Where Developers Are Betting Travel Will Rebound

Want to know where the post-Covid party is? Follow the real estate money.

Tracking the vaccine rollout doesn’t tell you where travel is going to rebound in America. States demonstrating less concern about the virus generally have higher bookings. But historical bookings data from hotels and airlines won’t give you a complete picture either, because that’s what happened yesterday. 

To get a sense of what lies ahead, take a look at hotel real estate deals happening now.

Some places, like Miami, are kind of a no-brainer. “If you had to pick a place on the planet to open a hotel I would say South Beach, Miami would be one or two on the list, hands down. We feel very good about it,” says Eric Birnbaum, founder and CEO of New York-based development company Dreamscape.

He’s still buzzing from the opening of The Goodtime Hotel, a 266-room boutique hotel launched this past April in South Beach. Birnbaum and his partner Michael Fascitelli bought the property for approximately $200 million via Imperial Companies four years ago, long before Covid sent Silicon Valley tech bros and New York hedge fund managers fleeing to Florida.

Now they’re all welcome to daydrink at The Goodtime, which adds a splash of sophistication and style to a city that can’t stop pool partying. Despite developing the project “during the worst of the pandemic,” Birnbaum was able to tap a dream team of designers, with cheerful candy-colored interiors by Ken Fulk, landscaping by Raymond Jungles, and an ‘only good vibes’ food and beverage program from nightlife hustler Dave Grutman and Pharrell. You know, the guy who sings “Happy.”

It was a good deal on a location that led to more deals for Dreamscape, which wasted no time raising a billion dollars and purchasing hotel properties in key markets across the U.S., including Miami, The Saint Hotel in New Orleans, The Warwick Hotel Rittenhouse in Philadelphia, and the 2,522-room Rio All-Suite Hotel & Casino in Las Vegas — which Dreamscape purchased from Caesars Entertainment Corp. for $575 million in 2019. 

Surely these are data driven deals based on traffic forecasts and algorithmic modeling, right? Not really. Birnbaum insists these decisions are “instinctive.” He says: “I could tell you that it’s data driven, but it’s more about understanding the location and product, and therein lies your customer.”

Does that justify a massive corporate conference hotel (billing 160,000 square feet of meeting space) in a city that had to shut down corporate conferences? Maybe. From the sounds of it, Birnbaum’s got big plans to redesign the Rio in a city reopen and rebounding.

As of June 1, Las Vegas’ COVID-19 restrictions were fully lifted for visitors, with all restaurants, stores, and casinos allowed to operate at 100% capacity. Historically, the biggest revenue stream for Vegas hotels was always corporate conventions. Those, too, are gearing up for a desert revival. “Our forward bookings both for the second half of this year and into [2022] are extremely strong,” Caesars Entertainment CEO Tom Reeg told CNBC back in April. “We’ve just got to make sure that we can accommodate them.”

Clearly, the devil-may-care Las Vegas brand is still very much intact (because the What happens here stays here tagline is now… problematic). It’s not much different from what’s happening in Miami. Or Times Square. These are gateway cities in need of the kind of revenue boost that only pent-up-party tourists can bring.

WELCOME TO MARGARITAVILLE

Another developer capitalizing on this phenomenon is Sharif El-Gamal, CEO of Soho Properties, who now owns Margaritaville Resort Times Square, which officially opens July 1st. 

The $370 million development is the latest opening in the Margaritaville Enterprises LLC  empire, run by CEO John Cohlan and founded by the still-very-charming singer Jimmy Buffett, now 74 years young. Today, Margaritaville encompases more than 35 hotels spanning the U.S., Carribean, Costa Rica, and Mexico. It works, at least in part, because the brand delivers the same vibe we get from Buffett’s laidback lyrics: “It’s these changes in latitudes, changes in attitudes, Nothing remains quite the same… If we couldn’t laugh we would all go insane.”  

Frankly, it does seem insane to open a big box, 234 room high rise in the middle of Manhattan with a 492-seat restaurant before Covid is over. According to the Department of City Planning report, demand for hotel rooms in New York City is not expected to fully recover to pre-pandemic levels until 2025. And yet, during the ribbon-cutting tour on June 10, guests crammed into small highrise elevators and rose 32 floors to cram themselves into even smaller hotel rooms, albeit with lovely skyscraper views. The rooms are small even for Manhattan standards, but the pricing is too. (Room rates start from $250 for a Standard Queen).

With Buffett’s song in my head and the smell of fried “Cheeseburgers in Paradise” in the air, I ask El-Gamal what market data gave him confidence in this multimillion dollar business decision. 

“There is no market data today that makes any sense. It’s instinct. When you do what we do, you build a sixth sense around being able to make decisions. When we started this building, I started it spec. I had no tenant. I didn’t know what I was gonna do. But I wanted the location, because location is one of the biggest drivers of the basis and the costs of how you put together a deal,” said El-Gamal.  

Of course, there is market data that makes sense. According to STR, a global hospitality data and analytics company, the top five highest occupancy markets for U.S. hotels include: The Florida Keys, Fort Lauderdale, FL, the Florida Panhandle, Charleston, South Carolina and Colorado Springs, Colorado. *This data is based on the 4-week moving average, ending June 5, 2021 compared to ending June 8, 2019. 

Manhattan didn’t make the cut, but that’s not stopping developers who need to think five to 10 years ahead to run a successful real estate portfolio. According to Lodging Econometrics, 150 hotels are in the new construction pipeline in New York. In 2020, nine new hotels opened in the New York City market. “The expectation is that travel will resume, and that building a hotel in a downturn represents a unique and potentially valuable opportunity for owners,” according to the office of the New York State Comptroller. Take a stroll down Broadway on any given weekend and you’ll see for yourself — it’s going to be one hot summer.

Great news, if you’re a hotel magnate. “Execution is a lumpy business. You could go years without finding something, or have three deals in a year. It’s all circumstance. We’re opportunistic. It’s not a volume game. It’s a good deal game,” said Dreamscape’s Eric Birnbaum in a recent interview.

BETTING ON INSTINCT

It must be said, there is an undeniable attraction to Margaritaville. It’s over-the-top flip flop kitsch that won’t be drawing any of New York’s elite sophisticates any time soon. If you’re looking for refinery, go elsewhere— but that’s the point. Margaritaville will draw tourists who may feel overwhelmed during their first visit to the concrete canyon and seek comfort in a familiar, affordable brand. Is there anything wrong with that?

Looking out at the grand opening crowd of real estate suits, overly tanned Parrot Head investors, and hired hawaiian shirts, I think this really might just fly. Mass market tequila and a year-round heated pool is tailor made for the Times Square reveler. As two buff swimsuit models float past on inflatable parrots, you can’t help but hand it to them: You definitely know your customer. 

But they took it a tad too far. El-Gamal is getting away with calling this a “resort” even though it is absolutely nothing of the sort. To call this place a resort is a gross exaggeration. One of the reasons “making it” in NYC isn’t for everyone is that New Yorkers smell hyperbole from a mile away and write you off in a New York minute. What you have here is a chain hotel in a standard 32-floor city high rise built on the assumption that RevPAR (revenue per average room) will turn a profit. Calculated by multiplying the average daily room (ADR) rate by the occupancy rate, RevPAR declined in Manhattan by 75 percent in 2020.

Does that matter to the consumer? Of course not. They’ll all be drinking frozen margaritas chanting “Fins up everybody!” before New Yorkers can put up their masks and take a different city block.