Consider this: On the same day last week when a couple of New York City-based sources told Commercial Observer the Zika virus was hindering hotel lending in Florida and the Caribbean, a trio of Southeast-based brokers and developers laughed in our face for suggesting the same.
Florida is hot, said group B. Florida is not, said group A.
Surely there is something to a virus the World Health Organization (WHO) declared a Public Health Emergency of International Concern. Right?
We decided it was worth a closer look.
In February, the World Bank predicted countries highly dependent on tourism could suffer losses in excess of 1 percent of gross domestic product. But neither the Center for Disease Control nor the WHO has issued restrictions on travel—or business—within the 73 countries and territories where Zika has been reported, though pregnant women (and those looking to become pregnant) are advised not to travel to areas with ongoing outbreaks.
To review: Zika is an arbovirus, a viral disease transmitted by mosquitoes, ticks and fleas, similar to West Nile virus, Lyme disease and dengue fever. In this case, the Aedes aegypti mosquito spreads Zika. On Feb. 1, following nearly a year of reported outbreaks in Central and South America, Zika entered the WHO’s International Concern territory. As of now, that status has not changed—the WHO says there is scientific consensus that Zika causes congenital brain abnormalities like microcephaly (children born with unusually small heads) and can trigger neurological brain disorders like Guillain-Barré syndrome (which can lead to paralysis and death in newborns).
Most infected people have symptoms that resemble the flu. There’s no vaccine, and so fluids, over-the-counter medicines and rest are the cure through the few days of discomfort. Unlike the flu, however, which you know that sniffly person on your flight to beach-weather has, Zika is reportedly altering plans of travelers left and right.
“Zika has definitely affected the hotel business in the Caribbean,” said Paul Weimer, a Miami-based vice president in CBRE’s hotel division, who has spent more than a decade selling and financing resorts and hotels in Florida and the Caribbean. “Investors are taking a pause, a ‘wait and see how it unfolds’ approach, especially institutional funds in Chicago and New York,” he said, viewing the region as a single entity, not individual areas and islands with differing experiences of the disease.
Affected areas include Florida, the Caribbean, Central and South America and the Pacific islands.
Weimer continued, noting, “if you’re selling now, you’re not under stress, but maybe it’s taking longer than the usual 30, 60 or 90 days.”
“Locals are not nearly as concerned as people nationwide,” said Alexandra Lalos, a Miami-based associate director with Holliday Fenoglio Fowler L.P. (HFF), which has not seen Zika impact its business. Last month, for example, HFF arranged sale and financing for Westin Tampa Harbour Island for an undisclosed price. This week the Pittsburgh-based firm expects to close on a hotel financing on Florida’s east coast.
“We’re more than 80 months into an expansion in the hotel sector,” said Daniel Peek, the head of HFF’s Hospitality Practice Group. “So lenders are starting to think about the next five years. Is there a downturn coming? Statistically speaking, you’d say yes.”
But, “you’d be asking these questions if there was Zika or not,” added Lalos.
From a business perspective there is one market that everyone agrees to be impacted by Zika: group travel, particularly weddings and honeymoons.
“Romance tourism is the region’s bread and butter,” said Matt Cooper, the chief marketing officer at Caribbean Tourism Development Company. The decline in leisure travel is real, he and his peers agree.
The answer, Cooper said, is to redirect the romance market and look to families and people less focused on potential childbearing.
Either way, the downturn in arrivals, to use tourism industry-speak, is not dramatic enough to stop or even postpone development.
Philadelphia-based Apple Leisure Group, according to its website, is on pace to open a slew of new resorts in the Caribbean by the end of the year via its subsidiary AMResorts. “Overall, Apple Vacations has had very few cancellations due to the Zika virus. Apple Vacations is anticipating a slight dip in destination weddings. However, as a whole, Apple Vacations is not impacted by the Zika virus,” said a spokesperson for the company that’s one of the largest tour operators to the Caribbean.
“Mosquito-borne illness is not new to the region. We’ve seen dengue and chikungunya move along. Zika will move along,” Cooper said. “There’s a lot in our way of developing ahead of Zika. This is the most sales-dependent tourism region in the world, and there are no bridges,” he added, referring to the complete reliance on air and sea transportation. Cooper can name some 50 projects in some state of planning or development that have continued their progress despite the disease.
One such project—Warwick Paradise Island Bahamas—had its soft opening on Oct. 28.
“The Zika virus has not had any impact on the development or opening of Warwick Paradise Island Bahamas,” said Benjamin Davis, the general manager of the resort. On Oct. 27, the Bahamas Ministry of Tourism issued a press release stating there have been no new cases of Zika reported in the country since Oct. 3, and it’s isolated to New Providence, the nation’s most populous island. Remember, the Bahamas includes 700 islands and cays.
