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Key West Commercial Real Estate
Key West Lodging Property Market Update
June 20, 2019 | Keith Bland

When the year-end 2018 Smith Travel Research (STR) report for Key West and the Florida Keys was released, it lent credence to the fact that the downward market correction of the past two years, due to both a large number of new and renovated rooms coming online and Hurricane Irma, is turning around—although the effects of the national news incorrectly reporting major hurricane damage in Key West lingered. STR is the gold standard in hotel data benchmarking for more than 6.8 million hotel rooms worldwide and provides valuable information for the Key West lodging market. Let’s once again review the events of the past few years concerning our market and then take a look at the 2018 report and reports from mid-year 2019 and attempt to put it all in perspective.

​As mentioned in previous newsletter articles, you will note several terms with which you might not be familiar. Occupancy rate is simply the percentage of hotel rooms occupied, let’s assume 85% for this example. Average Daily Rate, or ADR, is the average base rate, before taxes, that hotels charge per room, let’s assume $275. And Revenue Per Available Room, or RevPAR is equal to occupancy rate times the ADR (85% x $275 = $233.75 RevPAR).

Recent History, The Flood of Supply, & Irma

2016 and 2017 saw the first decreases in occupancy and ADRs in Key West since the Great Recession of 2008. The year-to-year increases of occupancy and particularly ADRs from 2009 to 2015 were simply unsurpassed. In fact, in 2015, per the STR report and as reported by our Tourist Development Council, Key West was the highest RevPAR market in the United States. Revenues had increased an unprecedented total of 65% in only 6 years, far outpacing other U.S. markets.

These huge rate increases were unsustainable even in a healthy supply/demand market and predictably began to waiver in 2016. Besides the anticipated hyper-growth correction, the Key West hotel market of 4,542 rooms was forced to absorb 20% of its total inventory in the form of 371 new hotel units in Stock Island and at The Marker Hotel in addition to the 519 renovated rooms in New Town that came back online in 2016-2017 after being out of commission for several years. And then, added to those two significant market factors, Hurricane Irma slammed into the Lower Keys, and the national media inaccurately reported that ‘the Keys were destroyed’. Clearly some areas were badly damaged, as our friends and neighbors up the road can sadly attest, but Key West was spared for the most part and was ready for business within a few weeks. That revised message never got out to the world and the perception by potential guests for many months continued to be that Key West was no place to spend a vacation. This flawed assessment sadly carried on into 2018.

The STR Reports and Forecasts

Because of the aforementioned market factors and forces, the 2017 STR report saw a RevPAR decrease of 5.5% from 2016 for Key West Small Properties. With the newly released report, however, for the period 2017 to 2018, RevPAR began to climb back up for boutique hotels, increasing 4%. Both

Occupancy and ADRs increased during that period, and overall, Key West lodging properties’ RevPAR increased 5%.

Added to the increases for the past year, the fact that Key West has the highest barrier to entry market in the United States with our ROGO protections combined with our critical need for workforce housing, and the restrictions on issuing new transient licenses (hotel rooms) tightening even more over the past year, a fix of the supply side is practically ensured for the foreseeable future.

STR is also projecting another year of positive RevPAR growth (2.4%) for the US Lodging Industry in 2019, and Key West is always among the top destinations, signaling consistent and increased demand.

As far as the investment outlook, Blackrock’s annual research on the Investment Managers sector shows institutional investors plan to increasetheir allocations to real estate and private equity in 2019 as they retreat from the volatile equities market – another positive sign for property values.

Given Key West’s highly regulated supply side combined with projections of growing consumer demand, the trajectory of RevPAR and value for the hotel investment market in Old Town Key West is once again trending upward and the 2018 STR report is evidence that the positive trend began. The mid-year 2019 reports from property owners in Key West reveal this upward trend has now reached pre-2016 revenues once again.