he said. "Many of those players are hurting."

Prior to the conference, Romanowski said a 10 per cent to 20 per cent drop in the price of resort units hadn't been matched by similar declines in construction costs. This has prompted Bellstar and other developers to reconfigure offerings.

"Something's got to give, because the consumer isn't willing to pay, and the developer can't build for no profit at all. It doesn't make any sense, otherwise we're going to continue to see several developers fail," he said.

New units at Spirit Ridge, for example, include one-bedroom and modest two-bedroom units in addition to the standard two-bedroom and three-bedroom units originally planned.

Gary Raymond, formerly of Intrawest and now managing director of Arizona's Winding Road Development Company LLC, said the shift represents a move away from condo hotels and other investor-driven projects to ones that focus on end users.

"We had to get back to the historic selling of resorts," he said of lessons learned from the crash.

It is a lesson being learned the hard way at some resorts. The troubled Mt. Baldy ski resort near Oliver, B.C., is expected to sell for less than a third of its $9 million asking price when the smoke settles this year.

Rooms going dark

A key component of resort developments is renting lots of rooms - and this is proving a major hurdle.

"It's hard to make money at 52 per cent," hotel market analyst Betsy MacDonald of HVS International said as she released occupancy level forecasts for 2011.

There are many hotel and resort owners in Western Canada - even at Whistler - who are struggling with near half-empty buildings this year and will be for the next 12 months, according to MacDonald, who joined a financial and analyst panel at the two-day conference.

At Whistler - which set national records with average room rates of $546 per night during the Winter Olympics - total 2010 occupancy levels are projected to fall to an average of just 57.7 per cent this year and drop to 55 per cent in 2011. Typical revenue per available room (REVPAR) for perhaps the highest-level hotels in the province: $149 this year and a meagre $121 average in 2011.

The panel agreed that Vancouver is the best hotel market in the country, but even here REVPAR at $136 is flat with little improvement seen into 2011.

Downtown Vancouver has seen occupancy levels in this Olympic year of nearly 75 per cent, but analysts expect this level to drop below the 70 per cent occupancy level next year. It is worse the further out you get. Abbotsford and Chilliwack are struggling with an average 56 per cent occupancy and a REVPAR that has fallen to $59 per night.

On Vancouver Island (south of Nanaimo) the forecast is for 57 per cent occupancy this year and an average of 58 per cent in 2011, but the REVPAR will remain in the $68 range. There are eight hotels planned between Victoria and Nanaimo, but nothing is yet under construction, the conference was told.

The Thompson Okanagan region is already seeing 49 per cent occupancy levels this year with little improvement expected in 2011, with REVPAR in the skid-row $56 range.

In the Trans Canada Corridor from the East Kootenays into Banff and Canmore, hotels are seeing 57.5 per cent occupancies since 2009 with only a slight increase forecast for next year. REVPAR is in the $98 range, but analysts suggest that if the 1,000-room Fairmont Banff Springs Hotel is taken out, the average revenue per room would be much lower.

Financing

A panel of lenders told the conference that financing of any new or refinanced hotel, resort or large motel is easier today, but their case studies showed it remains tight. In fact, borrowing money or refinancing appears to be a as tough as ever.

For example, Quebec-based Romspen Investment Corp. provided details of the $50 million loan it worked out with the Revelstoke Ski Resort.

As Romspen vice-president, originations Robert Schiller explained, the three Revelstoke principals had both long experience and combined personal assets of $1 billion.

The 18-month loan was at 12 per cent (or 800 basis points above prime) with a loan-to-value ratio of 10 per cent. The financing is being used to develop 1,000 multifamily units.

"We were told we would be in trouble with Revelstoke, but they have paid the loan out," Schiller said, adding, "We are flush with cash and looking at where to put it."

Rick Matheson, managing director of RBC Capital Markets, looks at all RBC hotel and resort deals across North America. He said, "There is extreme competition for debt."

He added most hotel loans require 55 to 60 per cent loan-to-value ratios but noted lenders are willing to consider lending at 150 to 170 basis points above the rack rate now, compared with 400 basis points a year ago.

The conference was told that 15 per cent of all hotel sales in B.C. this year have been "distressed" sales, with most of these in the Victoria area, including the Travelodge chain, which has been partially purchased by the City of Victoria as social housing.

When asked which markets offered the best opportunities for investors next year, all the panellists picked Vancouver, with Calgary second, followed by Edmonton. Calgary, they noted, has higher occupancies mid-week, suggesting business travel is more important than tourists. Vancouver is busier on weekends.

The experts said Whistler is a challenge with the greatest decrease expected in both occupancy levels and rental income through 2011.

The last peak in the hotel market in Western Canada was in 2007, but few expected those levels to be reached again until 2013 to 2014.

Most of the resort industry professionals polled at the conference believe that conventional hotels will see the strongest asset growth over the next few years, with the worst value growth seen in fractional units, timeshares and condo hotel units, all of which are used primarily by resort developers.

from Western Investor, December 2010