South Florida market still a draw for investors

SOUTH FLORIDA – Stakeholders in the South Florida hotel market have been busy deploying a variety of investment strategies of late, many looking to 2024 for an improved economic landscape vis-a-vis interest rates and a strengthening of development and deal activity.

Brookfield, Driftwood Capital, Gencom, Procaccianti Companies, Pyramid Global Hospitality and Sonesta International Hotels Corp. are among the marquee names with a vested interest in the region.

Diversifying demand mix

Of the companies noted, key executives at each consider the region, composed of Broward, Miami/Dade and Monroe counties, to be well-worth organizations’ attention, even with a few nods of concern to existing headwinds around interest and insurance rates.

“South Florida has always been a highly favored investment market, and a preferred region within the Sun Belt states due to the diversity and strength of demand,” said John Hamilton, executive vice president, Business Development, for Pyramid Global, which is focused on acquisitions and management in the region.

He cited leisure, group, commercial, cruise and international as overall demand drivers in the state, with South Florida now “seeing growing demand from corporate relocations, which is further diversifying the demand mix. This robust demand appeals to many types of investors—private equity, REITs, high-net-worth and international buyers.”

Shai Zelering, a managing partner in Brookfield’s Real Estate Group, said his organization is bullish on the entirety of Florida, including South Florida, for the obvious reasons, including positive migration, welcoming business environment, overall quality of assets and investment environment. “Florida has been propelling since COVID and is doing a great job sustaining its positioning as one of the best markets for investments,” he said.

Brookfield's Mayfair House hotel in Miami

Global owner and operator Brookfield, along with its funds, has been active in the SoFlo market over the past year on a variety of fronts, including the headline-generating disposition of the 1,000-room Diplomat Beach Resort (Curio Collection by Hilton) in Hollywood, Florida, a year ago for $835 million to a JV of Trinity Investments and Credit Suisse Asset Management.

The significance of the deal for Fort Lauderdale’s market performance was put into perspective by Matthews Real Estate Investment Services, which noted the transaction represented 90% of the approximately $921 million in hotel sales in first-half 2023.

Brookfield also executed on a multimillion-dollar re-finance last summer of the 594-key Hilton Fort Lauderdale Marina on the Intracoastal Waterway and piqued investor interest again this January with its sale of a majority stake in the Ritz-Carlton Key Biscayne via Brookfield Asset Management Ltd. It was an opportunity scooped up by Miami-based Gencom, already a partial stakeholder in the beachfront property and the hotel’s original developer in 2000.

Zelering indicated the property exits don’t signal a shift in confidence regarding the south Florida market. “Brookfield is always an active buyer and seller in the market. We still own numerous hotels and resorts in Florida, and we continue to look for opportunities to buy in the region,” he said, noting there’s a preference toward complex assets and full-service hotels with “clear needs” for capital improvements. “There are various considerations when we sell a hotel, most prominently, making sure that our investors’ returns are optimized. The level of interest in hotels in Florida continues to be robust, and we will opportunistically evaluate offers for our hotels, and continue to look for investment opportunities.”

One such opportunity Zelering cited was the The Mayfair Hotel & Spa in Coconut Grove, which Brookfield Asset Management bought five years ago and transitioned into The Mayfair House Hotel & Garden. “The Mayfair has incredible history. The asset was neglected for numerous years, and we literally rebuilt the hotel while preserving its unique essence and aesthetics,” he said. “When you step into this hotel it really transforms you to a different place and the team does an incredible job activating the rooftop pool, bars and special spaces. This is a building that cannot be replicated and has so much character in one of the most unique neighborhoods and locations in Miami.”

Gencom’s own opportunistic move back to majority ownership of the Ritz-Carlton Key Biscayne—it had sold that interest in 2015 to Carey Watermark Investors for $325 million—has it planning a $100 million “transformative renovation and repositioning” to begin in 2025, according to Executive Vice President and Chief Investment Officer Alessandro Colantonio. He expects the revamp to ensure the 12-acre property “will remain a top luxury resort” as Miami’s international inflow expands.

