GHN Market Report: Los Cabos

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1 GHN Market Report: Los Cabos Manuel Bremont Director Hospitality & Leisure Group Alvarez & Marsal Real Estate Advisory Services, LLC Los Cabos Market Overview Los Cabos was the third master-planned resort community developed by FONATUR (Mexico s National Tourism Fund) in 1976, following the fund s development of Cancun and Ixtapa, both of which began operations in It enjoys a subtropical dessert weather that records average temperatures in the mid 70 s year round, which coupled with its diverse natural attributes and ecological attractions, have made of Los Cabos a region that offers great potential for leisureoriented activities and strong development appeal. As a result, the area has attracted the interest of domestic and international investors which contributed to the robust tourism infrastructure expansion of Los Cabos over the last 25 years. Fueled by the rapid growth, Los Cabos evolved from a small village into a premier resort destination that continues to draw an increasing number of visitors from around the world year over year. The municipality of Los Cabos encompasses the towns of San Jose del Cabo and Cabo San Lucas which are connected by a 20-mile, four-lane highway known as the Tourist Corridor that stretches along the Sea of Cortes coast line. By air, Los Cabos is located approximately two hours away from US cities such as Dallas, Phoenix and Los Angeles, and between three and five hours away from Denver, Atlanta and New York, to name a few. Economy and Demography According to the 2010 census conducted by the National Institute of Geography and Statistics (INEGI), Los Cabos was the second largest municipality in the state with a population of 238,487 only after state s capital city of La Paz, which had a total population of 251,871. Together, the two municipalities accounted for approximately 77 percent of the state s total population in By 2015, the National Population Council (CONAPO) estimates population in Los Cabos will reach 305,980 surpassing La Paz by approximately 16,000 people. Los Cabos, and the state of Baja California Sur, are highly dependent on tourism. In 2012, tourism contributed approximately $922 million to the state s economy, an 8.7-percent increase over the $848 million recorded in Other contributing economic sectors include agriculture, cattle ranching, fishing and commerce. According to the last economic census Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 1

2 statistics available, it was estimated that the 37.1 percent of the labor force in Los Cabos was employed in hotels and restaurants. Looking ahead, the economic outlook for Los Cabos is positive, primarily driven by a marked recovery in the tourism sector as evidenced by the improved passenger arrivals and visitation trends experienced by the destination during the first eight months of 2013 (further addressed in following sections of this report). Access/Transportation A number of road infrastructure projects have been implemented over the last few years with the goal of improving connectivity between La Paz, San Jose del Cabo and Cabo San Lucas. In 2011, the Federal government began work on the expansion and modernization of Highway 19 which runs along the Pacific coast line and connects the towns of La Paz, Todos Santos and Cabo San Lucas. Reportedly, the project represented an estimated investment of over $250 million and its scope comprised the highway s expansion from two to four lanes, reducing driving time from La Paz to Cabo San Lucas from 2.5 hours to 1.5 hours. The project also involves the development of a $50-million, 4.4-mile bypass across the town of Todos Santos to improve traffic flow along Highway 19. In 2012 the Communications and Transportation Secretary also began construction of the bypass that will connect San Jose del Cabo with Cabo San Lucas which is anticipated to alleviate the traffic flow along the Tourist Corridor and improve travel time between the two towns. Reportedly, the bypass will have an extension of approximately 27 miles and represent an investment of more than $20 million. Los Cabos is served by the San Jose del Cabo International Airport (SJD), located approximately ten miles north of San Jose del Cabo. In 2012, Aeropuertos y Servicios Auxiliares ranked SJD as the country s sixth busiest airport in terms of passenger traffic. The airport operates a two-milelong runway that accommodates large aircrafts and has two commercial terminals, a general aviation terminal and an FBO (Fixed-Base Operator) terminal. A total of 22 airlines service SJD including American Airlines, Alaska Airlines, US Airways, United Airlines, Airtrain, Delta Air Lines, Virgin America, Air Canada, Volaris, Interjet and Aeromexico among others. In 2009, SJD experienced a 15.1-percent decrease in passenger arrivals attributed to the economic downturn in the US (Los Cabos top feeder market), which caused a significant contraction in leisure travel to the destination. However, over the last three years, passenger traffic to SJD has experienced a strong recovery, growing a cumulative 20.8 percent through On November 1, 2012, Grupo Aeroportuario del Pacifico (SJD s operator) inaugurated SJD s Terminal 2 following an estimated $80-million infrastructure investment. The new international terminal accommodates higher flight and passenger volume; features expanded public, check-in and boarding areas as well as improved ancillary services. The opening of Terminal 2 has rapidly translated into a higher number of arrivals as evidenced by year-to-date (YTD) figures which show a 14.6-percent increase as of September 2013 compared to the same period last year. Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 2

