Group hotel business turns corner in Miami Beach

MIAMI BEACH The hotel market in Miami Beach is turning a corner, according to a market analysis from Jones Lang LaSalle Hotels’ strategic advisory experts.

Once a burgeoning group and leisure travel destination, local appeal and industry hotel investments waned following significant overbuilding in the market, further compounded by the recession. Now, the sunny market’s group business is showing new signs of life, marking its place on the road to a comeback for both travelers and investors.

“Clearly, the group segment, long a pillar of Miami Beach hotel demand, disappeared in 2009, due to the backlash against luxury group travel in the market. It was bad enough to say you were going to a meeting, let alone a meeting in Miami. That seemed too decadent to be responsible,” says Fernando Garcia-Chacon, an executive vice president of strategic advisory for Jones Lang LaSalle Hotels in Miami. “And so hoteliers simply lowered room rates across the board in an attempt to survive.”

Historically, corporate groups book well in advance, anywhere from nine months to two years, and hotel owners, with this business now guaranteed, turn and sell their remaining inventory at a higher premium to leisure travelers. However, a close analysis of room rates at South Florida’s larger beachfront hotels shows that the healthy difference between leisure and group rates of US$30 to US$50 evaporated in 2009.  With it went any pricing power available for hoteliers. 

In fact, 2009 room rates that vacation-goers paid declined by more than 20%, settling in the low US$200s, virtually the same rate paid by whatever remaining groups were still coming to Miami. In addition, the corporate customer, having paid large amounts in cancellation fees, are now utilizing shorter booking windows than they have historically.

Dark clouds appear to be breaking up and clear signs are appearing that we are touching bottom. Obviously, February’s Super Bowl helped, although this occurred during peak season when business should have been strong regardless.

There are additional signals that the ever-important group segment is coming back. There have been a number of large city-wide conventions, and in the corporate group segment, pharmaceutical company meetings are starting to return. There have even been reports of financials booking meetings for later in the year. January was the first time in almost 18 months that Miami saw a positive growth in RevPAR over the prior year.

“While it is still too early to announce a full recovery, we are fairly certain the worst is behind us,” Garcia-Chacon says. “Once we can confirm the presence of solid group demand, ADR growth will resume. At that point, it’s all about yield management to manage the pricing for leisure travelers.”

From a hotel investment standpoint, Miami’s hotel market was hit by a perfect storm. Between 2004 and 2007, room supply actually shrunk as existing hotels were taken out of service for renovation or condo conversion. Garcia-Chacon added that as a result, the Miami Beach market appeared to be doing great, but because of the supply taken out, the rate appeared extraordinarily strong.

Developers, looking at these numbers plus what seemed to be an infinite overseas demand for condo, started an unprecedented building boom of condo and condo hotels.  In 2008 and 2009 at the time of the Bear Stearns bailout, the Lehman collapse, and the start of the worst recession in recent history, Miami Beach was welcoming the opening of the new Mondrian, a conversion of an old condo building; the Gansevoort South, a conversion of the Rooney Palace condo building; a new W originally conceived as a 100 hotel-400 condo building; and the Fontainebleau which reopened with 1,500 guestrooms, half of which are condos. All in all, this rendered a 20% increase in supply at one of the worst times in history.

Many of the condo projects attached to these hotels have significantly discounted the condos to the point where they are starting to be absorbed by the market. This will help create demand over time for the hotel components and their amenities.

Available product will include hotels that were over-invested at the height of the market.  This product will come from groups that purchased or developed assets with the idea of a condo play that did not work out or get executed. Several well-known property names are now in the hands of special servicers. Hotel product and note sales will be available over the next six months, but the question will be at what discount. Just recently, several high-profile properties were put into foreclosures, indicating that lenders are preparing to take action, which will ultimately create new opportunities.

“If you can get in under US$300,000 per key, that’s when an investment starts making financial sense,” Garcia-Chacon says. “Investor interest will come from Europe as well as the U.S. and other offshore investors. Financial investors are looking for yield and capital gain, while the appeal of the beach will continue to attract emotional buyers Miami Beach will cater to both investor profiles. The strength of the medium- to long-term fundamentals are there—Miami Beach hotel real estate offers a strong business case.”

Miami Beach has a clear upside given it retains its allure as a destination for U.S. and international groups and leisure travelers. Its beaches, weather, entertainment venues and attractions make it a strong competitor among rival destinations.

“Once the group market stabilizes and comes back, this excess inventory will be absorbed. Now is an optimal time to enter the market,” Garcia-Chacon says. “The challenge is to find the product with the cash flow to keep the lender at bay. We believe there are opportunities, and tapping into the distressed hotels is a good bet now before it is too late.”

Jones Lang LaSalle Hotels has advised numerous owners and lenders on restructurings as well as value enhancement opportunities on properties in Miami and throughout the United States.