CENTRAL AMERICA—Increasing political stability in Central America combined with the leisure allure and business and investment potential stimulated by the Dominican Republic/Central America Free Trade Agreement are putting more than just Costa Rica on chains' development radar. “Historically, Central America's hotel demand markets were thin, with little growth in RevPAR or in unsatisfied demand. That is changing,” says Gregory Rockett, Hilton Hotels Corp.'s vice president of development, Latin America and Caribbean. “We have seen huge increases in ADR in San Jose (Costa Rica) and Panama City over the last 12 to 15 months. There is development potential throughout the region.”

Despite concerns about oversupply in San Jose, Costa Rica remains the top development priority. “It's regarded as the 'Switzerland of Central America.' The perception is that Costa Rica has a very stable government and a strong economy,” says Marcos Agostini, Interval International's assistant vice president, sales and service, Latin America.

Guanacaste, Costa Rica, is definitely on the radar. With its own international airport and proven ability to support high-end flags such as Four Seasons, this lush slice of paradise is on its way to becoming an important tourist destination. “We have only one hotel approved for Central America, and it is in the Guanacaste region,” says Ezzat Coutry, Ritz-Carlton's senior vice president responsible for the Southeastern United States, Caribbean, Mexico, and Central and South America. “In other countries, the barriers to entry are mostly economic. Either there's country risk or the market can't support a 5-star rate. Costa Rica can attract both (luxury) leisure and incentive travelers. It has some amazing infrastructure.”

It soon will have offers below the level of Four Seasons, Mandarin Oriental and Ritz-Carlton. Among Hilton's 2,200 rooms coming online in Central America will be a property being reflagged as a Hilton and a new-build Hilton Garden Inn. More timeshare is also on the way in the form of “first-class resorts unique to Costa Rica,” adds Agostini. He predicts rapid growth for emerging secondary markets such as Jaco, Manuel Antonio, Quepos and Limón.

If Costa Rica is a “must have” market, Panama is one that would be good to have. “We see a new travel pattern of South Americans going to Panama. Panama City is positioning itself as Little Miami,” Agostini says. With current U.S. Homeland Security regulations requiring visitors to have visas making travel to the United States more difficult, Agostini says more Latin Americans are taking advantage of easy airlift to experience the duty-free haven of Panama City. Development is concentrated in Panama City for the moment, but the availability of financing at attractive rates may jump-start new destinations such as Boca del Toro and sites along Panama's coastlines.

Panama's “boom” associated with the expansion of the canal and its bullish property market may have investors' and operators' attention, but, as elsewhere in Central America, development numbers will be cautiously small. “Although we hear anecdotally that there is an explosion of turn-away demand now, it is difficult to tell how many hotels can be supported in either San Jose or Panama City,” Rockett says. That is why Steve Hedberg, vice president, operations, Carlson Hospitality International, is targeting areas by market and looking at adding one to two hotels per market per year for the next three to five years.

“Honduras could be the next hot market,” Hedberg says, particularly for luxury brands such as Regent. With its combination of leisure, soft adventure, eco-tourism and cultural appeal, Honduras can cast a wide net for tourism. Availability of “pristine” sites will open the way for mixed-use development that can support luxury hotels with a complement of ownership offers. “A project would have to have residential to make the number work,” he says. “And it has to have a beachfront. If there is no waterfront, there is no resort.”

Alvaro Diago, area president of IHG Latin America, likes the prospects for up and coming cities such as Guatemala City, San Salvador and San Pedro Sula. He says these markets are benefiting from “a new business traveler who is more cost conscious.”

A growing travel segment, these 21st-century road warriors are taking shorter trips—sometimes just overnights; extending their business travel with short getaways; and looking for cost efficiencies through dynamic hotel and airline packages. “We're seeing more trips being taken by mid-management whose travel plans and budgets require hotel functionality and practicality rather than upscale perks,” says Diago, who is managing a 2,000-room Latin American pipeline. “Mid-tier and select-service also appeal to developers and investors because of the relatively low investment with a relatively quick return.” In stronger markets, investors will no longer be waiting a decade to see substantive returns, he adds.

Another reason for a second look at Central America is the emerging promise of group and convention business. El Salvador is a case in point. Thanks at least in part to the strength of locally headquartered TACA airlines, arguably the region's leader, El Salvador hosted several international events. A series of trade agreements through the Americas from Canada to Chile haven't hurt either.

Infrastructural improvements in airports and ports, combined with greater transparency in investment regulations and tourism arrivals of more than 1.2 million, are garnering the attention of global brands and niche players, says Yolanda Martinez, PROSEA, El Salvador's Investment Promotion Agency. “The brands growing most rapidly are those already acquired by large local players such as: Hilton, Sheraton, Radisson, Courtyard by Marriott and IHG,” Martinez says. “Nevertheless, the fastest growing brand has been Decameron Hotels, a top-of-the-line, all-inclusive, sun-and-beach hotel that has grown from 140 rooms to 280 rooms in less than two years.”

Central America's overall development story is more about ripples than waves. “The biggest challenge is also the biggest opportunity: political and economic stability,” Diago says. Experts will continue to monitor not only elections, but economic and trade relations with the United States, Europe and, increasingly, China and Japan.

Agostini cites other barriers, such as the lack of financing in some markets and the lack of governmental incentives for developers to enter the industry. For Rockett, the specter of the “boom and bust” cycle is still a factor, as is “the historical paralysis” following natural disasters. “A number of destinations have good potential, but infrastructure is slow to materialize,” he says. “Awareness of tourism assets in some countries is low. Destination promotions in the countries' main source markets would help to expand demand.”