MIAMI—An economic recovery in the Caribbean will be a prolonged one and the result will create a different environment for the hotel industry, according to speakers participating in Monday’s opening general session at the Caribbean Hotel & Resort Investment Summit.
Several things are clear, according to the panelists:
Hotel developers hoping to use a residential component as a funding source are dreaming;
any project proposal is going to be under greater scrutiny than ever before; and
the recovery will be drawn out, and performance levels might never reach pre-recession levels.
“It seems the hurricane has passed over; there’s still a little cleaning up to do,” said Simon Townend, partner with KPMG Corporate Finance. “We hope there’s not another one on the horizon.”
“While the recovery is on, it is still very incomplete,” said Warrant Jestin, senior VP and chief economist for Scotiabank
Following is a snapshot of the four presentations during the opening session at the JW Marriott Marquis Miami.
Warren Jestin, SVP and chief economist, Scotiabank
Jestin said his company expects economic growth to moderate during the next year, even in places such as China—where growth will still be more robust than in the rest of the world.
“Slower momentum is the story for the next few years,” he said.
Jestin was the first of the presenters to question whether this recovery will return economic indicators to pre-recession levels.
“In the U.S. there are 7 million jobs needed to get back to pre-recession levels, and it’s worse than that in Europe,” the Toronto-based economist said. He added that a big contributor to the slower recovery is that in 20 major United States markets, average housing prices are 25% lower than peak prices.
The deficit problem of the U.S. will have an effect on capital markets, and in three to five years it will be a debt problem, according to Jestin.
“The day of reckoning will come beyond 2012,” he said. “It will inevitably lead to higher interest rates on a go-forward basis.”
Warren Jestin, SVP and chief economist of Scotiabank, said his company expects economic growth to moderate during the next year, even in places such as China—where growth will still be more robust than in the rest of the world.
Jan Freitag, VP of business development, STR
The performance of the Caribbean’s hotel industry improved during 2010, but has shown signs of unpredictability, Freitag said. For example, year-over-year average daily rate increased 3.8% during 2010, but ADR during the first two months of 2011 decreased 1.8% even though occupancy was up 4.2%.
“We still have quite a way to go if we want to get back to where we were pre-recession,” he said.
View Freitag’s slide presentation.
Freitag said Caribbean hoteliers have plenty to be optimistic about, but there are obstacles to overcome.
“Yes, the last year and the last two months, the percent changes are positive, but we’re coming off two years of low growth,” he said. “When times were good, we were raising rates about 10% or so every year.”
However, the Caribbean hotel industry lost 17% in ADR during the recession.
“There’s quite a long way to go if we want to get back to ADR where it had been,” he said.
One opportunity for the Caribbean could come if Florida cuts its tourism marketing budget as speculated. The Caribbean could step in and fill the void by upgrading its own marketing budget, he said.
Demand in the luxury hotel segment in the Caribbean outpaced the demand of 2008, and that bodes well for future increases, Freitag said. Following are the 12-month moving average figures through February:
Room supply: 11.4 million room nights (+2.6%)
Room demand: 6.5 million room nights (+7.1%)
Occupancy: 57% +(4.4%)
ADR: US$338 (+4%)
Revenue per available room: US$193 (+8.6%)
Room revenue US$2.2 billion (+11.4%)
Freitag said the overall construction pipeline contains 22 properties in construction, nine in final planning, seven in planning and 19 in pre-planning. The growing number of hotels in the pre-planning stage gained Freitag’s attention.
“If there’s a lot of chatter, it means something may happen,” he said. “There’s a lot of money out there … there’s a lot of money in this room.”
Simon Townend, partner, KPMG Corporate Finance
Townend said the hurricane metaphor is completely appropriate, because a dramatic cleansing is necessary for any ecosystem to survive.
“The question in everyone’s mind is: Are we turning the corner?” Townend said.
Receiverships and liquidations have been prevalent on the Caribbean landscape for the past few years. High-profile properties involved in such situations include: Bimini Big Game Resort and Grand Isle in the Bahamas; Temenos in Anguilla; Lambert Beach Resort in the British Virgin Islands; and Discovery at Marigot Bay Resort and Spa in St. Lucia.
Many of the troubled assets have residential components, which have fallen out of favor with lenders, Townend said. Plus, fewer banks are lending overall.
“Many of those without a physical presence in the region have retreated entirely,” he said.
But the Toronto-based executive wasn’t all doom and gloom.
“The good news is that tourism appears to be on the rebound,” Townend said.
One silver lining for the region is a number of major infrastructure projects have been completed or are in the works—including an airport upgrade and a port addition in the Bahamas and big projects in Jamaica.
There are also some hotel projects that are off the ground, including: Grand Palladium in Jamaica; Albany and BahaMar in the Bahamas; Oil Nut Bay in the British Virgin Islands; a Four Seasons and a Courtyard by Marriott in Barbados; and Buccamant Bay in St. Vincent and the Grenadines.
Townend said the projects under construction tend to not have traditional lending terms—starting with often having shorter loan tenants than historical averages (five years to seven years).
Because half-finished projects dot the region’s landscape, Townend expects future construction projects to be far more scrutinized for sustainability. That doesn’t only include operation sustainability, but structural sustainability, too.
David Larone, director, PKF Consulting
Larone said there were approximately 50 broken deals throughout the Caribbean during the recession. He said the chances of those projects coming to fruition depend on return-on-investment expectations.
The frozen projects share common characteristics: a lack of clarity in the market and the project; the lenders and original equity are looking to get out whole; and relatively little equity has been deployed.
“Unfortunately in this part of the world there are projects with a shovel in the ground,” Larone said. “The shovel is still there, but there’s nobody on the end of it. … The interest is there, the money is there. It’s a matter if you can land at a price.”
Because there’s more clarity, deals for such properties could come sooner than later.
“Deal flow has commenced in a serious way in the U.S.,” he said. “In Caribbean regions, you get into political and social issues at the store level. There is some activity, but there are a lot of questions to it.”
The criteria surrounding new deals include the project having “no baggage,” an extended timeframe for completion, it will be subjected to incredible scrutiny, it must be a spectacular opportunity; the sponsors must have deep pockets; and the project management must have the ability to stay the course.
Developers must also scrutinize the environment before they commit, he said.
“(Airline) lift and labor are definitely in vogue. That hasn’t changed,” Larone said.