Cabo continues to make its comeback
 
Cabo continues to make its comeback
26 JANUARY 2015 7:12 AM
Devastated by Hurricane Odile, Cabo has seen a resurgence led by luxury brand developments.
Sun. Surf. Sand. Los Cabos has it all. Or had it all.
 
Category 3 Hurricane Odile swept through Los Cabos, Mexico, on 14 September 2014, resulting in more than $1 billion in economic losses. 
 
No power. No telecommunications. Massive destruction. So, where is Cabo now?
 
Amid high season, Los Cabos has reopened several resorts that suffered significant damage just a few short months ago. One cannot understand this unique and powerful market today, however, without reviewing its recent rise, fall and resurrection. 
 
Undoubtedly, Cabo is making a comeback. 
 
The rise
A UNESCO World Heritage Site, the Los Cabos region is renowned for its beaches, sport fishing, sailing and world-class golf facilities. Los Cabos boasts convenient air access from key cities in the United States (particularly on the West Coast); a secure, isolated location; and year-round beautiful weather.
 
Accordingly, and especially after the 2009-2010 global economic downtown, the prized destination has enjoyed high visitation and strong hotel performance, as well as considerable investment in its infrastructure and hotels.
 
Investing in infrastructure
In 2012, Los Cabos hosted the G20 Mexico Summit, which attracted presidents, key global political and economic leaders, and extensive media exposure, thus helping catalyze Los Cabos’ recent rise. For the Summit, the Mexican government invested about $300 million in infrastructure projects to elevate the destination’s competitiveness and economic development, including:
 
  1. constructing a Los Cabos Convention Center;
  2. expanding the San Jose del Cabo International Airport; and
  3. improving roads and general beautification projects.
 
These infrastructure investments, coupled with a recent strong increase in visitation, have attracted considerably more hospitality investments to Los Cabos. 
 
Attracting hotel investors
Historically, leading hotel investors have sought Los Cabos as a premier upscale global resort destination, with branded products, favorable supply and demand dynamics, and a strong average-daily-rate performance across segments. And, notably, these investors often partner with experienced operators and developers, typically from well-established Mexican families with land parcels and direct ties to the region.
 
Since the Summit in 2012, institutional-grade Mexican and U.S. public and private hotel investors such as Thayer Lodging Group and Fibra Hotel have entered the market through strategic acquisitions of existing assets. Similarly, other private investment firms such as Vertex Real Estate Investors, Ohana Real Estate Investors and SV Capital as well as public hotel companies such as Hyatt Hotels Corporation have acquired distressed assets or land for re/development projects.
 
Changing the market makeup
Los Cabos traditionally has distinguished itself by having world-class hotel products that include small ultra-luxury resorts such as Rosewood’s Las Ventanas al Paraiso, One & Only’s Palmilla, Auberge’s Esperanza, and the Resort at Pedregal (fka. Capella), as well as larger international upper-upscale branded resorts such as Hilton, Westin, and Sheraton. 
 
Furthermore, Los Cabos’ hotel supply uniquely possesses a large proportion of timeshare units (about 60% of the total), under renowned brands such as Pueblo Bonito, Solmar and Vidanta Resorts.
 
The remaining hotel supply recently has experienced a shift toward all-inclusive products (about 50%-plus of the room inventory). This segment continues to grow through conversions and new developments. Since 2012, various resorts were converted into all-inclusive operating formats like the Marquis to a Secrets, and the El Faro (fka. Crowne Plaza) to a Barceló Grand, while the former Barceló Grand was reflagged to Hyatt Ziva. A new 500-room Secrets Puerto Los Cabos also opened in late 2013. 
 
However, with the addition of new hotel investors has come the introduction of new segments and niches in the Los Cabos market, such as lifestyle concepts (e.g., El Ganzo) and limited/select-service hotels (e.g., Fairfield Inn, Holiday Inn Express and Hyatt Place).
 
The fall
When Hurricane Odile ripped through Los Cabos in September 2014, the Cabo rise quickly converted to ruin.
 
