MEXICO CITY — The luxury and lifestyle hotel segments in Mexico have been changing to adapt to new guest expectations and financial requirements.
A generational shift is driving the changes in what guests expect from a luxury experience, said Carrie Wilder, senior director of market management, Mexico and Caribbean, at Expedia Group, on a panel at HVS' Mexico Hotel & Tourism Investment Conference.
“The privilege and the marble is out,” she said. “What’s in is being sustainable and being inclusive. That’s a different type of property.”
So many digital nomads traveled to Mexico during the pandemic and showcased inspirational travel through their social media channels, Wilder said. As a result, guests now crave unique experiences from luxury hotel stays.
Mexico “has been recognized a very, very long time by the high-end luxury traveler in North America as being a luxury market, and that's evidenced by the high performance in these resort markets,” said Phil Keb, senior executive of luxury brand growth, Americas, at IHG Hotels & Resorts.
In 2023, some of the highest performing hotels in Cabo and Puerto Vallarta had higher average daily rates and revenue per available room than some luxury hotels in Maui and Southern California, Keb said.
Luxury Hotel Ownership
The capital formation for luxury and lifestyle hotels typically falls into a couple categories, Keb said. One is high-net worth families, usually Mexican families, who have enough industry sophistication to take on the same decision-making processes as the big institutional holders.
The younger generations of these owner types are more interested in adding sustainable practices to the development of new hotels, he said. That could include water conservation and reclamation, reducing the use of plastics and minimizing the amount of land disturbed by the development.
Sustainability and wellness continue to play major parts in investors’ decisions, Keb said.
In a recent Expedia survey of 11,000 people, 50% said they were willing to pay more if they know a hotel matches their commitment to the environment through sustainable practices, Wilder said.
“From an investment standpoint, it's good to know and it's also important that the people value it when they book a hotel,” she said.
More institutional players are entering the hotel business in Mexico, said Nicolás Martinez, vice president of development for Mexico, Central America and the Caribbean at Accor. That includes both private equity as well as real estate investment trusts, called FIBRAs, or Fideicomiso de Infraestructura en Bienes Raíces.
The family offices are sophisticated, often with private equity as business partners, he said. That has changed the dynamic of the market and led to a lot of transactions.
Many luxury hotels owned by family offices were considered long-term holds as the families were not thinking about six-year exits, he said. However, with more institutional owners entering the field, more offices are taking exits into consideration.
Branded Residences
For most new developments in the luxury and lifestyle space, there’s a residential component attached because it changes the economics and shifts risk away a bit from the developer, Martinez said. It also changes the cash flow.
There was a lot of wealth created in the U.S. over the past several years, and many people from California in particular bought second homes in Mexico because it’s an easy flight, he said. Owners looking to develop a luxury hotel with branded residences may or may not keep the property for the next 20 to 30 years, but will have already sold a large part of the inventory with the residences.
Having branded residences complicates operations, Keb said, but it is an absolute necessity for luxury hotel projects.
Other than in mainland China, “I don’t think there are any projects being done today that don’t have some form of branded residence, whether it’s urban or a resort location,” he said.
The cost to develop luxury hotels can reach about $2 million a key, he said, even with lower construction costs in Mexico. Profits from the branded residences can help to make the necessary returns on investment until the hotel can ramp up.
In resort locations, owners often intend to use the branded residences for two to four weeks a year during breaks in the school year or festive seasons, he said. The rest of the year, they put it back into the rental program to get back their return on the investment.