By Derek Gale, Senior Editor -- Hotels, 2/1/2009

The 220-room Nikki Beach Resort & Residences Playa Blanca is set to open this summer.

PANAMA CITY

Given that volume, Panama soon will overtake the ever-popular market of Costa Rica as the hottest development destination in Central America.

Panama City, where more than half of the country's 17,000 existing hotel rooms and most of the development projects are located, offers a perfect combination of business and leisure activities, according to Alvaro Diago, area president for IHG in Latin America. Diago works closely in that market with Herman Bern, a prominent local developer who has built, owns and manages two InterContinental properties, a Crowne Plaza and most recently a Holiday Inn hotel near the Panama Canal with an attached hotel school.

Bern's company, Empresas Bern, plans to open and manage another three hotels this year, according to Herman Bern Jr., who handles the Bern Hotels & Resorts division. Those projects include an exclusive 20-villa cluster within an existing residential development adjacent to the company's InterContinental Playa Bonita Resort & Spa (planned for March); a 118-room Le Méridien hotel occupying the lower floors of a central Panama City condo building (set for a summer opening); and, by the end of the year, a 40-key hotel component for an existing residential project in the Coronado Beach area.

Bern Jr. notes that Panama City is booming with hotels and brands, and that the market was looking for something different—something upscale, with a more European flavor. Le Méridien was a good fit—a European-heritage brand with a renewed energy and a lot of new openings, he says.

And while Panama has not been extremely successful in attracting the Europe markets as yet (Europeans now make up only about 10-15% of visitor arrivals), Bern Jr. says he sees great potential in those markets, especially with KLM's late 2008 announcement that it would increase from three to five the number of weekly direct flights from Amsterdam's Schiphol Airport to Panama City.

Some 210,000 Europeans visited Panama in 2008, nearly twice as many as the year before, according to Carl-Fredrik Nordström, sub-administrator general of the Autoridad de Turismo Panama (ATP).

Panama continues to reach out to Europeans, with the tourism authority spending serious money on the second stage of a global public relations and advertising campaign that is now targeting Western European tourists specifically.

Part of the reason for the prevalence of Panama City hotel projects is the market's performance, and perhaps equally important is the availability of financing.

In 2007, Panama climbed to second place in the world in hotel occupancy on the Deloitte Global Ranking Index, with 84.7% occupancy. The same year, the country also saw nearly 38% RevPAR growth—the best in Central or South America.

For 2008, international branded properties in Panama City performed at about 78% occupancy and an average daily rate of near US$175 per night, according to Rogerio Basso, a hospitality analyst with Ernst & Young in Miami.

Meanwhile, Panama City is a financial center, with many large international banks operating there, as well as strong national banks. And the banks understand the lodging industry's supply-demand equation (the ATP's Nordström says the country needs another 7,000 rooms by 2010), and have found the hotel industry in Panama to be very stable.

With that combination, plus tax incentives from the country's government to encourage foreign investment in hotel and tourism development, there are projects aplenty.

Some of the other Panama City developments under way include the 300-room Renaissance Panama Hotel Financial District (opening 2011) and the 150-room Buddha Bar Hotel & Spa Panama (set to open at the end of the year), from Revat Group, the developer representing Hospes Hotels & Moments in Latin America.

The owner of Canal House in Panama City's Casco Viejo plans more boutique hotel properties in the old quarter.

Then there's Panama City's Casco Viejo—the old quarter—a UNESCO world heritage site that holds great potential as a tourism attraction. A number of boutique hotels are in the works in that area, including two projects from Conservatorio SA, a local developer dedicated to the area's revitalization.

Most of the new rooms under development outside Panama City are in the Farallon or Playa Blanca area, which the ATP's Nordström calls the “Panamanian Riviera.” He says this stretch of land about 120 km (75 miles) from the city on Panama's Pacific coast is one of the areas that holds the most potential for investors and developers.

Projects already under construction there include the Playa Blanca Beach Resort, Spa & Residences; the 126-room Bristol Buenaventura and villas (opening this month); the 220-room Nikki Beach Resort & Residences Playa Blanca (set for a late summer opening); and SuperClubs' 330-room all-inclusive Breezes Playa Blanca.

Despite the global economic downturn, Panama's economy remains strong—the country expects GDP growth of 8% this year, Nordström says, and while work on hotel projects has slowed slightly, construction permits are up 35%, he says.

Expansion projects at existing internationally branded hotels are ongoing as well. “Things have not stopped because of the recession,” says Jorge Loaiza, president of the Panamanian Association of Hotels.

Panama's tourist arrivals also are expected to continue to increase. Year-end 2008 numbers are expected to show approximately 1.5 million tourist arrivals, Nordström says, and he sees no reason why Panama should not reach 2 million arrivals in a year in the near future—catching up to Costa Rica.

Boosting Panama's numbers in part will be the Atlantic coastal city of Colon's new status as a home port for Royal Caribbean International cruise line's Enchantment of the Seas ship. Colon is another area with tourism development potential, Nordström says.

He also mentions Bocas del Toro, near the Costa Rica border, as a key area for future investment and development.

Such development fits into the country's Master Plan for Sustainable Tourism Development, implemented last summer and designed to provide direction, strategic planning and economic benefits through the year 2020.

Despite concerns last year that the volume of new hotels coming online could create a situation of oversupply and drive down occupancy in Panama City in the near term, at this point a dramatic supply increase seems less likely, as certain projects have been put on hold and others simply are no longer likely to materialize, says Ernst & Young's Basso.

“A number of projects were underwritten using a residential component,” he notes. “Real estate activity in Panama has slowed down, and the ability for some of the projects to be executed, from a residential perspective, is low.”

Because of that, “Panama should be able to absorb the supply of new lodging inventory being built,” he says.

That in mind, the overall outlook for hotel operations in the country remains positive, with most observers expecting continued high performance, and, therefore, continuing interest from international operators, investors and developers.