Loading...
1674-15 Ian Schrager 31 of 42, 3 Terms mh SOUTH BEACH THRIVES, BUT PROFITS ARE ELUSIVE 03/16/1992 THE MIAMI HERALD Copyright (c) 1992, The Miami Herald DATE: Monday, March 16, 1992 EDITION: FINAL SECTION: BUSINESS PAGE: 7BM LENGTH: 140 lines ILLUSTRATION: map: South Beach SOURCE/CREDIT LINE: GREGG FIELDS Herald Business Writer MEMO: TOURISM SOUTH BEACH THRIVES, BUT PROFITS ARE ELUSIVE HOTELS SUFFER FROM LOW RATES, CLIMBING COSTS THE morning is gorgeous, more so, if that's possible, than the beautiful woman by the fountain at the Century Hotel on Ocean Drive. She smiles. Her blouse slides off of one shoulder. She draws a crowd. But the crowd is made up of photographers, makeup artists, lighting specialists. They're all needed to produce a perfect picture for a magazine layout, the illusion of a beautiful woman sitting casually by a fountain. Never mind that reality is something else entirely. Much could be said for the revitalization of South Beach. To the casual observer, it's an image of near-perfection. In recession-racked Miami, there are restaurants that are jammed; clubs that are crammed; traffic to he damned. The restoration of the historic Art Deco architecture is further along than even visionaries could imagine five years ago. But as with the fashion shoot, there are behind-the- scenes forces at work, not all of it pretty. Many hotels with beautiful facades are struggling. Their owners are juggling the explosive combination of cheap rooms, big mortgages and, if they're lucky, busy restaurants. There are many observers who think it is unlikely to produce profitable hotels. "The Deco district is an attraction, and as an attraction it has no parallel, " says Stuart Blumberg, head of the Miami Beach Resort Operators Association. "As a hotel district, in a multi-district market, it has a very tough time." Why? Partly because the hotels are smaller, which means they produce less revenue, frequently get cut out of lucrative big tour group and convention business, and are tough to advertise. Also, as with most historic districts around the country, property values have risen sharply over the last few years, sending operating costs soaring and making profits tougher to come by. And costs are soaring. In a trend that's both good and bad, rents on Ocean Drive are so high that businesses catering to locals are being squeezed out. The costs may be hurting redevelopment efforts -- there are still empty buildings on Ocean Drive -- but other businesses, ironically, are succeeding by targeting the upscale crowd. In a town with 10.6 percent unemployment, that primarily means tourists. In a benefit for the city, however, development is spewing west. Restaurants are blooming like bougainvillea on Washington Avenue, and Collins Avenue flashed in a national spotlight recently when former Island Records mogul Chris Blackwell opened the posh Marlin Hotel. And there's some migration to below Fifth Street, which long acted as a barrier to development moving south. Last week, the Portafino Real Estate Fund of Germany plunked down $13.3 million for a tract of raw land at the tip of Miami Beach. "The next development wave is going to be on Washington, and Collins will follow that, " predicts Kay Statz, president of Camp Development, a major player in rehab work. To understand it all, one must first accept that South Beach has its own peculiar economic laws, and they often run contrary to the rest of Miami. In a region where commercial property values have fallen for years, South Beach buildings cost almost twice as much as five years ago. In another strange twist, South Beach values have been falling recently despite the district's renaissance. Like the rest of Dade, however, South Beach is a tough place to get a loan. Five years ago, there were banks and savings and loans freely lending in the area. But most of those institutions were noted for being risk-takers, and a number of them -- like First American of Palm Beach, CenTrust Bank of Miami and American Savings of California -- later failed. Many other institutions got burned. The parcel bought by Portafino, for instance, was sold by Capital Bank. It took it back from a developer who defaulted. Banks are still making some loans in the area, but they acknowledge they're cautious. "We're very actively involved with the investors who are less speculative; who understand they have to put up their own money and not just the bank's, " says Monty Weigel, senior executive vice president at SunBank. A general rule is that a developer must first buy a building himself, renovate and operate it for about a year before getting a mortgage. One problem for banks is that property values, particularly on Ocean Drive, are soft. "Prices have leveled off and have also come down in some cases, " says Abel Holtz, chairman of Capital Bank. Five years ago, says Holtz, undeveloped Ocean Drive hotels could be had for $10,000 a room. A couple of years ago, the price was $30,000 or more. Today, it's more like $25,000 if the hotel has a bar or restaurant, or $18, 000-$20, 000 without. The result can be bruising. Some hoteliers took on huge debts when prices were soaring. Now they can't find financing to redo interiors. It's keeping room rates low and making profits elusive. "You can't support a $3 million mortgage, a night desk, security and all the other staff on a $40 room rate, " Holtz says. Even amid Ocean Drive's prosperity, then, some buildings sit empty. Others are in foreclosure and some for sale. Six hotels once controlled by the Royale Group, whose chairman was convicted of racketeering last year, are set to be auctioned. Statz, the developer, says the changes reflect a new era for South Beach real estate. Five years ago, redevelopment was being led by preservationists and somewhat idealistic speculators. Few had the money or management skills required. "The people who came here originally, who had the vision, were small operators and almost completely undercapitalized, " he says. Now, funding is increasingly coming from private pockets, especially out-of-towners and foreigners. Also, there's an embryonic trend toward converting Ocean Drive hotels into condominiums. And perhaps most significant of all, hoteliers are increasingly targeting the upscale, particularly the fashion industry that spends some $1 billion annually shooting layouts on the beach. It's an approach similar to the one used by the historic guesthouses in the Old Town section of Key West. "Our rates range from $140 to $190 nightly, and we' re shooting for 60 percent occupancy, " says Wendy Hart, who oversees the Marlin Hotel for Island Trading Co. The Marlin, opened in November at 12th Street and Collins, has 14 suites. Using Hart's figures, the hotel operation should generate roughly $500,000 annually. The hotel hopes to generate about as much from its 45-seat Jamaican restaurant. There's also a recording studio in the building. To recoup its investment, the Marlin's suites are being marketed as condominiums, at $100,000 to $200, 000 each. Two have sold. Island Trading manages them and will form a rental pool that leases them to tourists. Revenues are split 50-50. Island Trading also is renovating the Netherlands hotel on Ocean Drive -- spending some $6 million to produce 13 luxury condominiums. The group also owns The Tides hotel, sitting empty on Ocean Drive right now. Statz, the developer, believes South Beach has dazzling potential in upscale European tourists. To tap the market, however, American managers must rethink their methods. "The big guys need 200 rooms to make a profit, " says Statz, a Germany native. "This is a different concept." Still, there's some question about how many upscale travelers will stay in South Beach. What appears to be happening now is affluent people spend their evenings there, then retreat to more exclusive lodging elsewhere. One problem may be noise; many hotels depend on lively bars and restaurants. Chase Burritt, a Miami hotel industry consultant, believes another obstacle is marketing. "If you could buy six hotels and put together one coordinated front desk, and sell them to European wholesalers as luxury rooms -- that could work, " he says. If there's one point on which everyone agrees, it's that South Beach's gains of the last five years are real; they're going to last. But if the neighborhood needn't worry any longer about the price of failure, say observers, it still must concern itself with the costs of success. 'It has to build on its strengths, and make them stronger, " says Blumberg, of the resort operators group. "So that in five years everybody doesn't say, 'I didn't think this could happen. ' " KEYWORDS: TOURIST MB TAG: 9204140828 4- Exit :4