“Our approach has always been to be patient and selective when it comes to finding the right opportunities for asset acquisitions as we view each investment through a long-term lens. As a long-term owner and operator, we like to take our time to find the right opportunities, particularly amidst the challenging market conditions,” Colantonio said. “When we evaluate opportunities, it comes down to the location, the quality and potential of the asset, and the surrounding destination.”

The CIO shared that Gencom is “very excited” about another transformative project dubbed Miami Riverbridge. Set for Downtown Miami, the privately funded, mixed-use development is slated to deliver a 615-key Hyatt Regency hotel, residential apartments, Class A meeting and event space and 50,000 square feet of new public green space along the Miami River.

In summer 2023, the project received the City of Miami Commission’s unanimous approval in favor of Hyatt and Gencom’s land-lease agreement and prior to that, they were successful in gaining the community’s support for the project through a referendum, in which 64% of voters were in support, according to Colantonio. He added, earlier this year, the investment firm submitted its zoning application, the next step in advancing project plans.

Too much development?

Interestingly, the Gencom project is on the boards with local support at a time when some SoFlo municipalities copiously supplied with hotels are looking to put the brakes on more lodging development to strike what would constitute a “better” balance between residential and hotel footprints.

According to news outlet Miami Today, Miami Beach City Commissioner Alex Fernandez suggested discussions slated to head to the city commission’s Land Use and Sustainability Committee would include such topics as limiting which zoning districts would permit hotels, as well as “increasing the minimum and average unit size potentially for hotel rooms because that’s one of the ways through which we can limit hotel development and promote more permanent residential development and limit the density of new hotel rooms in the city.”

Gencom's Miami Riverbridge project rendering

That said, the city will see one of the largest new-construction hotel projects emerge over the next few years: the 800-room Grand Hyatt convention center headquarters hotel, set to come out of the ground at a reported $600 million.

The number of hotels currently in construction across South Florida’s three counties is less than two dozen, according to CoStar data. There are five (1,335 rooms) in Broward, 16 (2,224 rooms) in Miami/Dade and one (110 rooms) in Monroe. Projects in final planning show 18 (2,230 rooms) in Broward, 34 (6,054 rooms) in Miami/Dade and four (370 rooms) in Monroe.

“There are cranes all over Miami, Fort Lauderdale and beyond,” said Brian Quinn, chief development officer for Sonesta, which has nine hotels in the SoFlo market, including the 250-key Nautilus Sonesta Miami Beach, acquired last June by REIT Service Properties Trust for $165.4 million from Quadrum Global. The property is set to undergo a $25 million renovation and conversion to The James brand next year. “We even have new construction in the works in the form of our first new-build Sonesta ES Suites in Port Charlotte,” Quinn said.

Sonesta also is debuting the upscale Z Ocean Hotel in South Beach, the first property that falls under its newly launched soft brand, Classico, A Sonesta Collection. “Miami was the perfect location to debut this brand as it speaks to its ethos,” Quinn added. “The benefit and appeal of South Florida is the diversity in terms of consumer, location and demand. This has allowed us at Sonesta to open a wide variety of properties in the region such as airport hotels, Nautilus and Z Ocean—both on the beach—extended-stay properties like Sonesta Simply Suites and Sonesta ES Suites, as well as select-service and economy properties. All of these properties cater to the different types of consumers in the SoFlo area, whether it be family travel, upscale travel, business travel or longer-term stays,” he said.

New-build news

New construction also is on the agenda for Driftwood Capital and, like Gencom, the focus is on mixed-use development on the Miami River.

The $185 million project, known as Riverside Wharf, is a joint venture between MV Real Estate Holdings, led by Miami developer Alex Mantecon, and Driftwood Capital that, when completed, will deliver a lifestyle entertainment complex anchored by a 165-key Dream Hotel. Other components include the return and expansion of Breakwater Hospitality Group’s The Wharf Miami; 16,000 square feet of restaurants; a 12,000-square-foot event hall; a 30,000-square-foot nightclub and rooftop dayclub; and a private, deep-water marina capable of accommodating mega-yachts.

“The company is excited about the collaboration with various groups, including Alex Mantecon’s, and the progress of the project,” said Driftwood Capital’s Chairman and CEO Carlos Rodriguez Sr. “[We are] currently working on the seawall with plans to break ground later in the year. The financing is in place, and Driftwood Capital expects a positive impact on the market upon completion.”

