Caribbean going strong despite gentle headwinds

MONTEGO BAY, Jamaica – Caribbean hotel investment is at its strongest level in more than a decade, but operators are taking steps to prepare for the next downturn.

By Peter Mitham

MONTEGO BAY, Jamaica – Development and investor interest in
the Caribbean’s hotel sector is riding highs not seen since before the
financial crisis of 2008 and the Great Recession that followed, but gentle
headwinds are emerging that point to a need to change tack to make the most of
circumstances.

Typically a secondary market that delivers higher yields,
the Caribbean usually hits its stride late in the global economic cycle.
While no one knows what could cause the current expansion phase to end, there
are several signs that consumer jitters could become an issue.

“The Caribbean market has been a very resilient market,”
said Parris Jordan, managing director with advisory firm HVS Bahamas and chair
of this year’s Caribbean Hotel Investment Conference & Operations Summit
(CHICOS) in Montego Bay, Jamaica. “Overall, the market is doing well. We just
need to be careful of the new supply that’s coming into the market. We need to
be careful of the fears of an economic slowdown.”

Hosted by HVS, CHICOS regularly draws more than 300 people,
and this year was no exception as the duelling forces of optimism and concern
fuelled discussion about what lies ahead.

Parris Jordan, managing director of HVS Bahamas, says lenders are more conservative than they were a decade ago.

Parris Jordan, managing director of HVS Bahamas, says lenders are more conservative than they were a decade ago.

“The lenders have been smart enough not to be overly
aggressive as they were in the last downturn,” he told Canadian Lodging News. “A lot of the banks that operate in the
Caribbean tend to be conservative, so there hasn’t been a lot of debt available
to every investor. … Marginal projects are not being financed, which bodes well
for the market.”

This is a switch from 2007, when many projects were driven
by condo sales. Several projects were caught short and didn’t complete, making
many lenders and governments wary of new proposals.

“A lot of the developers were not in the deal for the
long-term. A lot of times, using the condo model you can get the money in
advance to do deals, and sometimes these deals don’t pencil as a hotel,” Jordan
explained. “The banks learned from 2007, and they’re not aggressively lending
on marginal projects, they’re not lending as much on condo hotels.”

All-inclusive resorts go upscale

What’s taken their place is all-inclusive resorts, which are
built to receive guests and depend not on potential buyers but actual costs.

“You build your pricing from the cost structure,” said David
Larone, a veteran of the Caribbean market and now senior managing director, valuation and advisory services
with CBRE Hotels in Toronto.
“You’re not building a bunch of other stuff to try and make the numbers
work. It’s pencilling on its own.”

Larone moderated a panel on the outlook for the region that
included Jose Carlos Azcarraga, CEO of Mexico’s Grupo Posadas; Laurent de
Kousemaeker, chief development officer with Marriott International; Fernando
Mulet, senior vice-president of Playa Hotels & Resorts; Terry Sanders,
chief development officer with the Radisson Hotel Group; and Alex Zozaya,
executive chairman of Apple Leisure Group. Almost all of them are developing or
investing in all-inclusive resorts, something that wasn’t happening 10 years
ago.

“The message to the government players sitting in the
audience was, ‘We’re developing this stuff because the people who want to come
to the region on vacation want this model,’” he said.

It’s also not the cheap-and-cheerful vacation option,
either. Brands such as Westin and W are putting their names on the properties
because of the demand for options that can provide safe, hassle-free experiences.
Operators, meanwhile, are able to tap into their extensive customer networks to
bring travellers to the properties. A case in point is Marriott, which has
committed to five all-inclusive properties in Mexico, as well as opportunities
in the Dominican Republic and Bermuda.

“You now have the largest hotel company in the world, with
130 million loyalty members,” Larone said. “If there was any lack of validation
for the all-inclusive concept, they’re just put a stamp of approval on it.”

Eyes on the future

With visitor traffic up 10% over last year, year-to-date,
the region is set for approximately 33 million people this year – a new record.
Jordan said the question on many people’s minds is when will a downturn come,
and what will it look like?

“The region is highly reliant on leisure travel, and when
there is a recession, people tend to curb discretionary spending,” he said,
noting that more than half of visitors to the Caribbean come from the U.S.
“[But] even if there is a downturn, we’ve seen the region continue to be a very
popular destination for U.S. travellers because of its proximity.”

While new construction is a concern, he feels operators are
more disciplined than in the past, when the three major destinations would
often drop rates, putting the squeeze on smaller destinations.

Construction estimates from CBRE indicate that 65% of the
14,000 rooms being built in the region are located in the Dominican Republic,
Jamaica and Cuba. If the music stops, will they be able to maintain rates and
avoid causing pain elsewhere?

“I believe that the operators are more sophisticated,
they’re more geared to understanding that a downturn will come eventually, and
hopefully they’ll hold rate,” Jordan said, noting that asset managers and the
presence of major operators should provide a stabilizing influence. “Having
said that there’s going to be a lot of supply coming in.”