Another Miami Hotel Bubble? Think Again
By Marc Stephen Shuster, Partner, Berger Singerman
At this year's 35th annual NYU International Hospitality Conference, arguably one of the top three conferences in our industry, numerous panels dealt, directly or indirectly, with these questions:
- Where are the deals?
- Where should we invest for maximum ROI?
- Which hospitality markets will remain hot?
Similar questions have been echoed at most every other seminar or conference involving hospitality investments. No one will argue with the notion that, after New York, Miami is the hottest hotel market in the country. When suggested, however, that continued investment in the Miami hospitality market is prudent, there remains a certain lack of enthusiasm and a healthy dose of skepticism. Given the state of the Miami hotel market, some might wonder why this is so.
One need not look very hard to see that the Miami hotel market is "on fire." Most any 2013 buyer will surely tell you that the continual price increases on any "in-play" Miami hospitality asset (which resemble the larger commercial real estate market in Miami) are harshly punishing those who have been late to the buy, yet they continue to invest. This is especially true for the high-end and select service sub-markets within Miami, where flag-dominated product either brings their respective sellers' increased equity on the sale, and/or strong cash flows along the way. And these sellers are all too happy to see the profits roll in upon each successive sale. Indeed, the entirety of the Miami commercial real estate market is also ablaze, and is dovetailing with the success we are now seeing in the region's hotel space. Still, there remains a sweeping undercurrent of pessimism - a belief that 1) an impending downturn is headed Miami's way - readying itself to "correct" the Miami hotel market, and 2) that the terrible struggles of 2008-09 are poised to rear their ugly heads again in this space. We find it difficult to blindly concur with this notion, and believe the present thinking may not be taking into account the factors articulated in this article. Let's focus first, however, on the reasons for the skepticism:
Pundits and publications don't just espouse the notion that the ever-escalating prices of Miami commercial real estate, in general, and hotels specifically, will be short-lived. They actually double-down on this seemingly apocalyptic prediction, warning against a second bubble that will undoubtedly cripple the city, and send its real estate prices and overall economy spiraling downward back towards 2008-09 levels. In fairness, it should be noted, that many of these same analysts are the same folks that predicted the demise of South Florida in 2008 when 30,000 or so residential Miami-Dade condo units remained vacant. Not only are those vacant units gone today; they are trading again at a profit.
While these views are not implausible; they are far from persuasive. At their core, these assessments are steeped in global economic concerns. To begin with, we're not that far removed from Lehman's bankruptcy or from the dissolution of Bear Stearns. There does remain a historical fatigue that might make one lean towards the conservative viewpoint that we're heading back to 2008-09 levels across the entirety of the economy. Secondly, the economic data, whether it be inflation, unemployment, or a number of other metrics, has not been empirically impressive. That's been the case with the federal government's bailout and the continued purchasing of securities. Finally, some have attributed the high level of skepticism to nothing more than a "too good to be true" mentality - critics finding it difficult to believe that any market could rebound this quickly. The idea that Miami could, within two short years, return to the boom levels of 2005 seemed far-fetched, at the time, even to Miami's staunchest cheerleaders.
When one applies these same metrics to evaluate the Miami real estate market, however, one does so at his or her peril. This narrow viewpoint flatly ignores the reality of international money that continues to cycle into Miami as a "safe harbor," the burgeoning and expansive activity enjoyed by the South Florida banking and tourism sects, and the changing global perception of Miami and other parts of South Florida. To a student of the South Florida real estate market and of international economic drivers, perhaps such a speedy recovery should have been more obvious. One needed to look no farther than Brazil, the economic engine of South America, to see the signs.
According to the Miami Association of Realtors, 9% of Miami residential real estate transactions in 2010 had a Brazilian buyer. That figure rose to somewhere between 12 and 15% in 2011. What brought so many Brazilians to Miami was not just the strength of the Real compared to the dollar, or the skyrocketing prices of similar properties in São Paulo and Rio de Janeiro. At the time, Forbes' Kenneth Rapoza wrote, "The purchase is also a testament to Brazil's general belief that the U.S. economy always recovers over time, and that owning fixed assets like real estate makes sense even for them." Brazilians see the US as a hedge against the uncertainties they will always associate with their native economy. Then combine that with the fact that, as a safe haven/investment destination, Miami has numerous advantages over a city like New York. As Rapoza commented, "Miami is closer to home. The weather is nicer. There are palm trees and sandy beaches." Versions of this story continue to play themselves out in Latin America (particularly in Venezuela and Colombia), and to a lesser extent, in Europe and Russia. As Miami becomes more diverse each day, it only becomes a more attractive destination for those seeking the perfect area in which to protect their money.
