After more than two years of delays, the Esmé Miami Beach was supposed to open in time for this year’s Art Basel.
A retrofit of the former Clay Hotel, the Esmé had suffered setbacks due to Hurricane Irma but was poised to return as a focal point along Española Way.
Then came COVID.
Now, the Esmé is slated to open in March — but with contingency plans should the pandemic linger.
“We are still optimistic,” said James Stuart, director of hospitality for Infinity Collective, the hotel’s developer. “We hope that in three to six months things will have improved, and there are potentially fewer protocols needed.”
Still, the hotel is prepared to implement all the safety measures now common throughout the industry.
“We don’t want to make it part of the opening dialogue,” he said. “But it’s essential to be responsible.”
The Esmé’s uneven journey exemplifies the fragile recovery sprouting in one of the world’s most visited destinations. In Miami-Dade, hotel occupancy currently sits at 42.3% — up from 23.9% in April but well below the 83.7% seen this time one year ago, according to travel data group STR.
That upward trend has given hospitality stakeholders hope that the market is on the mend. Earlier this week, upscale hostel Generator Miami on Collins Avenue announced it would reopen on Nov. 5, while developer Dreamscape said it would partner with music legend Pharrell Williams and club owner Dave Grutman on a Washington Avenue hotel set to open in January. Other local hotel properties have secured new investment dollars and partners to fund renovations or simply to stay afloat.
For operators like Stuart, the strength of the Miami Beach brand outweighs the risk and uncertainty of opening during a pandemic.
“The fear is that Miami Beach, being such a global destination — it relies upon the South American market and European market, so while there are travel restrictions, that is a real concern,” he said. “At the same time, we’re hopeful and tend to believe that if and when things do start improving [those] domestic guests, especially ones who might have traveled abroad, will be traveling to the beach.”
Alastair Thomann, CEO of London-based hotel operator Generator, said the decision to reopen the Generator Miami next week was driven by the bounce-back the company had seen at the nearby Freehand hostel, which is now at about 50% capacity and climbing. The company owns both lodgings.
“When we look at where guests want to travel, Miami and Miami Beach are at the top of the list,” he said. “People are trying to get to Miami…whoever we speak to or whatever we read about this, they feel quite comfortable coming here — of all locations.”
Yet elsewhere, the pandemic is starting to reveal fractures in the local industry.
The Lord Balfour Hotel, located at 350 Ocean Drive, is now in foreclosure, according to Stephan de Sabrit, a representative for Leste Group, a partner in the property’s mezzanine loan. The out-of-court seizure was initiated last month. London-based private equity firm Henley Investments purchased the 1940s-built, 81-room hotel in 2019 for nearly $35 million. Henley did not immediately respond to a request for comment.
Meanwhile, on Alton Road, the Variety Hotel is putting itself up for sale as it faces down a foreclosure suit from its lender. The Real Deal reported in September that the initial asking price was $37 million. Listing agent Susan Gale did not respond to a request for comment about whether that price had changed.
The local industry may well be at the beginning of a new foreclosure trend, according to Christian Charre, senior vice president with CBRE Hotels and a specialist on Florida, Caribbean Latin America markets.
“Do I expect more? I would think yes,” he said.
But it may not be as dire as some experts had feared. Seizures are likely to be concentrated among properties funded by commercial mortgage-backed securities; these properties, he said, tend to have less room to renegotiate terms. “I don’t think we’re going to see wall-to-wall foreclosures.”
For many bank-owned properties, Charre said, forbearance and renegotiation will likely continue to be the norm — giving the industry further breathing room.
“It’s very painful to go through the foreclosure process, and you’re likely not going to find a buyer right now,” he said. “The outcome might not be beneficial for the lender or the owner. I think there is still a desire to wait and see.”
Rich Lillis, executive managing director for hotels at real estate group Colliers, said he is also seeing some properties survive through bridge loans. “Lenders are all different,” he said. “There’s a wide variety of participants in these assets.”
One hopeful sign: earlier this month the Fontainebleau Miami Beach is again in good standing on its $975 loan after previously seeking special servicing terms from lenders on its debt. According to structured-finance data and services group Trepp, the Fontainebleau’s most recent payment occurred October 6. The loan had been transferred to special servicing in March, as the iconic resort discussed modifications to its loan documents. The loan returned to master servicing Sept. 23.
“The servicer will continue to monitor the situation,” said Fontainebleau’s servicer, Cleveland-based Key Bank, according to Trepp. A representative for Key Bank declined to comment to the Miami Herald. The Fontainebleau received forbearance through deferring furniture, fixtures and equipment payments, as well as excluding 2020 financial performance when calculating debt-yield tests, Trepp reported. The furniture, fixtures-and-equipment payments will now be repaid in seven equal monthly installments starting in January 2021.
“It is important to note that the borrowers for the property have continued to make timely payments and the loan has been marked current in our database for entire 2020,” Trepp reported. “In the current COVID-19 crisis, a transfer to special servicing is not necessarily a reflection of impending default.”
A representative for the Fontainebleau declined to comment.
The Fontainebleau’s reprieve could be an exception among CMBS-related loans; because the Fontainebleau’s loan is so large, it is not bundled with other debt. That likely granted its servicer more room to maneuver. The Wall Street Journal reported earlier this month that commercial mortgage-backed securities lenders “are more eager” to foreclose, with 278 U.S. CMBS properties already in foreclosure.
More could come. According to Trepp, the percentage of U.S. lodging-related CMBS loans in special serving was 26.04% in September — the highest reported on record. In the Miami market, the rate is 30.1% — the fifth-highest in the U.S., according to Commercial Mortgage Alert, a publication of Green Street Advisors.
For Devlin Marinoff, broker and managing partner of Miami-based commercial real estate brokerage firm Dwntwn Realty Advisors, many beach hotels will remain financially vulnerable until air travel picks up.
“Areas like the Keys are doing well, but that’s because people from the tri-county area are driving down to get away for the weekend,” he said. “Then you have fly-to hotels in Miami Beach and they are just not going to recover.”
Others, like Charre, are optimistic that pent-up demand for travel will express itself during the winter season.
“I think people are now less averse to travel and willing to take more measured risk,” he said, “so the trend for this winter is an uptick in demand for Florida.”
Experts across the industry estimate it will be 2023 before the local industry returns to 2019 occupancy levels — and even longer for average daily rates to improve.
The question is whether the worst is past.
“You have to have conviction and not have recency bias” when it comes to COVID’s impact, said Jan Freitag, senior vice president of Lodging Insights at STR. “The last six months are not going to be like the next 6 years.”
Still, uncertainty prevails, said the Generator’s Thomann.
“Everything changes so quickly now,” he said. “Things could be very different — they could be much better, or become much worse.”