National Report – The Florida Keys are becoming a hot spot for tourism, with incoming volume climbing 6 percent annually.
An anticipated 2.9 million visitors will be making their way to this southern point Florida, with hotels reporting a 15-percent rise in revenue per available room in 2013 to $218 per room. The highest RevPAR point for the Florida Keys was in June, when it reached $243.38, reaching high above Miami’s $183.
Gregory Rumpel, managing director of JLL’s Hotels & Hospitality Group, said he is not surprised by the region’s uptick.
“The Keys are thriving, delivering yields more commonly associated with much larger top-tier markets, like New York. Investors, including big institutional investors, are taking notice,” Rumpel said.
Throughout the recession, the Keys reported a nominal RevPAR decline of 6.3 percent, while the national average reached 17.4 percent in 2009.
Hotel investors have taken note of these strengths, evidenced by 23 hotels (27 percent of the area’s total inventory) changing hands since 2011. These hotels produced $853 million in sales volume, around $375,000 per key.
Assets such as Pier House, Hyatt Key West Resort & Spa, Hawks Cay Resort and Southernmost on the Beach, in particular, have been purchased by real estate investment trusts since 2013.
Meanwhile, Northwood Investors sold the 148-room Parrot Key Resort in May to Hersha Hospitality Trust for $100 million. The Carlyle Group similarly purchased the 79-room Hampton Inn & Suites Islamorada three months before.
The market is a high barrier of entry for investors and developers due to its unique configuration consisting of 137.3 square miles of land stretched across 1,700 individual islands.
“The restriction on increasing hotel supply, lack of large undeveloped waterfront parcels, or even parcels that can be redeveloped, plus the complexity of construction and building down here make it difficult to pull all the pieces together,” said Pritam Singh, founder and president of The Singh Company, the islands’ largest real estate developer. “We have pretty much reached build-out on the Keys.”
The Florida Keys’ rate of growth ordinances prohibit hotels from constructing new rooms before they demolish an equivalent number of rooms, and according to Chuck Ross, VP of PKF Consulting USA, it is not yet economically viable to begin demolishing properties.
“If you want to build a 100-room property in the area, investors could potentially have to demolish five 20-unit motels to clear the ordinance,” Ross said.
According to Ross, these restrictions are in place for safety reasons.
“Once investors get off the islands they don’t encounter as restrictive barriers to growth, but because the Keys are islands, they are by definition limited in what they can physically support,” he said. “Occupancy just doesn’t have much room to grow there.”
Plentiful financing fills in where land is lacking. Debt capital has reached its highest level since the 2008 downturn. Investors are primarily using this capital on renovation projects as they run out of areas to build.
Four budget hotel properties totaling 500 rooms are currently undergoing full renovations to re-open as branded select-service hotels in 2015.
Upgrades like these are planned to raise room rates and capitalize on increased tourism in place of building new rooms. Investors are hoping that incremental upgrades over time will result in a ripple effect on the Keys’ hotel economy.
“These renovations will put pressure on other hotel owners and operators to update their properties in order to maintain their market share,” said Carolina Lacerda, VP for JLL. “Ultimately this will drive even higher RevPAR rates for the entire region.”
“A location that is constrained in its growth but not in its demand is an investor’s dream – and it makes for a terrific market,” Singh said.