3 SJD Airport Statistics Passenger Arrivals (2006-Y TD 2013) Year Domestic International Total ,036-1,064,003-1,338, , % 1,030, % 1,426, % , % 1,014, % 1,466, % , % 849, % 1,245, % , % 980, % 1,366, % , % 997, % 1,400, % , % 1,058, % 1,504, % YTD 2012 (1) 304, ,190-1,014,125 - YTD 2013 (1) 317, % 844, % 1,161, % (1) YTD figures through September Source: Los Cabos Hotel Association, Grupo Aeoroportuario del Pacifico and Aeropuertos y Serv icios Auxiliares Cruise Industry Historically, the port of Cabo San Lucas has been positioned among the top Mexican destinations in terms of cruise ship arrivals. However, arrivals have significantly declined since 2009 reaching only 160 vessels and less than 400,000 passengers in In 2013, local port authorities estimate that only 120 vessels with approximately 300,000 passengers will arrive to the port while 2014 projections are anticipated to improve marginally to approximately 144 vessel arrivals. Beyond the evident decrease in cruise travel as a result of the downturn in the US economy, security concerns have also played a major role in the negative trends experienced by the destination, resulting in several route cancellations from major cruise lines. Despite the challenging outlook, authorities have expressed their commitment to improve the performance of the industry noting that numerous meetings with cruise line representatives Cabo San Lucas Port Cruise Ship Arrivals and Passenger Volume ( ) Year Cruise Ship Arrivals Number of Passengers , % 675, % % 818, % % 667, % % 699, % % 583, % % 392, % Sou rce: Tou rism Prom otion Cou ncil w ith statistics from Mexico's Central Bank have been held in an attempt to guarantee the safety of all cruise ship passengers traveling across the Mexican Pacific, and reactivate the cancelled routes. Tourism and Visitation As previously noted, tourism has become an integral part of the economy in Los Cabos. The destination s geographic location and quality of infrastructure have positioned it highly within the international tourism arena although it primarily maintains a focus on the North American market. Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 3

4 Visitation to Los Cabos, as measured by the number of tourist arrivals to the destination, has experienced a significant recovery following the US economic downturn that began in 2008 and the H1N1 alert issued in The recovery has been primarily led by domestic visitors which have recorded continued growth since 2010 and by 2012 accounted for approximately 30 percent of the total tourist arrivals. By comparison, the domestic market only accounted for 21 percent of total arrivals in 2008 when Los Cabos recorded the highest number visitors over the last 10 years. In contrast, international visitation to Los Cabos did not improve until 2011 when total tourist arrivals increased from 803,669 to 900,921, or 12.1 percent compared to Unlike domestic visitation, international arrivals are yet to reach the record levels experienced in 2008 despite the 14-percent cumulative growth experienced between 2010 and YTD figures as of September 2013 nonetheless, already position international visitation 19.3 percent above the same period last year while total visitation is 13 percent higher, paving the road for yet another milestone in the recovery path of tourism in Los Cabos. Los Cabos Visitation Statistics Tourist Arrivals ( Y TD 2013) Year Domestic International Total , ,981-1,072, , % 854, % 1,095, % , % 1,020, % 1,290, % , % 937, % 1,201, % , % 803, % 1,120, % , % 900, % 1,237, % , % 917, % 1,268, % YTD 2012 (1) 269, , ,244 - YTD 2013 (1) 262, % 804, % 1,067, % (1) YTD figures through September Tourist arriv als represent the number of tourists registered by lodging establishments in the destination Source: Los Cabos Hotel Association and SECTUR Resort Residential Market A primary vacation destination in Mexico with much international appeal, Los Cabos has an established brand image as a high-end vacation and residential market. In the resort residential segment, the destination has recently drawn much of its buyer demand from European markets due to the a recent agreement between Snell Real Estate and Engel & Volkers, a German, luxury real estate brokerage firm that has broadened the buyer universe beyond the historically strong North American market. Since the US economy entered a recession, the second home vacation ownership market in Los Cabos has yet to recover as it has primarily reported an overall slow pace of sales over the last few years. Reportedly, average absorption rates in Los Cabos are at approximately one or less units per month with little buyer appetite for lots and the majority of the demand leaning towards turn-key product. The majority of the transactions that have recently taken place are Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 4

