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South Florida’s hotel conundrum
Leisure travelers are keeping hotels afloat, but full recovery hinges on return of conventions, cruises
The lights are still dark at the Diplomat Beach Resort, a sprawling 1,000-room oceanfront hotel in South Florida.
More than a year after the pandemic began, conventions and business travelers — the lifeblood of such large properties — remain sparse. And cruises, which usually feed hordes of passengers to hotels, are still halted.
While leisure travelers have descended on South Florida over the past six months, pushing hotel rates up and boosting occupancy, the hotel market’s overall recovery still hinges on the return of conventions and cruises, as well as international travelers, experts say.
And the effects are wide-ranging. The long interruption in business travel has led developers to put new convention hotel projects on hold until financing and demand returns. At the same time, hotels are struggling to keep up staffing.
“The true recovery is not going to be in full force until the corporate travelers, the group business and the cruise line industry come back again,” said Boaz Ashbel, managing director of Miami-based commercial real estate firm Aztec Group. “And they have yet to do so.”
Open for business
Florida’s lack of restrictions, zero state income tax, beaches and warm weather have fueled the inbound wealth migration.
Visitors too, desperate for a Florida getaway, took advantage as soon as they could.
High-end hotels, especially in Miami Beach and the Florida Keys, have benefited the most throughout the pandemic, much like luxury residential real estate, brokers and analysts say. Developers are also moving forward with ultra-luxury hotel projects, including Aman, Bulgari and the recently launched condo-hotel Waldorf Astoria.
“The luxury hotels segment has been driving occupancy and rates up to a level that’s higher than the first quarter” of 2020 compared to 2019, said Andrew Dickey, who leads hotel sales for JLL in Miami.
In the first quarter of this year, hotel occupancy in Miami and Fort Lauderdale ranged from 64 percent to 69 percent, according to data from hotel research firm STR. The average daily rate topped $220 in Miami and reached nearly $140 in Fort Lauderdale — below last year’s rates by about $50 in each market.
Compare that to the rest of the country, where occupancy averaged less than 50 percent in the first quarter, and the average daily rate was nearly $100, according to STR.
Brokers say investment sales are expected to climb this year. Investors raised billions of dollars to buy distressed deals, but few South Florida hotels traded in 2020.
“There were a lot less foreclosures than people had anticipated, a lot less forced sales, but the last year was really hard,” said Suzanne Amaducci-Adams, a partner at the Miami-based law firm Bilzin Sumberg. “We’re blessed because we are a resort destination.”
Dickey said he is working on deals totaling half a billion dollars in South Florida that are set to close by the end of the second quarter, some of which could sell for more than their pre-pandemic price. More resort owners in drive-to markets in Florida are also able to secure new debt.
By March, “it became clear the recovery was happening much faster” than initially anticipated, said Paul Weimer, of CBRE’s hotels group. Family offices, funds and even real estate investment trusts are back to buying hotels in Florida, though some properties are still discounted.
The overall outlook in South Florida is rosier than in other major metros such as Chicago, New York and San Francisco. Additional lockdowns would be “devastating,” hotel owners said, but are not expected, especially in Florida where the governor lifted remaining Covid restrictions in early May.
PwC principal Scott Berman, who leads the firm’s hospitality and leisure practice, said Miami has “become the case study in how to recover.”
Canceled conventions
But it’s not all great news.
At the master-planned Miami Worldcenter development in downtown Miami, the timeline for MDM Hotel Group’s planned 1,700-room Marriott Marquis hotel and 600,000-square-foot convention center is murky. MDM acquired the site more than four years ago for $45 million.
The company said it is monitoring “the current realities of the meetings and convention industry on a daily basis,” and that the pandemic “forced us to put a hold” on the project’s development.
In Miami Beach, construction of David Martin and Jackie Soffer’s convention center hotel, an 800-key Grand Hyatt, is yet to begin. It was originally scheduled to open in 2023.
The pandemic threw a wrench in Brookfield Property Partners’ plans to sell the Diplomat in Hollywood for about $800 million. The sale to Jeffrey Soffer’s Fontainebleau Development fell apart in May of last year as a result of the pandemic.
At the earliest, large conventions won’t return until next year, observers said.
