Despite a very tough year for Mexican tourism, some positive results demonstrate resiliency.

International tourism visitation collapsed globally by more than 73% in 2020. The decline was felt in Mexico to a lesser extent — a 46% drop versus the previous year, according to the Mexican Ministry of Tourism.

Considering the circumstances, Mexico tourism outperformed on a relative basis and actually became the third most-visited destination worldwide during the pandemic year, according to a recent ranking issued by the World Tourism Organization.

By comparison, China had 84% fewer tourists than in 2019, while Spain had 76% fewer international visitors, and the United States had 72% fewer tourists.

Nevertheless, Mexico’s national GDP decreased by about 8.5% in 2020, of which 2.4% is attributed to these important tourism declines, according to researchers at Anahuac University in Mexico City.

Indeed, the sector suffered significant economic pains, job losses and fiscal deficits in 2020.

Although Mexican tourism still faces some headwinds, this summer travel season is likely to jump-start a rebound for this crucial sector.

Looking back over the past year, Mexico faced significant tourism constraints due to the pandemic, including local government mobility and capacity restrictions, the closing of the U.S.-Mexico border to non-essential travel, the suspension of all flights from Canada during the 2021 high season, and the introduction of a travel warning and a PCR test requirement to visitors from the United States.

As a result, Mexico’s hotel industry was affected and only achieved roughly 26% occupancy in 2020 versus 60% in 2019, according to the Ministry of Tourism.

However, the Mexican resort/leisure segment suffered less — achieving 30% average occupancy — than their urban/corporate counterpart — with 23% average occupancy — in 2020. Not all urban markets, however, suffered to the same extent, as lodging demand performance in this segment was divided by the type of corporate demand into “boots” versus “suits” travelers.

“Boots” tourism comprises manufacturing businesses related to exports, with the strongest demand exhibited in northern border cities — with 33% average occupancy. By comparison, “suits” demand, which includes businesses related to services, sales and multinational firms — especially in large cities like Mexico City, Guadalajara and Monterrey — was softer with an average of 24% occupancy, due to companies’ travel restrictions.

Overall, stronger relative performance in resort destinations and “boots”-oriented industrial cities offset losses in other market segments.

Certainly, Mexico’s decision to not impose restrictions for international visitors, as well as the proximity, connectivity and recognition of its tourism destinations for the North American market, helped attract more than 5.3 million tourists from the United States — representing nearly 69% of all international arrivals — in 2020.

Looking ahead, Mexico's tourism industry experts expect a summertime travel boom by vaccinated U.S. and Canadian visitors, supported by easing travel restrictions and anticipated border reopenings, to jump-start a tourism sector rebound.

In fact, leveraging future-looking data from STR’s recently introduced Forward STAR report in Mexico, the Riviera Maya market occupancy on the books for the next 60 days reveals an average 55% base occupancy for the upcoming summer period, which should help revenue optimization strategy efforts.

Adversity often exposes vulnerability. As Warren Buffett once said, “You only find out who is swimming naked when the tide goes out.”

This has proved true in Mexico over the past year, as numerous independent hotels, domestic brands and small- to medium-sized managers sought to improve their chances of survival, operating performance, complementary distribution and competitive scale by pursuing deals with larger solid stakeholders.

Several examples of recent soft-brand conversions of existing properties in Mexico include:

• Marriott’s Autograph Collection licensed five all-inclusive resorts in the Cancun area.
• Hilton’s Curio Collection signed hotels in Monterrey and Tulum.
• Posadas’ Curamoria Collection landed in Queretaro, San Miguel de Allende and Tulum.

In fact, the most branding activity and changes in management have occurred in the Riviera Maya, especially in Playa del Carmen and Tulum.

For instance, tech-enabled Life House Hotels forayed into Mexico and took over branding and management of three Cotelier Hotels in Playa del Carmen.

Similarly, all-inclusive operator Playa Resorts assumed management of a newly introduced Tapestry by Hilton boutique hotel in Playa del Carmen through a small yet creative deal with Fibra Hotel, Mexico’s largest hotel real estate investment trust.

The Tulum submarket has also been active with the openings of international hard-branded lifestyle hotels such as Aloft, Kimpton and Esplendor.

Interestingly, the Aloft and Kimpton properties in Tulum involve franchises with third-party-managed structures by professional operators like Highgate and Presidente, respectively.

Certainly, the consolidation between third-party managers at the property and corporate levels will continue post-pandemic.

In fact, the largest global independent hotel manager, Aimbridge Hospitality, just acquired Grupo Hotelero Prisma in Mexico, which will strategically expand the company into Latin America.

Additionally, numerous alliances were established during the pandemic to enhance distribution:

• Hoteles City Express partnered with Aeromexico’s loyalty program for business travelers.
• PriceTravel linked with Food & Travel and Disney Destinations for cross-selling efforts.
• Marriott Bonvoy introduced a cobranded travel credit card with Banorte for consumers.

