2023 Caribbean Recap

by Adam Greenfader, Chair AG&T

I had the opportunity this week to participate in the 2023 CHICOS conference in St Thomas, United States Virgin Islands. The event was hosted at the Westin Beach Resort and Spa at Frenchman’s Reef. The hotel was destroyed in the 2017 hurricane and has now re-opened with hardened infrastructure including new hurricane windows, reinforced concrete structures, and clean energy generators (see more info. below). https://www.caribjournal.com/2022/11/09/st-thomas-resort-powered-by-clean-energy/? Bravo to the development team for a job well done.

The CHICOS conference was represented by over three hundred regional and international investors, as well as the leading Caribbean opinion leaders, developers, bankers and tourism officials. In general, the 2024 Caribbean outlook is favorable, even though talk of a recession is still on the books for the United States. Below is a good graph by CoStar.

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The Upside

So while the U.S. seems to be slowing down, the Caribbean hospitality sector is currently booming. 2023 boasts record performance metrics in ADR, RevPAR, and visitation levels. These metrics represent the highest peak performance for the Caribbean in the last 10 years.??

One reason for this record-breaking performance is the euphoria caused by the end of the COVID19 pandemic. The pandemic made people realize the importance of travel, connecting with other people, and having new “experiences” or experiential travel.

The other reason for this growth is that the Caribbean is the only tourism market in the world that is a "three-continent destination." North America, South America and Europe, all provide a constant flow of capital, people, and services to the region (which has enjoyed long periods of no wars, major diseases, or terrorism).?

High saving rates from the pandemic also created a massive amount of new wealth. Net worth for the typical U.S. household grew 37%, after inflation, from 2019 to 2022, according to the Federal Reserve (Triennial Survey of Consumer Finances). So, where did all this new wealth go?

In 2022, there was approximately a 15%-17% growth in high end luxury products. Across most Caribbean islands, the luxury sector saw flourishing real estate sales. The price of branded condo-units units grew on average from $800 a square foot to over $1,200 or more.

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The Downside

In order to curb inflation, the U.S. Federal Reserve in 2023 embarked on one of the most aggressive tightening of monetary policies in recent history.? The goal was to curtail aggregate demand which has slowed more than half from 4.9% in Q3 to 2.1% in Q4. As monetary policy tightens, leisure travel is also starting to soften. Although most of the hotel groups at CHICOS are reporting very strong numbers into 2024. Tourism appears to be “flipping back to normal levels” as business/group travel is picks up.

In terms of large commercial transactions, there has been a significant reduction of real estate trades in the second half of the year. This is due in part that sellers are still seeking 2022 prices while buyers want 2024 prices (or in capital vernacular), the “bid-ask spread” is still too large.

Much of this slowdown in transaction sales is that the cost of capital is going-up.? Construction debt for example is ranging from 300-500+ over SOFR (The Secured Overnight Financing Rate). This translates into loans with interest rates between 10.5%-12.0% as of today’s writing. It was also clear from presentations at CHICOS: The Caribbean Hotel Investment Conference & Operations Summit that new hotel projects have to put more equity (not including land) into their deals. The 60% loan to cost term sheets are few and far between. ?

As rates are going up, Caribbean financial institutions also seem to be seeking stronger sponsors and guarantees. The group felt that working with known sponsors was a top priority (i.e., developers that have experience in the Caribbean with the specific product type). More importantly, there was ample talk about creating multiple layers of capital protection. This includes full recourse loans (i.e., personal guarantees) as well robust completion guarantees and bonds.

Another area of concern is that construction costs are still 15-18% higher than before the pandemic. One-way that developers and banks are mitigating increased costs is with cost-plus contractor agreements. The good news is that that while costs are still high, they do seem to have stabilized.

Insurance, however, continues to plague the region. Re-insurance markets are creating huge headwinds and it is extremely difficult today to buy catastrophic loss insurance. Banks are especially concerned that insurance is not covering 100% of their loans. Many developers are seeking new solutions such as parametric insurance and self-insurance. ?

Conclusions

There is still relatively little supply of hotels in the Caribbean compared to the U.S. or Europe.? The general slowdown of construction lending has not affected mission driven developments that have unique stories to tell.? Islands with good airlift and infrastructure such as the Turks and Caicos, Puerto Rico, and the Dominican Republic will continue to do well into 2024.

Impact Investing or ESG seems to be here to stay. Today, leading financial groups like IDB Invest are supporting the Caribbean island with reduced interest rates for developments that address key social issues. IDB Invest for example, will be financing its first Net Zero Caribbean hotel in 2024. ? ?

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