Recession Punishes the Caribbean Market

Presented by: Greg Bohan, ISHC

The economic melt-down of late 2008 and 2009 has had a negative impact on hotel performance all over the world. According to Smith Travel Research, for the year-to-date period ending August 2009 RevPAR declined dramatically from the same 8 month period in 2008:

• Asia Pacific Region – Down 28.4%
• Americas Region – Down 18.9%
• Europe – Down 28.5%
• Middle East/Africa – Down 15.9%

While the decline appears to be most dramatic in Europe and the Asia Pacific Regions, two areas of the Americas region have also been particularly hard hit. RevPAR declines of 22.3% and 21.7% in Central America and the Caribbean areas respectively have taken a significant toll on hotel operators in those regions. When combined with the much more stringent financing environment in which we find ourselves, the development climate for proposed and under-construction projects has also become much more challenging.

Pinnacle Advisory Group has been very active in terms of performing market research and due diligence on projects in the Caribbean and Central America. The Caribbean in particular has been the “darling” of ultra-luxury resort developers in recent years. Resorts catering to the well-heeled traveler – most of them including a significant residential ownership component to enhance (or actually allow feasibility) – seemed to be springing up (or at least announced) in every major Caribbean destination. The listing below presents only a partial snapshot of high-end resort developments, listed by area, in the Caribbean region:

Anguilla Viceroy Temenos Fairmont Bahamas Cotton Bay Ritz-Carlton Rose Island Conrad Bimini Rum Cay Barbados Four Seasons British Virgin Islands Raffles Tortola Dominican Republic Ritz Carlton Cap Cana Four Seasons Casa de Campo Cayman Islands The Bluffs Cayman Brac Mandarin Grand Cayman

Grenada Four Seasons Puerto Rico St Regis Bahia Mar W Vieques (former Martineau Beach) Mandarin Oriental Palmas del Mar Regent Palmas del Mar Dorado Beach Ritz-Carlton Reserve Fairmont Cerromar Coco Beach Turks & Caicos Mandarin Dellis Cay Ritz-Carlton Molasses Reef St Lucia Raffles Ritz-Carlton St Kitts & Nevis Mandarin St Kitts

As we all know, the world has changed in a relatively dramatic fashion since the fall of 2008. At present, more than 50 percent of the 3,500+ units in the pipeline at the projects listed above are being significantly delayed and/or face an uncertain future. Some were well-along in the development process; several were nearing completion. At Temenos (at first planned as a St. Regis and then Baccarat Resort) in Anguilla, the Golf Course was not only complete, but was actually inplay and construction of the balance of the resort was well-along. The Ritz Reserve – Molasses Reef in West Caicos was reportedly more than 70% complete and just a few months away from opening. Activity at both projects has been halted (or was halted when we last checked). We have been told that other projects appear “doubtful” in terms of their ability to be financed given the current environment.

While economic gurus seem to think that the current recession is ending or has ended already, it is difficult to project when lodging markets anywhere in the world will recover. For the US market, Smith Travel Research is projecting that, when all is said and done, we will have endured 11 consecutive quarters of declining occupancy and 9 consecutive quarters of declining RevPAR. If this holds true, the current lodging industry downturn will have lasted almost twice as long as the downturn which began following the events of September 11, 2001. Smith Travel is projecting “moderate improvement” in 2010 (mostly via growth towards year end) and “meaningful growth” in 2011 in the US.

One of the key factors inhibiting performance improvement in the US market is the number of new rooms entering the pipeline. In the Caribbean, while no one was projecting - even when market conditions were favorable - that all of the 3,500+ guest rooms in the projects listed on the prior page would come to fruition, it is now clear that a large number of these projects may not proceed. Given the continuing popularity of the Caribbean – particularly with travelers from the densely populated Northeastern part of the United States and this more modest outlook in terms of supply increases, we are of the opinion that Caribbean lodging markets – especially at the luxury end – will begin the path to more healthy performance levels in tandem with the US market, as stated by STR, in late 2010 and 2011.

Greg Bohan, ISHC is the Principal of Pinnacle Advisory Group in Pompano Beach, FL.