Key West, FL

Why Brightwild Loves the Key West Hospitality Market

Brendan Stone, Director of Real Estate

Key West may be known for its vibrant bar scene, key lime pie, maritime culture, rich Cuban influence, vibrant writer’s community, historic architecture and attractions such as The Hemingway Home and Southernmost Point. Here at Brightwild, we love Key West. We’re committed to being culture contributors in a place that many of our team members have called home for decades. We’re bullish on Key West as a place to visit, a place to live and a place to invest in hospitality real estate – and we think you should be, too. Here’s why:

Key West is the preeminent leisure market.

Over the past 32 years (1990-2022), the Key West lodging market averaged over 75% annual occupancy and 4.4% annual revenue per available room (RevPAR) growth, including the 2001 recession, 2009 recession and 2020 pandemic. In 2018 and 2019, the Florida Keys were the second ranked RevPAR market in the United States, surpassed only by New York City. The Florida Keys’ $302 RevPAR ranked first in 2022, outperforming top US markets by a wide margin, according to STR data (STR sets the standard for data intelligence and global benchmarking.) Despite RevPAR declines after the May 2022 peak, during the twelve months ending May 2023, Key West was still the second ranked RevPAR market in the continental United States, surpassed only by New York City (including Hawaii, Key West was the sixth ranked RevPAR market).

Given its extraordinary fundamentals, Key West’s lodging market has transformed into a target investment market for some of the most prolific institutions and high-net-worth families. When ranked amongst the top 10 U.S. markets tracked by STR, Key West has ranked #1 in RevPAR every year since 2015. Key West has also produced the highest RevPAR CAGR among all major markets since STR began collecting data.

Lastly, the magnitude of Key West hospitality market declines during recessionary pullbacks is muted when compared to other markets, making its risk-adjusted exposure highly compelling.

Key West has incredibly high barriers to entry.

Key West is incredibly land constrained, with a total area of just over 7 square miles and virtually no remaining development sites on the island. Hotel supply growth from 2002 to 2022 saw a CAGR of only 0.3%.

But in 1992, Monroe County adopted and implemented legislation known as Rate of Growth Ordinance. This legislation laid the legal framework for the county to regulate the development of both commercial and residential properties. The original basis for ROGO was to significantly limit any development in the Florida Keys to ensure that the entire population could be safely evacuated if need be.

Key West experiences absolute barriers to entry as the Monroe County Rate of Growth Ordinance (ROGO) restricts the amount of new hotel rooms coming online. Additionally, it is costly to develop given the extra layers of regulation, costs, and fees associated with environmental entitlements and employee housing.

For hotels, ROGO has essentially capped the number of transient development rights (TDRs) at the amount of existing hotel rooms in Key West. ROGO prohibits the creation of new hotel rooms throughout the county. To build a new hotel, a developer must first acquire and demolish an existing hotel, then use its TDRs to build the new project. TDRs are transferable (with restrictions) as well as exchanged on the open market.

Monroe County is designated as a county of critical environmental concern. This requires all major projects to be reviewed and approved at both the county and state level, which can significantly complicate and delay the entitlement process. For waterfront sites, there are often federal approvals required as well. It is not unusual in the Keys for development approvals to take five to 10 years or longer.

The Florida Keys have onerous employee housing requirements for hotel development, wetland mitigation requirements and a land development code limiting density to no more than 12 hotel rooms per acre.

We’re bullish on future Key West hospitality market performance.

Within the investment community, much attention has been given to the outperformance of the Florida Keys and other drive-to leisure destinations throughout the pandemic. As the following chart shows, Key West RevPAR declined precipitously early in the pandemic, saw a dramatic upswing throughout the pandemic, and has started reverting to long-term trend since its May 2023 peak. That said, Key West RevPAR is still at or above long-term trend as measured using two different methods.

Method One: In the below chart, the dotted blue line represents the long-term RevPAR trend based on pre-pandemic figures. Treating the exponential trend line as the correct measure of long-term performance, as of May 2023, Key West TTM RevPAR is still above trend in nominal terms.

Method Two: In this approach, we modeled Key West RevPAR and U.S. CPI from January 1988 through February 2020. The green line in the below chart represents what RevPAR would have been if it continued to grow at the historical, pre-pandemic multiple of CPI. This approach illustrates normalized RevPAR growth in contrast to the “double V-shaped” trend that resulted from pandemic-era demand dynamics. As of May 2023, inflation-adjusted Key West TTM RevPAR is approximately at trend, as shown by the intersection of the black and green lines.

The green line above was derived using the long-term historical relationship between Key West RevPAR and inflation, which points to 2%+ spread to inflation and a 1.8x multiple of inflation. This reveals that long-term Key West RevPAR growth is significant both in real and nominal terms, as reflected below.

Brightwild is a travel platform connecting people in real life through personalized experiences and standout stays. Our expert team of GEMs, one-of-one spaces and commitment to local culture ensures that when you stay, you stay real. At Brightwild, we don’t see your trip as an escape from reality. It’s a closer connection to it. Learn more today:

Sources: Smith Travel Research, CoStar, and internal company data