5 unit re-sales and very few developer sales. This trend has negatively impacted the market s pricing as re-sale discounts have ranged between 30 and 45 percent in some cases. Conversely, the discounts reported by developer-owned inventory that has traded have not exceeded 20 percent for the most part, as developers continue to wait for the market to recover. Lodging Supply and Demand Analysis Following the downturn in the US economy in late 2008 and the corresponding negative impact on the lodging industry in the US and Mexican resort destinations through 2011, the hotel market in Los Cabos appears to be recovering. The destination s lodging demand, measured by the number of occupied room nights, experienced a Compounded Annual Growth Rate (CAGR) of 5.4 percent between 2006 and 2012 and a cumulative increase of 37.1 percent during the same period. Furthermore, YTD results as of September 2013 indicate lodging demand is 8.7 percent higher than 2012 results for the same time period. Despite the improved demand, market wide occupancies have experienced a lagging recovery given the high supply levels recorded, which increased at a CAGR of 7.2 percent between 2007 and This growth in room supply diluted the effect from higher demand and drove occupancies down particularly from 2007 to 2010 when the destination experienced a percent supply increase primarily driven by lodging developments that were under construction at the peak of the lodging cycle when the US economy entered a recession. However, consistent with current development trends in Mexico, the lodging market in Los Cabos has remained relatively unchanged since In fact, YTD figures report room supply is only 1.9 percent higher than the same period last year. This trend bodes well for future development plans in Los Cabos, as lodging demand continues to improve and get absorbed by the available room supply, setting up the fundamentals for new hotel construction to capture latent demand. Over the years, Los Cabos has been able to position itself as a tourist destination that has successfully targeted the luxury customer segment characterized by high income, desire for amenities and extensive selection of activities. As a result, the lodging market in Los Cabos has historically achieved some of the highest rates among Mexican resort destinations such as Cancun, Riviera Maya, Puerto Vallarta and Ixtapa-Zihuatanejo. At the peak of the lodging cycle in 2006 for instance, Los Cabos reported an Average Daily Rate (ADR) of $201 while Riviera Maya reported an ADR of $140. Faced with increased supply, a challenging economic outlook and the need to maintain lodging demand flow to the market, hoteliers engaged in rate discounting resulting on a 20-percent decrease in ADR between 2007 and In spite of this, rates have consistently improved over the last few years, increasing a cumulative 8.7 percent between 2010 and Interestingly, YTD results as of September 2013 indicate ADR is a remarkable 21.1 percent above rates experienced in the market over the same period last year. However, it is important to note that this notable growth responds to a recent shift in market trends. According to the Los Cabos Hotel Association, a number of European Plan hotels have introduced all-inclusive packages to Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 5