Several hotels were practically destroyed during Hurricane Odile, and others were severely damaged and still remain closed. As a result, many resort owners are evaluating the cost-benefit equations of renovating and reopening, and leveraging insurance policy proceeds, government incentives, and special financing programs. Additionally, Los Cabos’ isolated location has lengthened recovery periods and proven challenging and costly due to the limited skilled labor and availability of contractors and deliverable materials.
 
Furthermore, following the hurricane, two separate owners surprisingly terminated the management and license agreements of their damaged resorts, including:
 
  1. CarVal Investors terminating the Capella Hotel Group from the Capella Pedregal; and
  2. KM Promotions terminating AMResorts from the Secrets by Marquis.
 
In both cases, property disputes and subsequent terminations resulted from alleged improper financial reporting and diversion of revenues through improper fee calculations by managers. As expected, both U.S.-based management companies have pursued litigation, and it will be interesting to monitor the legal outcomes of these important cross-border disputes.
 
The resurrection
Despite disaster, Cabo is now making a comeback. Mexico consistently demonstrates its resilience, and Los Cabos is no exception. The destination is continuing important repairs and embracing and expanding new supply to its hotel market.
 
Undergoing repairs
Following Hurricane Odile, the Mexican government moved quickly to restore water, electricity and basic services. Also, it has implemented various other stimulus measures to help revive the local tourism economy, including: offering financial incentives; low-cost loans; and deferring the payment of taxes and social security contributions.
 
More specifically, the destination has continued improvements to its convention center and airport. The Los Cabos Convention Center is undergoing various repairs and is presently seeking a third party to help manage the facility. Once operational, the convention center expects to compete with similar destinations like San Diego and Hawaii to attract high-end groups and conventions, which will help increase demand during the low season.
Similarly, the San Jose del Cabo International Airport is undergoing repairs and additional expansion projects to help increase passenger capacities and attract more international flights.
 
Introducing new supply 
In addition to continuing repairs, Los Cabos is attracting new developments with luxury brand affiliations, such as the proposed Ritz-Carlton Reserve, Park Hyatt and Montage resorts, which are expected to create an even higher level of market perception. The various lifestyle-oriented projects in the pipeline, such as the Thompson, JW Marriott and VieVage resorts, are also expected to attract new travelers to the destination.
 
Importantly, as most of these luxury and lifestyle projects include sizeable branded, for sale real estate components, it is critical for hotel developers to determine which elements of their programs deliver comparative advantages to succeed in this newly crowded environment. 
 
Additionally, several trendy, larger, all-inclusive properties are in the proposed pipeline, including: a 400-room Le Blanc and a 600-room Hard Rock resort. Various other branded limited/select-service hotels, such as a Hampton Inn, City Express Plus and City Express Suites, are in the proposed pipeline as well.
 
As a result, the Los Cabos hotel market likely will exhibit competitive conditions in the near-to-medium term as the new supply is absorbed. Yet, as demand continues to grow and the destination continues its recovery, the destination will benefit long term from this consolidation and scale.
 
Luckily, airlift to Los Cabos has been steadily improving due to new direct air routes being introduced, particularly by low-cost carriers, such as Spirit Airlines and Southwest Airlines from the U.S., and Volaris and VivaAerobus from Mexico. These new direct international air routes will open new source markets, particularly from the northeast U.S. (New York City and Washington D.C.) to Los Cabos. Moreover, larger events, such as the Ironman, Open of Surf and International Film Festival, are attracting new group travelers to Los Cabos and helping generate demand during the off season.
 
Ultimately, a strong commitment by the Mexican government, renewed private sector investment, and an influx of new travelers and premier brands clearly demonstrate Los Cabos’ favorable market appeal and unquestionable resurrection. And once again, Los Cabos’ spirit proves stronger than wind and water.
 
Jonathan Kracer is Managing Principal of SION CAPITAL LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions, with offices in Miami and Mexico City. Mr. Kracer is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. In particular, Mr. Kracer has extensive experience investing in, designing, and developing Mexican resorts. Mr. Kracer’s columns primarily cover hotel asset-related subjects, with a particular emphasis on cross-border topics related to the U.S. and Latin America. He can be reached via email at info@sioncapitalco.com. More information about SION CAPITAL LLC can be found at www.sioncapitalco.com.
 
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