Too many keys, too few takers

Key International is looking for opportunities outside of South Florida, including this Embassy Suites hotel in St. Augustine.
Key International is looking for opportunities outside of South Florida, including this Embassy Suites hotel in St. Augustine.

Miami-Dade has occupancy issues. As tourism slumps in the wake of last year’s Zika virus threat and the ongoing financial and political unrest in Latin America, hotel development experts continue to warn that the supply of new rooms in Miami-Dade is far outstripping demand, and falling occupancy rates bear that out.

Some projects on the drawing board may not break ground, and others in the planning and construction phases will face even tougher financing hurdles in the coming months.

“Miami is the darling of the hotel developer community,” industry analyst Jan Freitag told The Real Deal. “But supply growth is outpacing demand growth, so it is not unreasonable to assume that occupancy will continue to slide down. And that makes future development tough to justify.”

Freitag, vice president of lodging insights for hotel market data firm STR, said supply grew from 52,203 rooms during the first four months of 2016 to 54,805 rooms during the same period in 2017, a 4.9 percent increase. At the same time, occupancy in the greater Miami market was 81.7 percent, a six-point decline from last year. The average room rate fell by 5 percent, to $220.31, compared with 2016, largely due to increased competition from the added rooms.

“Hoteliers were not quite as confident in their pricing power,” Freitag said. “The supply growth in Miami is close to three times the national average of 1.8 percent.”

Rich Lillis, a South Florida executive vice president for Colliers International, noted that Miami-Dade’s hotel room inventory grew by approximately 12 percent in the five years ending in 2016. “We are very late in the cycle now,” Lillis said. “There has been a little tightening in the capital markets in terms of liquidity for new hotel development.”

Shawn Gracey

Over the last six months, regional banks have been pulling back on financing new hotels, Lillis said. “The lending environment is much more conservative. The projects getting financed have compelling market dynamics, brands and locations. The ones at the margins, I honestly expect, won’t get done. It’s a short window, and it is closing a bit.”

A few notable deals that have closed  this year fit Lillis’s criteria for success. In February, CBRE secured $60 million in bridge financing on behalf of Quadrum Global for the Nautilus South Beach, an eight-story, Class A, 250-room property located in the heart of Miami Beach’s Art Deco district. The Morris Lapidus-designed building at 1825 Collins Avenue reopened last year after a complete renovation. The loan was provided by Apollo Commercial Real Estate Finance.

Mark Owens, CBRE Hotels executive vice president, said Quadrum fielded several offers because of the quality of the hotel, its oceanfront location and the developer’s track record.

In April, an affiliate of Jericho — a New-York-based company led by hotelier Alan Mindel — secured a $24 million construction loan to build a five-story, 122-room Aloft hotel in Delray Beach that has already cleared the city’s planning department.

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And in June, Total Bank loaned $28 million to the Finvarb Group to build an unnamed 96-room hotel at 1750 Alton Road in Miami Beach, next door to a Marriott Residence Inn the developer is already building.

Meanwhile, some real estate and development firms, like Key International, have started looking outside the Miami market for new development. Shawn Gracey, Key’s executive vice president in charge of the hotel division, said the company is building a hotel in St. Augustine that will be delivered in the first quarter of 2018, two more are under construction in Clearwater Beach, and Key recently acquired property for a new hotel in Gainesville.

As far as financing projects, Key is mostly interested in underwriting affordable hotel brands such as a Hilton Garden Inn or a Hampton Inn, Gracey said, adding, “We have gotten comfortable with that type of hospitality right now.”

Carlos Rodriguez, chairman and CEO of Coral Gables-based Driftwood Acquisitions and Development, said developers still building hotels in downtown Miami and the Brickell financial district should be feeling nervous.

“For sure, it is something to be concerned about simply because of what’s in the pipeline,” Rodriguez told TRD. “Those places have about 1,000 rooms set to open this year.”

Doral and the area surrounding Miami International Airport have also developed a glut of inventory that is making it harder for new hotel projects with inexperienced developers to get off the ground, Rodriguez said. As a result, Driftwood — which has acquired and developed more than 100 hotels across the country — is being brought in as a partner on some deals.

“We are in the process of building a Doubletree in Doral that is a third-party deal,” Rodriguez said. “We are helping them develop it, and we will be the managers. And we have another third-party deal to develop a Holiday Inn Express, which is also in Doral.”

The Doubletree obtained financing and is under construction, while Driftwood has started looking for a lender on the Holiday Inn Express project.

“We already have a couple of banks lined up,” Rodriguez said. “And we are in discussions to assist three more hotel deals here in South Florida.”

As inventory continues piling up, Rodriguez said, he expects fewer hotel projects will make the cut in 2017.

“I do see it getting more difficult,” he said. “I would not be surprised to see more projects put back on the shelf.”