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May 09, 2018  

South Florida Shaking Off Hotel-Sales Slump

The South Florida hotel-sales market is on the rebound.

After peaking in 2015, trading volume plummeted in the past two years, as hotel fundamentals suffered from a confluence of factors that included a spurt of construction and concerns about the Zika virus. But revenues are once again in growth mode — and that’s bringing back investors, with renewed confidence in the market’s long-term prospects.

“The difference today is you have this belief that the cycle is beginning, or at least we are back to the same market dynamics of 2014 or 2015,” said Max Comess, a managing director at HFF in Miami.

The listings that have emerged so far in Miami and other South Florida markets are fetching bids that meet or exceed seller expectations — a change from just a year ago. Already this year, some $486 million of properties have changed hands or are under contract, about 75% of last year’s total volume.

Meanwhile, owners in the last six months have stepped up requests for property valuations from brokers, a step typically taken before listings. That foretells a heavy pipeline of offerings in the coming months.

“I believe you are going to see $2 billion of trades before the end of the year in South Florida, either under contract or closing,” said Gregory Rumpel, a JLL managing director in Miami.

That would bring the market closer to its all-time peak, reached in 2015 when nearly $2.5 billion of large hotels traded, according to Real Estate Alert’s Deal Database, which tracks sales of at least $25 million. South Florida had become a preferred destination for domestic and foreign buyers in the years since the recession.

But deal volume dropped precipitously to $1.4 billion in 2016 and $642 million last year, the lowest level since 2011. The sales slump came as a batch of hotel openings coincided with a fall-off in tourism, depressing revenues. The increase in supply weighed down the market from mid-2015 through last year. At the same time, group and leisure travel declined amid concerns about the Zika virus, which was identified in some Miami Beach neighborhoods, and the closing of the Miami Convention Center for renovations. A rise in the value of the U.S. dollar also reduced the number of international travelers.

In the Miami-Hialeah market, for example, average revenue dropped from a high of $152.37/room in 2015 to $144.78/room last year, according to STR.

Within that timeframe, many of the hotels that came to market were met with nervous investors, who bid less than owners would accept. Most would-be sellers ended up deciding to take advantage of favorable debt markets and refinance instead.

But the dynamics have since changed. The construction pipeline has slowed, concerns about the spread of Zika have diminished and the convention center has reopened as its more than $600 million expansion and renovation nears completion.

During the first quarter, hotels in Miami-Hialeah registered a 16.6% gain in revenue per room compared to the same period last year, according to STR. Brokers said they’re hearing from owners who are awaiting final performance figures for April, which was also robust, before valuing and formally listing their holdings.

The performance upturn has reignited investor demand. Case in point: The 589-room Fort Lauderdale Marina received lackluster attention when Blackstone listed it with CBRE a year ago. But a renewed marketing campaign resulted in four rounds of heated bidding. The winner, Brookfield Asset Management of Toronto, made an offer in line with initial expectations of $175 million (see article on Page 10).

Sellers are now confident enough to list new or renovated properties before performance has stabilized — a process that can take two years — because bidders are willing to bet on the future. “Investors can underwrite a deal that doesn’t have cashflow today because the market has recovered so strongly and there is a clear path for getting there,” said Alexandra Lalos, also of HFF.

Quadrum Global of New York has listed the 250-room Nautilus South Beach, in Miami Beach’s Art Deco district, with expectations that bids will reach $720,000/room, or $180 million. An extensive renovation of the high-end property was completed in 2015, just as the market started to struggle. Meanwhile, the 100-room Hampton by Hilton Miami Beach is expected to fetch roughly $40 million, or $400,000/room. Also known as the Continental Hotel, the property is undergoing a substantial renovation slated for completion this summer. CBRE has both listings.

Buyers currently on the hunt include a mix of domestic and foreign players, largely looking for core-plus returns, brokers said. “The groups that are active today tend to be long-term focused investors,” said Comess.

Investors have become convinced that the performance ills of the past couple of years were temporary, said Rumpel at JLL. “Miami isn’t going anywhere, we didn’t fall off the face of the earth, we took our lumps, we didn’t collapse our rates,” he said. “We will have our ups and downs, but there is only a good long-term prognosis here.”