Another, the Kimpton Seafire Resort + Spa in Grand Cayman, is on schedule to open on Nov. 15, according to its website. Last month the brand announced its eighth Florida hotel, expected to open in 2018, in collaboration with Miami-based hotel developer Finvarb Group. “Miami continues to be one of the hottest tourist destinations in North America and has become an increasingly popular destination for international travelers as well,” Mike DeFrino, Kimpton Hotels & Restaurants chief executive officer, said in a prepared statement.
Meanwhile, Cooper noted a regional focus on projects in the $5 million to $50 million range, including renovations and reimagining of existing plans, and expansion by companies such as Cancun-based Palace Resorts as well as Spanish brands like Iberostar. “We’re seeing development abound. The future is bright,” he said.
Everyone CO spoke with in South Florida, both in real estate and tourism, mentioned a decrease in foreign investment and visitors, particularly Latin American and Russian, as a factor that ranks well ahead of Zika in impact on the industries. Recessions (and political instability) there mean the dollar is strong. A survey by The Miami Herald and Bendixen & Armandi International said foreigners, who represented 56 percent of buyers in the high-end residential market in 2015, made up only 33 percent in 2016.
The same survey noted that most out-of-town buyers are from New York, which doesn’t necessarily mean that everyone outside the U.S. is staying away.
On Oct. 26, British luxury car brand Aston Martin announced it will partner with Argentine supermarket family, the Cotos, to develop a 66-story luxury condominium tower on the Miami River. The Cotos family currently owns a 1.25-acre site there, purchased for $125 million in 2014. And, as reported by the Sun Sentinel on Oct. 27, Venezuela-based Grupo Alco paid $3.6 million for 1.75 acres in Fort Lauderdale to build a 10-story hotel to open in 2019. Groundbreaking is expected next year.
If a major epidemic occurred before Art Basel, or before the height of the winter season, Zika’s ranking as a South Florida financial problem might be different. As it stands, rising sea levels and elections are also higher on the things-to-possibly-deter-investors-and-visitors list.
And, noted Peek, last winter’s mild weather in the northeast meant fewer travelers to Florida anyway. “You cannot overstate the impact of Zika to the individual, but from a macro-market standpoint we think the impact is limited,” Peek said. “Zika is part of a mosaic of things we’re wrangling with at any time in the cycle.”
Weimer’s hotel clients speak anecdotally of a significant decline, particularly in the group business. And his colleagues who sell offices say they’ve seen investors wary of sending people down to look at properties. That said, Weimer is confident these attitudes will be short-lived. “People will be acclimatized or it will go away,” he said.
Wynwood, the first Miami neighborhood infected, for example, is no longer a zone of active local transmission. Or, to look at it another way, as Zika shows up everywhere else in the country, we will all have to accept and adapt.
In Miami there was a drop in revenue per available room, or RevPAR, before Zika because of issues such as economic distress abroad and a convention center undergoing multiyear renovation, meaning no convention business in the area (see the decline in group business, above).
According to reporting from the first nine months of 2016, hotel occupancy is down 1.4 percent in Miami (including downtown and Miami Beach) compared with the same period last year. But that has more to do with an increase in available rooms than a decrease in people traveling, said Jan Freitag, a senior vice president at national hotel benchmarking firm STR.
“The number of new rooms has skyrocketed. Are there some people who probably avoided the area? Maybe. But demand growth is healthy [up 2.6 percent over the same period last year] and supply growth is strong [up 4.1 percent over the same period last year],” Freitag told CO. “How low would occupancy have to go to be a problem for new development or works in progress? You’re talking about a prolonged, multi-quarter downturn. We are not there.”
From the underwriting perspective, Peek said, people are probably trying to draw some comparison to the Deepwater Horizon oil spill of 2010. Some 200 million gallons of BP oil flooded the Gulf of Mexico, impacting the environment and tourism. Peek notes it was mostly people outside the region who altered their travel plans in the year that followed, coming back after reports made it clear that beaches were indeed clean. “I think Zika is predominately going to impact group bookings,” said Peek, “for this year only.”
Lightstone President Mitchell Hochberg said that he continues to see the long-term opportunity in Miami, an exception to the collective theory that Zika is a bigger problem the further away from it you reside or work. Earlier this year, the New York City-based company announced its commitment of $2 billion to Marriott International’s Moxy Hotel-branded developments, including a 200-plus room property in Miami. “We see tremendous long-term opportunity in the Miami Beach market. Lightstone’s Moxy project in South Beach continues to move forward on schedule and has not been impacted [by Zika].”
Ultimately, the Sunshine State remains hot. “Miami and South Florida is really desirable,” Weimer said. “It’s a market that cannot be ignored.