6 their guests, thus increasing the rates reported. Although this trend clearly overstates the rate of ADR growth from 2012 to 2013, it also evidences the market s attempt to provide more value to the customer. In a lodging environment where travelers have become more rate-sensitive and appreciate having a budget when vacationing, the all-inclusive concept appears to be gaining momentum in Los Cabos and demonstrates that the American market has gradually become more amenable to the concept. Los Cabos Lodging Market Supply and Demand Trends ( YTD 2013) Year Available Room Nights Occupied Room Nights Occupancy % ADR RevPAR ,913,532-1,991, % - $201 - $ ,058, % 1,995, % 65.2% -4.6% $ % $ % ,525, % 2,001, % 56.8% -13.0% $ % $ % ,878, % 2,027, % 52.3% -7.9% $ % $ % ,273, % 2,425, % 56.8% 8.6% $ % $91 9.2% ,308, % 2,541, % 59.0% 3.9% $ % $ % ,410, % 2,733, % 62.0% 5.1% $ % $ % YTD 2012 (1) 3,299,835-2,051, % - $175 - $109 - YTD 2013 (1) 3,361, % 2,229, % 66.3% 6.7% $ % $ % (1) YTD figures through September Source: Los Cabos Hotel Association and SECTUR Additions to the Lodging Supply The recovery experienced by the lodging market in Los Cabos, in addition to the relatively small increase in supply over the last couple of years have reactivated the interest from investors and the development activity in the market. Reportedly, a total of approximately 1,700 rooms in various stages of development are anticipated to be added between 2013 and 2015, representing an estimated increase of approximately 12.5 percent to the existing lodging supply. Among the most notable planned additions is the 124-room Ritz-Carlton Reserve to be developed by a joint venture between Trinity Investments, LLC, a US resort developer and investor based in Hawaii, and Grupo Questro, led by Mexican real estate entrepreneur Eduardo Sanchez Navarro. The property will be located within the 2,000-acre, master-planned resort community of Puerto Los Cabos located approximately 20 minutes from SJD and five minutes from San Jose del Cabo. The resort community will also include the 500-room Secrets Puerto Los Cabos, reportedly representing an investment of approximately $130 million and scheduled for opening on December 15, Finally, a JW Marriott is also planned to be part of the resort offering at Puerto Los Cabos. The hotel will extend across 14 acres and will feature 300 rooms, and 820 feet of beach frontage. Reportedly, the hotel will be operated by Operadora Punta Peninsula, S.A. de C.V. and is owned by Grupo Diestra, a Mexican hotel group with over 65 years of industry experience which also partnered with Marriott International for the development and opening of the 221-room JW Marriott Mexico City Santa Fe last year. Additional projects include Mexico-based Hoppi s Hydawhey, LLC plans to develop the 200- room Arroyo Grande Resort & Spa with an estimated investment of approximately $160 million that will also include the development of a golf course, reportedly. Hyatt Hotels & Resorts, Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 6

7 which recently inaugurated the 157-room Hyatt Place in San Jose del Cabo, has plans for the development of a 196-room Park Hyatt including 36 branded residences to be located within a master-planned golf resort community. In the limited-service segment, Grupo Hotelero Latinoamerica is currently developing a 90-room Holiday Inn Express in Cabo San Lucas with a reported investment of approximately $7 million and an anticipated opening during the first quarter of A complete list of all the known additions to the lodging inventory in Los Cabos is illustrated in the table below. Los Cabos Lodging Market Planned Additions to the Lodging Supply ( ) Hotel Name Parent Company Development Stage Rooms (Anticipated) Opening Date Secrets Puerto Los Cabos AMResorts Under Construction 500 Dec-13 Unnamed Hotel N/A Under Construction 70 Dec-13 Holiday Inn Express Cabo San Lucas Intercontinenal Hotels Group Under Construction 90 Q Hampton Inn & Suites Los Cabos Hilton Hotels & Resorts Under Construction 101 May-14 The Arroyo Grande Resort & Spa Independent Final Planning 200 Jun-14 Delano Cabo San Lucas Morgans Hotel Group Planning 114 Dec-14 JW Marriott Los Cabos Marriott International Planning 300 May-15 Ritz Carlton Reserve Los Cabos Marriott International Planning 124 Jun-15 Park Hyatt Los Cabos Hyatt Hotels & Resorts Planning 196 Dec-15 Source: Smith Trav el Research and A&M Closing Remarks As one of the most prominent resort destinations in Mexico, Los Cabos will continue to thrive in the years ahead despite the challenges faced by the local lodging market and the international tourism industry as a whole. As previously noted, the destination s recovery is well under way with strong YTD increases in passenger arrivals and tourist visitation figures. In addition, fundamentals in the local lodging market have begun to stabilize. Supply has remained relatively flat over the last couple of years while occupancies and ADRs are trending upward. These developments have stimulated investors that remain confident and committed to the market s potential as evidenced by all the new projects in the supply pipeline. In short, the market appears to be at the brink of yet another resurgence that will reaffirm Los Cabos as one of the top-tier destinations worldwide. Alvarez & Marsal is a member of GlobalHotelNetwork.com and its Investment Committee. Copyright (c) 2013 Global Hospitality Resources, Inc., San Diego, CA USA. All rights reserved. 7