The hottest hotel market in America may be at the lowest point on the map, suggests JLL. As tourists flock to the Florida Keys, real estate investors are following, in search of a piece of the booming island action.
With the volume of tourist visits climbing by 6 percent annually—there are an anticipated 2.9 million visitors on the way this year—the Keys have taken their place among the best-performing tourism markets in the country. Hotels in the island chain have seen their revenue per available room (RevPAR) returns jump 15 percent in 2013 to $218 per room, nearly 20 percent stronger than Miami’s $183. Through June of this year, the Keys’ RevPAR climbed even further to $234.38. According to Gregory Rumpel, managing director of JLL’s Hotels & Hospitality Group, this isn’t a surprise.
“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.
Consistent, robust demand enables the Florida Keys to regularly outperform other markets. For example, during the downturn, the Keys proved their strength and resilience by recording only a nominal decline in RevPAR at 6.3 percent whereas nationally the average reached a 17.4 percent decline in 2009.
So, it’s not surprising that hotel investors are pouring into the islands like Jimmy Buffett chasing margaritas. Twenty-three properties, representing 27 percent of the market’s inventory, have changed hands since 2011. That produced $853 million in sales volume, or roughly $375,000 per key on average.
Real estate investment trusts (REITs) have been active buyers, grabbing up assets including the Pier House, Hyatt Key West Resort & Spa, Hawks Cay Resort and Southernmost on the Beach since May 2013.
This past May, Northwood Investors, LLC. sold the 148-key Parrot Key Resort to Hersha Hospitality Trust for $100 million, or $675,700 per key. Three months prior, the Carlyle Group bought the 79-unit Hampton Inn & Suites Islamorada.
Shortage of Land, Plenty of Opportunity
Part of what makes the Florida Keys such a draw to investors, JLL says, is its inherent scarcity of land. The Keys, often referred to as America’s Caribbean, consists of a 126-mile long chain of approximately 1,700 islands. And while this provides plenty of room for beach blankets, the islands are tiny, with only 137.3 square miles of land area. The shortage of land, combined with a highly restrictive rate of growth ordinance (ROGO), has created a market with high barriers to entry for investors and developers alike.
“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.”
Singh’s firm is currently developing a 96-room hotel on a vacant site in Key West. The site is a rare gem, centrally located within the heart of the Old Town area, three blocks from the well-known Duval Street and adjacent to the Historic Seaport.
While land in the Keys may be limited, financing is not: debt capital is at its highest level since the 2008 downturn. With nowhere to build, many investors are using that capital on renovation projects. At the moment, four budget hotels, totaling 500 rooms, are undergoing full renovations and are set to reopen as freshly branded select service hotels in 2015.
The upgrades should allow those properties to raise room rates—and have 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,” says Carolina Lacerda, Vice President for JLL. “Ultimately this will drive even higher RevPAR rates for the entire region.”
Strong fundamentals and investment interest should keep the Florida Keys’ hotel market booming for a long time to come. “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,” said Singh.