The world's investors are checking into Canadian hotels

For sale: Newly updated midtown charmer with 1,372 rooms at the edge of Toronto's Financial District.

In a sizzling real estate market, the Sheraton Centre hotel and convention complex on Queen Street West drew the attention of multiple buyers and sold in October to a unit of Brookfield Asset Management Inc. for $335-million, making it the largest single hotel transaction in Canadian history.

The deal is part of a boom in interest in hotels across Canada by equity investors from around the world.

"This has been building over the last three or four years with Canada's strong economy and GDP growth. As the economy goes, so does the hotel business," says Bill Stone, Toronto-based executive vice-president for commercial real estate services company CBRE Hotels.

"We are seeing large amounts of capital coming in – a lot of the activity is in Ontario and British Columbia, but there's an increasingly diverse interest across the country."

Underlying the trend, the operating performance of hotels has been extremely strong and occupancy rates have been growing much faster than the supply of hotel rooms, says Alam Pirani, executive managing director for the Toronto office of Colliers International Hotels. That has erased price estimates that were standard in the industry.

"Until recently, investors couldn't fathom paying more than half a million dollars per room. But if you look at the past 24 months, we've had transactions in which the Four Seasons Toronto sold for a valuation of $860,000 a room and the Rosewood Hotel Georgia in Vancouver at almost $930,000," Mr. Pirani says.

Toronto's Trump International Hotel and Tower, which is soon to be rebranded as a St. Regis hotel, sold for significantly more than $500,000 a room as well, although the price remains confidential, he adds.

Hotel investment across the country hit a record-setting total in 2016, with more than $4-billion in transactions. There has been another $2.8-billion worth of hotel deals recorded through three quarters this year, according to statistics compiled by Colliers.

About half of the 2016 total was a single transaction: the purchase of Toronto-based InnVest Real Estate Investment Trust by Bluesky Hotels & Resorts Inc., a company backed by investors from Hong Kong. The 109 properties in the $2.1-billion deal included the Fairmont Royal York in Toronto, the Hyatt Regency in Vancouver and the Fairmont Palliser in Calgary.

Offshore investors see Canada as a strong haven and they've got lots of equity they want to place in hotel properties, Mr. Pirani notes. For instance, Leadon Investment Inc., a group financed by Hong Kong and Chinese investors, bought the SilverBirch Hotels & Resorts portfolio of 25 properties across Canada from pension fund British Columbia Investment Management Corp. in February for $843-million (U.S.). The hotels in 20 cities include Marriott, Hilton and Radisson properties, as well as Delta hotels in Calgary, Halifax, Toronto and Victoria.

"We anticipate that Canada is going to be seen as a positive place to do business and travel to for at least the next couple of years. The Hotel Association of Canada has been very proactive and there has been a lot of targeted marketing," CBRE's Mr. Stone says.

Canada was chosen the 2017 destination of the year by Travel+Leisure magazine, which pointed to sesquicentennial events as well as the country's sustained cultural relevance, blend of world-class cities, epic natural wonders and eclectic cuisine. That interest has been matched by a growth in corporate travel, Mr. Stone explains.

"We are also the beneficiaries of a low Canadian dollar, and as long as it stays relatively low, it bodes well for increased tourism from the U.S. into Canada," Mr. Stone says. "You also can't ignore the domestic travel market. Given where the dollar is, people are travelling more in Canada. That's driving performance of hotels and resulting in a better value proposition for prospective buyers."

For instance, the amount of revenue generated by each available room in downtown Toronto hotels increased 16 per cent in 2016, which CBRE expects to grow by an additional 8 per cent in each of the next two years.

An underlying factor is that occupancy rates and revenue per room have been increasing faster than the supply of new hotel rooms, according to statistics gathered by Colliers. In Toronto and Vancouver, several hotels have recently been converted into student housing or residential uses.

"The net addition of rooms with new construction has been insignificant. And to try to build a stand-alone hotel these days is difficult, because of the more immediate return developers can get with a residential property compared to a hotel," Mr. Pirani says. "In Toronto and Vancouver, the luxury hotels that have been built would never have gotten built if it weren't for the condominiums within them."

While the most interest will still be in the major markets of Toronto, Montreal and Vancouver, investor interest in buying hotel properties is likely to continue to be robust across Canada in the coming year, Mr. Pirani is predicting.

"We are anticipating a real shift toward more activity in Quebec and Atlantic Canada than we have had in the past two years. That's a function of sellers deciding now is the right time to sell, since values are high and there's lots of capital out there."

While Alberta and Saskatchewan are still facing challenges, Colliers also foresees a more active market in Alberta in 2018 as the energy market stabilizes, Mr. Pirani says.

"There's also a substantial interest in resort properties. If you look at the Alberta mountain region, Banff and Lake Louise and Kananaskis Country, the market has been very strong."

Resorts in Ontario and around Whistler, B.C., have also had their best years in history, making them attractive investments, not only to groups experienced in the hotel space, but also other investors looking for better returns.

Looking to the future, there is growth potential everywhere in Canada, Mr. Pirani says. "Hotels are offering risk-adjusted return that is higher than other traditional investments in multiresidential or office properties."