Hotels bullish on Puerto Rico despite Zika, drop in business

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The El San Juan Hotel will join Hilton's Curio collection.
The El San Juan Hotel will join Hilton's Curio collection.

Hotel developers and operators continue to invest in the Puerto Rico lodging industry despite two serious concerns: the impact of the Zika virus on leisure travel and a drop-off in meetings and conventions resulting from the expiration of a U.S. tax incentive that had made doing business on the island very attractive.

The Puerto Rico government announced last month that the island's first Four Seasons will open in Fajardo, on Puerto Rico's northeastern coast about 40 miles east of San Juan, by the end of 2018. The $230 million, 140-room project will be financed by Puerto Rico-based developer Flagship Services and New York-based DLJ Real Estate Capital, and it will receive about $15 million in government funding, according to Ingrid Rivera Rocafort, executive director of the Puerto Rico Tourism Co.

Next month marks the reopening of El San Juan Hotel, which changed hands in 2015 and shut down last August to receive more than $20 million in upgrades, including a new spa, a new restaurant and improvements to its 388 rooms. When it reopens, El San Juan, which debuted in 1957, will be Puerto Rico's first hotel to be flagged under Hilton Worldwide's Curio collection, a soft brand that enables the hotel to keep its name.

That activity follows up a spate of investments at higher-profile hotels in Puerto Rico, whose inventory of some 15,000 rooms is about a quarter of the Dominican Republic's and about three-fourths of Jamaica's.

The Caribe Hilton, which company founder Conrad Hilton opened in 1949 (Hilton still owns the property outright), received $8 million in upgrades in 2012, the same year $2 million was invested in the Hilton Ponce Golf & Casino Resort on the island's southern coast.

Two years later, the Sheraton Old San Juan underwent a $4 million renovation, while both the Embassy Suites in San Juan and Embassy Suites Dorado del Mar received upgrades in 2015.

"Puerto Rico is a growth market," said Juan Corvinos, managing director of development for Hilton's Mexico, Central American and Hispanic Caribbean regions. "Airlift is the biggest issue in the Caribbean, and low-cost carriers have pushed a lot of tourism toward Puerto Rico."

Still, after boosting its inbound tourism count by about 20% between 2012 and 2015, to more than 5 million visitors, Puerto Rico tourism activity flattened this year, as the combination of new air routes from low-cost carriers such as Southwest and Allegiant and more cruise-ship dockings was offset by fears over Zika.

In fact, the Centers for Disease Control and Prevention last February forecasted that Zika might infect as many as 700,000 people on the island, spurring Puerto Rico's tourism bureau to launch its Facts vs. Fear campaign the following month. So far, Zika has infected about 35,000 people, or about 1% of the island's population, according to Rocafort.

"The growth trend stopped, but we've been able to stay even with a year that was a record high, and we've been able to dispel some of the fears about Zika," Rocafort said. She added that the cold weather and early snow in New England also helped spur inbound tourism starting last month.

Puerto Rico's draw as a gaming destination appears to have faded in recent years. The casino in the Condado Plaza Hilton closed in 2015, while the InterContinental San Juan's casino shuttered in early 2016.

On the other hand, the latter closing appears to have motivated the owners of El San Juan, which is adjacent to the InterContinental on Isla Verde Avenue, to add more gaming tables to its 7,500-square-foot casino, which was remodeled in 2014, with hopes of attracting high rollers.

While Puerto Rico has an advantage over destinations such as the Dominican Republic and Jamaica because U.S. residents don't need a passport to visit, the inbound meetings and convention market has suffered because of dwindling tax advantages once enjoyed by U.S. companies that built plants in Puerto Rico, according to Scott Smith, managing director at CBRE Hotels.

A tower guest room in the renovated El San Juan Hotel, reopening Feb. 5.
A tower guest room in the renovated El San Juan Hotel, reopening Feb. 5.

Drug companies, especially, came to Puerto Rico in the late 1960s and 1970s to take advantage of a federal tax incentive that allowed U.S.-based manufacturers to send all profits from Puerto Rican plants back to the U.S. without having to pay federal taxes. That incentive has now expired.

As a result of the influx of U.S. companies, Smith said, "San Juan had some pretty strong demand Monday through Friday, but Puerto Rico has lost some of that corporate demand."

Hilton is counting on the combination of minimal new development and the relative familiarity and safety of Puerto Rico compared with other Caribbean destinations to keep its 5,000 rooms on the island occupied. (Four Seasons representatives declined to comment.)

Hilton has 11 properties in Puerto Rico, while Marriott International has five flagged under its legacy brands and five more that it gained last year with the acquisition of Starwood Hotels & Resorts.

One big unknown is whether or not the stigma of Zika fades soon enough for those newer and upcoming hotel investments to pay off.

"Puerto Rico is considered a safe Caribbean destination, as is Aruba and Grand Cayman," Smith said. "It's more Americanized than Jamaica or the Dominican Republic, and Old San Juan has a lot of culture. But that Zika virus is a real stigma, and you've had a lot of displaced demand that has gone to St. Thomas or St. Croix."

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