“People are going to be much more cautious and determinative about where they are going,” Amaducci-Adams said.
Port-adjacent hotels and airports are also still struggling.
Cruise ships have not been operating in the U.S. for over a year. They could return as early as mid-July, if most of a cruise ship’s crew and passengers are vaccinated by the time they restart, according to the Centers for Disease Control and Prevention, though Florida Gov. Ron DeSantis’ ban on vaccine passports could send major cruise lines to other states.
Aztec, a part owner of the Hyatt Place next to Miami International Airport, is starting to see business improve as more people travel by air.
“Right now hotels are happy to get any business they can get” to pay real estate taxes, insurance and other fixed monthly costs, Ashbel said, adding that it is misleading to rely solely on the surge in leisure demand.
Waiting to pounce
Special servicers are selling the notes backing properties throughout the U.S., especially for larger hotels dependent on group travel. These types of deals happen behind the scenes, often only becoming public when a new lender assumes ownership through foreclosure or the borrower eventually satisfies the debt.
“Rather than foreclose and deal with the mess, they would rather sell the notes,” Ashbel said. “It happens every day of the week all across the country.”
If borrowers are clients of a traditional bank, they’re likely still working with their lenders, who have in many cases agreed to suspend principal payments, food, fixtures and equipment reserves, while requiring that interest, real estate taxes and insurance are paid.
“We still think there’s going to be a lot of stress” with the commercial mortgage-backed securities mortgages and loans issued by debt funds, Ashbel said.
Neil Shah, president of Hersha Hotels & Resorts, said that even though conditions have improved for both hotel owners and their lenders, they’re nowhere near where they used to be.
“Tired sellers” are losing millions of dollars a month who “just want to move onto their next opportunity,” Shah said. Hersha, a Philadelphia-based real estate investment trust, has sold hotels during the pandemic, including a Residence Inn by Marriott in Miami’s Coconut Grove for $31 million. Shah said he is looking forward to making acquisitions in the second half of this year.
Buyers have been sitting on the sidelines, ready to pounce.
Carlos Rodriguez, CEO of Coral Gables-based Driftwood Capital, said Driftwood “easily” has hundreds of millions of dollars to place but that the growing number of buyers has driven pricing up to a point that no longer makes sense.
“There’s a lot of money chasing deals right now,” Rodriguez said. “People are offering prices where I just don’t understand how they will get the returns.”
Employees have options
Meanwhile, bars, nightclubs, restaurants and hotels are facing a new challenge: attracting and keeping talent.
“Everyone says, what keeps you up at night? I think if you’re a hotel general manager, that keeps you up at night — where am I going to get the employees?” Amaducci-Adams said. “People are paying a premium, but is the service going to be there, and is that going to have a long-term effect?”
Ashbel called it a “massive problem.” Some hospitality workers left the industry. Others do not want to return for the same pay, exposing themselves to the risk of contracting Covid on the job, while government aid is available to them. That is forcing hotel operators to increase their hourly pay. And international workers have also largely disappeared.
“It is at the point now where I’m talking to some people who have been in the industry for 15 years and they’ve never had this problem before,” Ashbel said. “In many cases people are getting equal or better pay through benefits to not work.”
Some properties are accepting reservations based on projected staffing and will stop taking new bookings at 70 percent because owners and managers know that they can’t serve the guests properly.
Managers are cleaning rooms, checking guests in and out, and doing other things “they are not equipped to handle,” Ashbel said.
“It affects our service,” Driftwood’s Rodriguez said. “Everybody is running around like a chicken without a head.”
Hersha’s Shah said it’s now not uncommon to be unable to staff a hotel restaurant for three-meal-a-day service.
“There’s not a great motivation among potential employees to come back to work, just yet,” he said. “By September that will be better.”
Hoteliers hope corporate travel will begin a lasting rebound in the fall. Anything later than that “would be disappointing,” and would require changes in strategy, Shah said. He and others are encouraged by recent bookings of small weddings and meetings.
In major cities across the country, including Miami, weekend occupancy rates are climbing over 60 percent, but that falls into the 20 percent range during the week, according to Shah.
“That’s the next big worry,” Shah said. “When does business travel return and when do conferences get started?”