Driftwood Capital's Riverside Wharf project in Miami

The CEO added that Driftwood recognizes the potential of mixed-use developments and considers them a perfect strategy in many cases. “Driftwood constantly explores mixed-use opportunities based on supply and demand in specific submarkets. The approach involves designing projects according to the needs of the local market, whether it be retail, condos or otherwise,” he said.

SoFlo challenges

While voicing enthusiasm for SoFlo, those in the market also cited challenges.

“Concerning are the challenges with financing terms, land, insurance premiums and construction costs,” Rodriguez said. “Despite a strong and growing market with high barriers, the difficulty lies in making the numbers work due to these issues. The capital influx in South Florida makes it challenging to find deals that meet the company’s return expectations.”

According to Rob Leven, chief investment officer for Procaccianti Companies, which includes the Westin Fort Lauderdale and several properties in the Florida Keys, “High [interest] rates, lack of availability of debt capital, cost of equity capital, uncertainty on direction of interest rates, and uncertainty of economic trends, have all played a role in ability to transact in 2023. Clarity on any of those fronts will help, but there isn’t any ‘silver bullet’ in the short term,” he said.

Pyramid Global’s Hamilton said financing is now more challenging and costly than it has been in a long time. “However, the prospect of no further increases and the likelihood of a dip in rates will definitely spur activity,” he said. “There is a rise in distress, but in many cases, especially for quality assets, sponsors and lenders are working out the assets through extensions, equity infusions and other restructuring methods.”

Brookfield’s Zelering observed the impact of inflation on construction prices, delays in shipping and deliveries, increase cost of financing and lack of liquidity are “undoubtedly impacting” proposed projects and the development pipeline. “Which is good news for exiting owners of trophy assets in South Florida, because replacement costs are significantly higher than in the past,” he said. “The distress will come from owners with stretched balance sheets and undercapitalized assets that require renovations or have deferred maintenance. These dynamics, along with increases in operating costs and higher insurance costs will also put further pressures on owners.”

Pyramid Global Vice President of Business Development Nala Holmes added that most hotels are “experiencing annual premium increases by more than 25%. Insurance coverage limits, carrier rating and premium costs are heavily scrutinized by lenders,” she said. “Owners should take a proactive approach in evaluating property improvements to mitigate flood and windstorm risks. These mitigating measures will help support efforts in placing property coverage with an insurance carrier.”

M&A outlook

As to what M&A activity and pricing/valuation looks like at the start of 2024 Zelering expected the first six months to be relatively slow. “But there is a lot of money sitting on the sidelines and toward the second part of 2024, things should pick up,” he said. “As it pertains to Brookfield, we will continue to rebalance our holdings, selling hotels that are repositioned where we completed our business plan, and buy or JV with owners looking for fresh capital and opportunities for growth. This year will be quite active.”

Driftwood Capital and Pyramid Global also anticipate an increase in M&A activity in the market. “Some sellers may be pressured to transact due to maturing loans and demands from hotel chains for product improvement plans,” Rodriguez said. “We expect interest rates coming down to contribute to improved transaction numbers and we are actively working on two significant transactions scheduled for later in the year.”

Holmes felt the bid-ask spread remains challenging in these markets “as many assets are coming off record performance during COVID and buyers are underwriting a normalization of demand from leisure travel.”

Procaccianti’s Leven expects pricing will continue to move toward the buyer for most products. “The market continues to adjust to the new normal and generally that means lower pricing for the seller to transact,” he said. “Investors continue to be interested in South Florida based on population growth, business and leisure growth, and an overall positive economic environment.”

As of January 17, full-year 2023 data released by CoStar on South Florida’s combined counties show SoFlo edged downward in terms of KPIs. Occupancy was at 72.2% compared to 72.8% in 2022; ADR dropped to $222.37 from 2022’s $233.21; and RevPAR sagged to $160.59 from $169.77. While 2023’s occupancy also fell short of 2019’s pre-pandemic 75.4%, last year’s ADR and RevPAR were significantly stronger than 2019’s corresponding metrics at $178.39 and $134.49, respectively.