Robert Finvarb, CEO of the Robert Finvarb Companies, and the developer behind fourteen Marriott hotel properties in Florida, New York, and throughout the Eastern Region, looks to DC when discussing the tourism sector. According to Finvarb, "The Obama Administration has recognized the importance of Hospitality by easing visa restrictions on foreign hotel customers." This means that, currently, a Brazilian waits only two to three days for a visa to visit the U.S., as opposed to the past where it often took up to six months to procure a tourist visa to the U.S. With additional positive momentum driving growth in Miami, Finvarb has no intention of slowing down, and is adding to his existing portfolio two new-build mixed use-projects under development along Collins Avenue in Miami Beach. Finvarb further notes that the "select service" market of South Florida "will stay particularly strong based on the strength of a rising middle class throughout Latin America."
Chris Desai, Senior Vice President of Baywood Hotels, one of the largest privately owned hotel management companies in the nation, drives home the point that "Miami doesn't depend on just one thing. It is a maturing market, and when a city (Miami) decides to be international, it is transformational." Desai believes that Miami is now within the realm of the most significant US cities, with the added benefit of tourism. In a way, tourism has become tangential, but not necessarily the main driver pushing Miami forward. According to Desai, Baywood is bullish on Miami and is eyeing Brickell Avenue and the Doral area for new products, to add to their existing eight-property portfolio here in South Florida.
Dan Economos, Vice President of Economos Properties, one of South Florida's most prominent developers, sees numerous macro-business factors keeping Miami atop the hotel game. He states, "Airport expansion at MIA, dredging the port for anticipated cargo and cruise lines, and the fact that people from all over the world - not just Latin America - are coming in droves" all factor into the assumption that Miami prices have room to grow, and may even be undervalued. It is this confluence of simultaneous events that has Economos believing that Miami has a "long runway of success ahead."
It's important to note that these viewpoints are not just being espoused by industry players (or brands) that have a huge percentage of their properties in South Florida. Brett Lasher is a Vice President of Real Estate & Development, for Hyatt Hotels and is responsible for the entire Southeast. Lasher sees Miami has an international city which is the "second hottest market in the US behind New York." He identifies three areas along the Miami coastline that Hyatt sees prospering in the next cycle: South Beach, which now has annual core occupancy; Mid Beach (25th - 41st), which finally has a "sense of place," and Surfside/Bal Harbour, which remains at the high end as the chosen destination for the wealthy to visit, shop, and live. Further, Lasher remains optimistic about Brickell Avenue because of the "business environment that exists" and Midtown/Design District because it has finally become its own distinct neighborhood.
Denise Carpenter, Vice President, Development - Southeast Region for Hilton sits in Memphis, but also covers Florida. Carpenter revealed that she is in Miami once a month for at least two meetings discussing new development projects contemplated by various owners. And as Miami has become "annual" and an "economic hub" in and of itself, she believes the future looks bright for the Magic City.
In respect to the hotel space, we remain bullish on Miami, and on South Florida in general. Miami has transformed itself from a tourist-focused, local, Latin-centric, city into a full-time, prominent international city. That transformation is a large part of the reason why Miami has become the second strongest real estate market in the U.S. (behind New York). Moreover, fueled by relatively low interest rates, a "safe harbor" mentality for many to place their money into US properties and cash, and the influx of Brazilian, Russian, European, and New York investors, Miami's hospitality space is positioned for a multi-year run of increased prices and strong investment yields.
Marc Stephen Shuster is a partner in the Miami office of Berger Singerman, Florida’s business law firm. Mr. Shuster is a business attorney with extensive experience in commercial real estate transactions, both healthy and distressed, and corporate M&A deal work, with an emphasis on the hotel and hospitality industry. He advises both traditional hospitality conglomerates and Internet advertising sites serving the industry. Mr. Shuster he has served as counsel to a Florida-based emergency management/services conglomerate in negotiating for disaster relief work throughout the Caribbean. Mr. Shuster speaks and writes on novel issues affecting the hotel and hospitality space, serves on various community boards, and has been recognized with numerous awards and accolades. Mr. Shuster can be contacted at 305-982-4080 or firstname.lastname@example.org Extended Bio...
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