Party now, distress later for Miami Beach hotels

The glitz and glamour of the New Year’s Eve party at the Fontainebleau
Miami Beach with Lady Gaga performing for those who can shell out $500 to walk in the door or $25,000 for a poolside cabana belies its financial straits.

It’s not the only Miami Beach hotel facing a murky future, although it may be the highest profile one. The Sagamore Hotel, which is fighting foreclosure, hopes to strike a deal to open a Playboy club to keep it afloat. In the last few months, Shore Club and Gansevoort South have also found themselves facing foreclosure.

The fiscal hangover for Miami Beach hotels stems from a boom-time overindulgence that saw owners borrow enormous sums to buy into the market and spend lavishly to upgrade properties. Back then, lenders and borrowers saw no end to skyrocketing room rates and profit margins.

“Certainly it was based on what everybody thought was an ever-increasing economy,” said Jim Soble, a lawyer representing hotel lenders and a partner at Ruden McClosky.

He expects lenders to start foreclosing on distressed properties in the first and second quarters of 2010. Some may decide to restructure the debt by lowering interest rates or extending the loan terms. Just don’t expect the same people to be running those hotels, Soble said. 

Data provided to the Greater Miami Convention and Visitors Bureau by Smith Travel Research shows Miami Beach room rates and profits peaked in 2007 before falling off sharply in 2008. At the end of 2007, the average daily room rate stood at about $250, the data shows. More importantly, the revenue per available room, or revpar, stood at $185.

Trouble started in February 2008 when the rates and profit margin fell by about 10 percent compared to same month the previous year. For the next few months, the number held steady, until the fall when the economy tanked.

As travelers cut back, hotels dropped their rates to fill up rooms, cutting into profit margins. Hoteliers found themselves scrambling to keep up with their loan payments. In March, Miami Beach hotels saw their profit margin shrink by 30 percent to $167 from $234 per room during the same month the year before, the data shows.

As the year ends, profits continue to plunge. In November, the average profit margin for this year stood at $116 per room, a 20 percent drop from the first 11 months of 2008.

To be sure, Miami Beach is not the only vacation destination struggling. Many other hotels across South Florida and at other vacation destinations across the country find themselves in similar situations. But few have the panache of South Beach, where $1 billion went into the Fontainebleau’s two-year makeover.

However, it’s that Miami Beach élan that will help distressed hotels rebound, said David Schwartz, a third-generation Miami hotelier and principal at the Management Consortium.

“South Beach is a brand,” he said.

The high-end properties such as the Fontainebleau are in the best position to recover. But their recovery may come with new owners buying the properties at a cut rate or banks taking over to recoup what they can.

“Luxury always comes back,” Schwartz said.

Soble, the lawyer for lenders, said by the middle of next year and into the fall the financial picture for some of the distressed Miami Beach hotels will get clearer.