Hundreds of new investors have joined in on multiple deals with vertically integrated commercial real estate investment, development and lending platform Driftwood Capital, which President and Chief Operating Officer Carlos Rodriguez Jr. said is proof that hospitality is ripe with opportunities.
Over the past year, the Coral Gables, Florida-based firm that specializes in hospitality has welcomed more than 500 new investors, with 120 of them having invested in multiple deals, he said. Driftwood Capital was founded by Rodriguez and his father Carlos Rodriguez Sr. in 2015. According to its website, the firm has 1,200 active investors, 80 hotels in its portfolio and more than $3 billion in hospitality assets under management.
"There's definitely a sentiment that hospitality is the play today. [Investors] are focused on those leisure markets; they've seen how resilient, especially in the Sun Belt, leisure was even with COVID," Rodriguez Jr. said.
He said many of the early investment players have been seasoned commercial real estate investors who are looking to diversify their portfolios as the multifamily sector lags.
While in May there was a rotation of investors entering the hospitality industry, that activity has slowed somewhat since due to economic and geopolitical issues, , he said.
"I think that's going to pick up as the summer proves out what we're seeing in hospitality and [investors] settling in that 'Yes, this does make sense; I want to put my money here versus keeping it under the mattress,'" he added.
Recent Transactions, Development Activity
Rodriguez Jr. said it's been a difficult market to acquire hotels due to lack of supply.
"People were expecting the low interest rates to run a little bit longer and were caught by surprise. With that, going into the [NYU International Hospitality Investment Conference], we did go out to market with two hotels — a Canopy in Tempe, Arizona, and one in West Palm Beach — and at NYU we launched two more: The Hampton Inn in Daytona Beach and the St. Augustine DoubleTree," he said.
The latter two properties have performed well amid the pandemic, being that they are in leisure or beachfront markets. He noted "there's really not much out there on the market that fits that profile," as some owners are choosing to hold those assets instead of listing them.
Rodriguez Jr. said the time was right to list those four properties because there's such high demand for that product.
"We don't want to let these go but we need to put these out on the market and hopefully keep management," he said.
Driftwood is also focused on positioning current assets for growth, including a $20-million renovation of its 278-room Scottsdale Resort at McCormick Ranch, which the company purchased for $113 million in February 2022 from Junson Assets Management. Driftwood is positioning it as a Curio Collection by Hilton.
"It's just starting to ramp back up in that market, given that Scottsdale is also heavily group-reliant. It had been missing that [business] base," he said.
Driftwood is also well underway on its design for the development of the $185-million mixed-use Riverside Wharf in Downtown Miami that includes a 165-room Dream-branded hotel. Driftwood entered into joint venture agreement with MV Real Estate Holdings in late 2021 for this project.
Following its acquisition of the 240-room Sheraton Old San Juan Hotel in 2021, Driftwood was also able to purchase the adjacent parking garage for a three-block, mixed-use project with significant retail.
"We are very excited to create an extensive value-add play there. Puerto Rico has seen tremendous growth, kind of like Florida, with a lot of economic incentives as well," he said.
Driftwood's plans for the new $388-million development of the Westin Cocoa Beach resort and conference center has hit a hurdle in securing financing, Rodriguez Jr. Plans for the project were officially submitted to the city planning board in 2020.
Financing is "the biggest challenge today," he said. "We've been working with the city to get a grant for the conference center there that's going to bring a ton of demand to the area. ... We're kind of being strategic about when we go back out to capital markets."
Timing of Renovations a Challenge
Rodriguez Jr. said more thought must be given to the timing of renovations and the repositioning of properties.
"Obviously you don't want to disrupt something that is still ramping up significantly," he said. "And a lot of owners are changing brands. We're doing a bunch of conversions to Tribute, Tapestry and Curio; you have to be able to hit it on that improvement, whether it's on food and beverage or rooms or all of the above. That's not always easy to do with rising costs [and delayed] shipping."
Rodriguez Jr. said this presents an opportunity for Driftwood to purchase assets that aren't fully realized and then turn around the asset by adding value for guests.
Areas of Opportunity
The economy segment of the hotel industry has recovered more quickly than others from the pandemic, and Rodriguez Jr. said opportunities in the segment remain. In the earlier days of the pandemic, the luxury segment lagged. However, he now predicts a healthy improvement for that chain scale along with upper-upscale hotels.
"From a development standpoint, that mixed-use, experiential upper-upscale segment is something that we're trying to [go after]," he said. "We are doing a couple of Elements, which has that extended-stay component, but we're doing those in markets that have extremely high demand for it.
"I'm bullish on that. It's going to be very hard to get development deals done, [but] you're going to need to have new product coming out of [the pandemic]" as guests have shifted their taste and preferences, he added. "By the time we're opening these hotels, hopefully the [macroeconomic] noise is gone, we're normalized and we're the newest kids on the block for quite some time."