Besides the continued entry of cross-border hospitality players and the exploitation of commercial synergies, other newer home-grown competitors are demonstrating agility and introducing liquidity to the Mexican hospitality sector.

As mentioned last year, several emerging hospitality groups like local chain Hotsson Hotels — with recently planned openings in Mexico City, Tequila and Tijuana — are playing offense and gaining share; and other new market entrants are leveraging technology to grow in Mexico and eventually throughout Latin America.

Accordingly, domestic alternative accommodations startups like Ancana and Casai are joining international unicorn lodging platforms like Sonder and Oyo with new projects in the region.

SoftBank invested $75 million into its Oyo Latin America venture that assumed operations of 1,000 hotels in Brazil and Mexico in 2020. However, in early 2021 the company pulled out its physical presence and moved to a digital-only model run from India due to the pandemic’s consequences.

Notwithstanding COVID-19, patient local capital was still available for some developments.

Notably, Monific is an innovative fintech platform that emerged during the pandemic and is eyeing crowdfunded investments for eight boutique hotel projects.

A few other high-profile developments were also announced by non-traditional investors including a Rosewood Hotel & Residences in Mexico City and a Dreams Resort and separate Hyde Resort & Residences in Mazatlán.

The proposed Rosewood is sponsored by premier real estate development firm Grupo Sordo Madaleno, which recently launched Fibra SOMA, a diversified Mexican REIT. The two Mazatlán examples are backed by large agricultural-focused family enterprises.

Indeed, all three developments and the following acquisitions demonstrate investor appetite for portfolio diversification and for increased exposure to dollar-denominated operating assets.

Disconnects in valuations, among other dynamics, curtailed a wave of transactions, but a few deals materialized over the past few months, mainly between publicly traded sellers that were stretched for liquidity and had to offload some non-core assets to raise cash, and well-capitalized private family group buyers that took advantage of the timely situations.

For instance, Playa Resorts sold two different all-inclusive resorts for a combined consideration of $89.5 million — with 601 total rooms — in the Riviera Maya to separate domestic private investors for a blended sale price of roundly $149,000 per room, which represents about a 50% discount to replacement cost or about a 30% discount to pre-pandemic values, excluding renovation costs.

Despite the sale, Playa Resorts was able to retain management of one of the assets and actually sign another capital-light management agreement with the same owner.

Besides a few single-asset deals that were consummated, or are in the process of closing like the St. Regis in Punta Mita, numerous other portfolios and platforms were put up for sale by legacy family-owned companies, such as the Welk Resorts sale to Marriott Vacations Worldwide Corporation, which included a resort in Los Cabos.

On the public lodging markets front, various members of the respective control groups and management teams increased ownership stakes in their companies through share purchases, demonstrating their belief in the long-term prospects of the Mexican hospitality sector.

Yet, near-term political issues still present headwinds inhibiting an accelerated tourism recovery.

Mexico’s ongoing sociopolitical and security issues and uncertainty stemming from the June 6, 2021, midterm elections present challenges to its economic and tourism recovery, especially for corporate travel.

Additionally, recently introduced legislation involving a 15% increase in the minimum wage, an overhaul of the electricity law that will impact energy costs and an end to the outsourcing of labor have certainly curtailed economic competitiveness.

Despite higher labor and energy costs, leaner operations introduced during the pandemic should generate 2% to 3% better operating margin efficiencies for hotels going forward.

Furthermore, Mexico’s exchange rate remains favorable and the benchmark interest rate is at 4% — a five-year low — which is helping sustain cash flows. As of March 2021, however, inflation is creeping up to about 4.12% and must be controlled.

Another positive economic driver is the United States-Mexico-Canada Agreement, which generated critical industrial activity throughout the pandemic, and will continue to benefit Mexico’s economy, as companies rethink their supply chains and pursue near-shoring and re-shoring to reduce logistics and production costs and alleviate intellectual property concerns.

In summary, an analysis of Mexico’s 2020 tourism performance and 2021 outlook revealed these key themes:

• Mexican tourism fared better than the 2020 global market performance average.
• Mexican tourism performance represents a tale of two segments, with the resort/leisure market suffering less than its urban/corporate counterpart.
• Facing adverse conditions, vulnerable Mexican hospitality groups are pursuing a flight to quality.
• New market entrants present competition and liquidity in Mexico.
• Despite the downturn, deals were done.
• Ongoing political and security issues in Mexico still pose challenges for 2021 but favorable factors have also emerged that will benefit the tourism industry.

Ultimately, barring any major problems with the 2021 midterm elections, Mexican tourism should continue to rebound and recover over the next few months and into next year. ¡Arriba y Adelante!

Jonathan Kracer is the Managing Principal of Sion Capital, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions. Contact him at info@sioncapitalco.com.

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