Investing in the Caribbean Hotel Market

CBRE Hotels, in partnership with STR, conducted the webinar “Investing in the Hotel Market in Caribbean: Perspectives and Opportunities”, hosted by Fernando Garcia Chacon (Executive Vice President, South Florida, Caribbean & Latin America Division), Christian Charre (Executive Vice President, Capital Markets Institutional Group) and Patrícia Boo (LatAm Director at STR).

In addition to reviewing general trends in the hospitality market, the panel discussed specific indicators and trends in the Caribbean markets. Globally the hospitality sector has shown steady improvement during 2021. While many markets continued to experience occupancies below 2019 levels, average daily rate (ADR) has held strong and, in some cases, surpassed 2019 levels. As a result of strong top line growth and management of expenses, gross operating profit per available room (GOPAR) has recovered in most markets across the globe. The Caribbean has followed suit experiencing an improvement in key performance indicators (KPIs) over 2021, particularly ADR. However, each island has recovered at its own pace.

Panel Discussion

How do you reconcile reluctance to travel internationally with improving occupancy in the Caribbean?
Visitors look at the Caribbean as a suburb of the US. Puerto Rico and USVI weathered the storm well because they have avoided the onerous travel restrictions that exist for other destinations such as Eurore, Asia, and South America. While demand is strong, traveler visitation depends on how difficult or easy it is to enter the country. The Bahamas, St. Lucia, and Aruba have developed protocols that make it easier to visit despite travel restrictions. Covid will impact travel markets for the foreseeable future. As a result, travelers will be cautious when making travel plans for the next 3-5 years. As this trend continues, the Caribbean markets will benefit. 

Is this a good time to be a luxury hotel owner in the Caribbean? Will rate increases continue?
At 1.5% above 2019 ADRs, the Caribbean stands alone as a region with full ADR recovery to 2019 level. The current crises is a health crisis not an economic crisis. Those who can travel can pay the higher rates to travel. The resorts can generate demand without lowering rates. As a result, the region will not have to regain rate parity with 2019 coming out of the pandemic. In addition, occupancy continues to improve in the region.
Travelers from the US perceive the region to be less risky because it is closer to the US mainland. As a result demand for travel within the region will be maintained along with high rates. In addition, supply growth remains muted. In terms of scale, resorts will continue to do well while big box hotels will take longer to recover. 

What are your thoughts on the changing guest profile (i.e., the rise of the Digital Nomad)?
The average length of stay has lengthened during the pandemic. Business and leisure traveliers will likely lengthen their stays because of the ability to work from anywhere. The tremendous surge in leisure travel will continue with travelers interested in experiencing what various localities have to offer. Business travel will return but at a lower level than before the pandemic. US consumers will stay for longer periods of time when traveling to the Caribbean.

How is labor cost and availability impacting the Caribbean?
Labor issues impact the Caribbean less so than other regions in the world. There will be pressure on labor costs as a result of inflation but the availability of labor will not be the issue.

How have underwriting standards changed?
Transaction volume and pace depends largely on the specific island. Buyers are focused on what happens to revenue and cashflow as stimulus money dries up. Expectations need to be tempered about the next five years particularly in high performing islands like Puerto Rico. 

What headwinds exist for the Caribbean markets?
Changing testing standards have created more red tape because of the need to have a negative PCR test within 24 hours of returning instead of 3 days. The cost and the red tape creates an additional burden on travelers. Guests may choose to stay on the mainland for vacations.

How will the transaction between Hyatt and Apple Leisure Group change the landscape for all inclusive resorts?
Big brands recognize that growth opportunities exist in the all inclusive space. Potentially, the introduction of brand names into the space will introduce new guests to the all inclusive experience. With trusted brands entering the space, consumers may feel more comfortable trying an all inclusive vacation. The model in the past only worked in markets with lower labor costs, like Jamaica. With brands entering the space, the price point rises which might allow them to open resorts in new markets where the labor costs are higher like Bermuda and Barbados. Distribution costs should drop as well since large brands do not need to rely on travel agents for booking.

Any comments on new construction financing? Interest rates?
Lenders have been more open to new construction financing. With rising interest rates cap rates will rise between 50-100 basis points. Pricing will depend on liquidity in the markets.