While rebuilding following a wave of devastating hurricanes is no easy task for hotels and resorts in the Caribbean, experts believe the efforts represent a moment of opportunity for the region.
MIAMI—Investors in the Caribbean hotel industry are still in many ways sorting through the ramifications of the wave of damaging hurricanes in late 2017, but a group of experts believe the countries most affected by those storms have strong growth prospects going forward.
Experts speaking on the “Hurricane-impacted islands: Opportunities to buy, build and reinvigorate” panel at the recent Caribbean Hotel & Resort Investment Summit, said the allure of the region is still there, both for investors and travelers.
“Generally speaking, a buyer of real estate is romantically attached to the Caribbean,” said Mark Durliat, CEO of Turks and Caicos-based Grace Bay Resorts.
Several panelists agreed that interest in the region remains high, although many said the perception of the damaged caused around the Caribbean often doesn’t match reality, as many areas like the Bahamas were significantly less affected.
Both Durliat and Chris Barbe, SVP and GM of global sales and project development at DCK Worldwide, said that, if anything, pricing expectations for real estate in the region have increased of late as the recent storms have reminded some of what’s so special about the Caribbean.
Barbe noted that residential real estate has definitely seen a bump in both perceived value and in asking prices from sellers, but the landscape for transactions in hotel real estate is complicated by the fact that some properties are looking for equity investors in order to fund rebuilding efforts and others are effectively distressed assets now.
“We’re starting to see assets come up for sale because they can’t get to a point of rebuilding themselves, and those are probably undervalued versus residential real estate,” he said. “Many are in a position where they have to move on or take on a partner.”
How you build it
Asked whether building standards will and should change following 2017’s particularly difficult hurricane season, panelists said that in many places, high standards of building already exist, so it might just be a matter of tweaking the rules and doing a better job of abiding by existing code.
“Generally speaking, we’ve built to those codes for 15 to 20 years, and people expect it to cost a little more,” Durliat said. “There may be some changes to some things, but they’ll be very small. It’s more about the details than actual code.”
Barbe said building to hurricane-resistant standards is now commonplace with new-build properties, but it still isn’t an expectation with renovations, other than details like adding generator capacity.
“We’re not seeing the value (for revamping to higher standards), but there may be some savings for insurance and that could change things,” he said.
Durliat noted that hoteliers and investors must also acknowledge the reality that traveler and buyer expectations for the region sometimes mean building in locations and ways that are more susceptible to hurricane damage. This means building closer to the water than suggested and having buildings made to have a certain island “charm” that don’t follow hurricane-resistant standards.
In those cases, hoteliers “have to be prepared to basically have throwaway buildings to have that charm,” he said. “Like with palapa roofs. (Sometimes you have to decide) if it blows away, it blows away, because that’s what the customer comes for.”
Letvia Arza-Goderich, partner with Preston Arza, said hotels in areas like Puerto Rico are already built to high standards because buildings there have to be designed to withstand hurricanes and earthquakes. But the strength of the recent storms—with both Hurricanes Irma and Maria featuring sustained winds exceeding 150 miles per hour—meant different specifications for different islands.
While the “institutional structures” in Puerto Rico survived the storms, Arza-Goderich said areas like the Dominican Republic that rely on the previously mentioned “charm” of the Caribbean are more heavily hit, and will likely continue to be in future storms.
“People want that charm, but it has a related cost,” she said.
Even with all that said, Barbe said the hurricanes didn’t lead to a relative spike in construction costs in the same way as what was seen in Texas following Hurricane Harvey, in large part because the relative cost of building in the region was already high and sourcing of materials was more diverse.
“We’re buying throughout the world, so there’s less impact,” he said.
Similarly, Durliat said he doesn’t believe the storms have changed the financing landscape in the region.
“I don’t think the players have changed or have changed their views at all,” he said. “Those (lenders) who have participated in these jurisdictions are used to the same things we’re all used to. This happens.”
Ultimately, Barbe said he expects to see an uptick in hotel investment opportunities in the Caribbean over the course of the next six months.
The issue of insurance
As the 2018 hurricane season rapidly approaches, panelists said many hotels—and other businesses—are still dealing with the insurance process in the aftermath of the 2017 hurricanes.
More than eight months out from the 2017 hurricanes, many investors are still waiting for an initial appraisal of damages from their insurance carrier. Panelists noted the sentiment for insurance companies in the region is remarkably low right now, with some insurance companies now considering pulling out of the Caribbean due to a higher perceived risk of hurricane damage.
“The list is long of people waiting for a process that hasn’t begun,” Arza-Goderich said. “People submitted claims, proof of damage and so on, then they have to call and call and call (the insurance companies).”
Francisco González, director general for Mexico-based Bancomext, said as insurers lag, financial institutions like his that depend on the health of tourism must “act quickly” to help stabilized assets and the broader economy. He said this often means fronting a sum of cash to stem the tide before the insurance payout, which can sometimes take a year or two.
“The idea is to stabilize the economy by getting funding very fast,” he said.
Panelists acknowledged that as frustrating as the current situation with insurance is, the insurance companies themselves are dealing with a monumental task of sorting through all the claims. Barbe said hoteliers can help themselves and their insurers by approaching them as prepared and well-armed with information as possible.
“It’s definitely a process learned over years, but you’ve got to give them information,” he said. “It takes an enormous amount of work (to sort through the claims).”
Durliat said that the entire process taught him that his company was perhaps “a bit complacent” in terms of its insurance. He said the fact that previous hurricanes did less damage than expected, his company carried insurance policies with higher deductibles than they should have, in retrospect.
The effects aren’t equally felt
Panelists stressed the fact that despite the widespread perception outside the Caribbean, neither the initial damage nor the response to that damage was universally felt.
Many areas of the Caribbean avoided damage altogether, while the islands that were hit suffered different levels of damage and have experienced different forms of governmental response.
Durliat noted that Turks and Caicos could be viewed as the best-case scenario in terms of emergency response, and the fact that power was quickly restored made a huge difference going forward.
“Our situation revealed itself as being superior in our utilities and our ability to react,” he said. “We’re agile, and it’s helped sell our story.”
He said being able to explain how smoothly recovery has gone there has already shown a positive impact in the company’s sales efforts for residential units.
Panelists agreed that across the Caribbean, governmental entities need to do a better job of explaining to the traveling public whether or not specific countries or areas are hurt by storms.