Tourism Up, Hotel Investors Flock to Miami Beach
By: Matt Hudgins
Real estate investors seem to be flocking to Miami Beach, in hopes of capturing part of the market’s resurgent tourism industry by acquiring, or by expanding their investments in, the limited supply of hotel properties.
Decades of development have built up most of the potential hotel sites in Miami Beach, and virtually all of the beachfront or near-beachfront hotels on the Atlantic Ocean side of Miami Beach fall within one of several historic preservation districts. Those factors make new construction a rarity. Instead, investors seeking a piece of the hospitality pie typically acquire one of the many hotel properties on or near the waterfront and renovate to increase value and command higher room rates.
Buoyed by an economic rebound in tourism after the recession initially drove away some business, competitive bidding has pushed prices for some hotel properties to record highs. Venerable establishments along Miami Beach’s Art Deco district that have undergone makeovers include the Royal Palm and the Ritz Plaza, and a renovation is under way at the former Gansevoort.
This month, the former Royal Palm at 1545 Collins Avenue will reopen as the James Royal Palm Hotel after a renovation. Denihan Hospitality Group of New York operates the 393-room property under the James brand. KSL Capital Partners, a private equity business based in Denver, owns the hotel.
A consortium of Starwood Capital Group, the LeFrak Organization and Invesco Ltd. has changed the name of the Gansevoort Hotel at 2377 Collins Avenue to the Perry, and is investing more than $100 million in a renovation to be completed next year. The group acquired the Gansevoort early this year from a Credit Suisse subsidiary that had foreclosed on it in 2010. The mixed-use project has 334 hotel rooms, 255 residential condominium units, a rooftop pool and lounge, a restaurant and a pool plaza.
In June, the 140-room SLS Hotel South Beach at 1701 Collins Avenue opened in the shell of the former Ritz Plaza, a historic Art Deco structure. In January, St. Regis Hotels and Resorts opened the St. Regis Bal Harbour Resort at the northern tip of Miami Beach, with 243 guest rooms and suites, as well as residences in three 27-story towers.
Demand for hotel rooms, dining and entertainment is sufficient to support more hotel renovation and expansion projects in Miami Beach, said Sam Bakhshandehpour, president of SBE, which owns SLS Hotels. SBE, which is based in Los Angeles, owns and operates the SLS Hotel South Beach and the two high-end restaurants on the property, The Bazaar by José Andrés and Katsuya by Starck.
Mr. Bakhshandehpour said hotels in Miami Beach were just beginning to bounce back after a pause in the recession, and would appreciate in value as other sectors of the economy gained strength.
“From a timing perspective, we’re still on the cusp” of economic growth, he said. “The success of our property hasn’t even been driven by an economic recovery.”
The recession did not hamper tourism in Miami Beach for long. The number of overnight visitors to the city dipped below 4.9 million in 2008, the Greater Miami Convention and Visitors Bureau reported, but by the end of 2009 the annual total had jumped to nearly 5.4 million. That was more than in 2007, before the bust. By the end of 2011, annual overnight stays exceeded 5.5 million.
The city’s hotels, restaurants, nightclubs and stores have had a consistent inflow of dollars in recent years, reflected in steadily increasing hotel occupancy rates. This year through September, the average hotel occupancy rate reached 75.9 percent in Miami Beach, a 12-year high, said Jan Freitag, senior vice president at STR, a hospitality research business.
Healthy occupancy is generating impressive revenue gains, said Marlo Courtney, the developer and managing director of Goldman Properties. On Ocean Drive alone, room revenue rocketed to $63 million in 2011, up nearly 25 percent from $51 million in 2010, said Mr. Courtney, who is president of the Ocean Drive Association, a business group. “That was a pretty remarkable increase in our revenues, and it was great for the Ocean Drive community and our hotels.”
Real estate investors picked up on the economic rebound in 2010, and competitive bidding has pushed prices to prerecession levels, said Christian Charre, a local real estate broker.
“They don’t make any more beach, and there is a limited number of projects available, so that is creating pent-up demand,” said Mr. Charre, who is president and chief executive of the Charre Group, a Miami company that deals exclusively in hotels.
A fully renovated hotel on one of Miami Beach’s main drives along the Atlantic — either Ocean Drive in South Beach, or Collins Avenue north of 15th Street — would sell today for $500,000 to $900,000 per room, equivalent to prerecession prices, Mr. Charre said.
For unrenovated hotels, “you will see transactions happening now at about $250,000 per key, but you have to consider that a significant amount of money is going to be invested in the property,” he said. “They’ll end up at about $500,000 a key.”
The Delano, a 194-room hotel at 1685 Collins Avenue, could fetch as much as $900,000 per room, Mr. Charre speculated. Morgans Hotel Group in New York recently completed a multimillion-dollar renovation of the property and is seeking a buyer.
Keith Menin, the principal at Menin Hotels, said he was frequently surprised by prices in Miami Beach. “Every time I think a hotel has been sold at a crazy price, another one sells,” Mr. Menin said.
Menin Hotels, which is based in Miami Beach, owns all or part of five local hotels, including its latest project, the Gale South Beach and Regent Hotel, which is set to open in December at 1690 Collins Avenue. The property combines the shell of the original Gale Hotel, built in 1941, with a former nursing home next door to form an 87-room complex.
Boutique hotels, which offer a high level of customer service and charge accordingly, dominate Miami Beach. That compels the relatively few larger properties to provide better service to compete for customers, said Jeff Lehman, general manager of the Betsy, a boutique hotel in the South Beach neighborhood. Of the 19,000 hotel rooms in the city, 12,000 to 15,000 are in properties with 200 rooms or fewer, said Mr. Lehman, the board chairman for the Miami Beach Visitor and Convention Authority.
Beachfront hotel buyers in Miami Beach must pay extra attention to revenue and expenses to ensure a return that exceeds the market’s high acquisition and operating costs, said Scott D. Berman, principal in the Miami office of PricewaterhouseCoopers.
“There has got to be an economically compelling story,” said Mr. Berman, who monitors the hospitality and leisure industries. Because they occupy a peninsula of high-priced hospitality venues, Miami Beach hotels face costly challenges obtaining goods and services, including food, supplies and affordable labor. “It’s a really unique, eclectic geography, and you sort of throw industry standards out the door,” he said.
Are investors in Miami Beach creating a bubble of inflated hotel prices? Not yet, say industry officials, including Saul Gross, founder and president of Streamline Properties, a local real estate company. Hotel investors today tend to buy with cash rather than with borrowed money, and most investors renovate after buying, which should make it easier to recoup their investment and generate profit over time or in an eventual resale, they said.
“I’m not as concerned at these price levels as I was before” the financial crisis, Mr. Gross said.
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