Can Panama Compete as a Luxury Brand?
View of Panama City from Casco Viejo
As I approach my mid-30s, in addition to a nagging rotator cuff and vanishing hairline, I have also lived long enough to witness three economic downturns. My first experience was the stock market collapse of 1987. I remember “Black Monday” distinctly, because my 8th grade Civics teacher spent the entire class bemoaning the Chernobyl-eque meltdown of his portfolio. Then there was the dot-com bust, marked by a handful of my 20-something college buds who were momentarily rich and soon thereafter calling me in Costa Rica for life advice. It wasn’t easy playing Dr. Phil to amigos who were not yet ready to face a permanent 70% pay cut.
That brings us up to today, with the current housing bust gone really, really, really bad. I can’t help but think that, given the extent of the current world wide economic crunch, I will soon be bearing witness to my 4th full blown “correction”. I’m referring of course, to Panama’s impending real estate bust.
To all those yay-sayers whose who would respond with the standard “No way. Panama is DIFFERENT!” retort, I can only remind you that the whole “this market is different” mantra was EXACTLY what fevered investors relied upon to rationalize the runups of the aforementioned dot-com and housing booms. No matter the market, the laws of supply and demand still apply.
Given that Panama’s current real estate prices are bordering on crazy cat lady type levels of insanity, I have to ask…
How does Panama propose to compete as a global brand in an increasingly difficult tourism and real estate market?
But as a preface to that question with another question, just what IS the Panama brand?
- Affordable? — no
- Eco-friendly? — no
- Service-oriented — heck no
- Innovator — err, no
Panama needs to first figure out WHAT it is and where it wants to (and is able) to compete before it can really hope to have any chance at sustainable success. If I were granted absolute marketing power over Panama, I’d say that it needs to pursue a strategy that isn’t as trendy as selling $6 café lattes: BE A VALUE BRAND!
Value never goes out of style. Value is instantly understood by consumers, sometimes subconsciously. Value isn’t easy to deliver. But ask Wal-Mart or McDonalds how they’re faring in this crisis. Value SELLS. Back in 2005, when I first heard Panama had $80k pre-construction condos for sale, I didn’t need to hear anything else. I understood the inherent value of a roof over my head for under $500 a month. I didn’t ask about price per meter, didn’t over analyze the neighborhood or materials…I just signed the contract. Value is not a complicated, glossy or overly complex pitch, but it does require some hard work and HUMILITY.
Unfortunately, faster than a French surrender, Panama went from being a value player with low cost of living, retirement benefits and tax breaks….to a marketplace focused on luxury condos and high flying lifestyles.
WHY AND WHEN DID PANAMA GET SO SWANKY?
I don’t want to get on a rant here but…
When exactly did Panama decide it could go uptown? I mean, seriously? Despite the looming spectre of the Noriega years, Panama was able to work its way onto a competitive global real estate and tourism map 8+ years ago via one simple marketing method: IT WAS CHEAP! Ten years ago, cheapskates from Costa Rica began moving to Boquete and the former Canal Zone because both the cost of living and real estate was but a fraction of Costa Rica’s. Don’t forget that Costa Rica became famous a decade earlier for being a cheap alternative to Florida.
A lot has changed recently:
- The U.S. stock market has tanked
- Real estate prices are plummeting all over the U.S.
- Banks are not lending with the same reckless abandon they once were
- The U.S. and world economies have lost the major headwind that led everyone to believe that global expansion, both for big business and individual investors, was the quick and easy path to success.
RESULT? LUXURY BRANDS ARE SUFFERING GLOBALLY
Quick, name five publicly traded companies known as luxury brands. Don’t worry, I’ve made a list below for you. The links are to their 1 year stock charts. They’re ugly junior, REAL ugly.
- Starbucks – who else could call the guy that serves you coffe a ‘barrista’?
- Coach – purveyor of overpriced handbags
- Williams Sonomoa – One of the leading specialty retailers selling upscale home furnishings and cooking accessories. They can claim credit for the ubiquitous presence of the subtly snobby “banana ripening rack” and “garlic peeler” in fine home kitchens everywhere.
- Tiffany – really, really expensive lamps n’ such
- Harry Winston Diamonds – when the mere promise of eternal love just isn’t enough
These, like nearly all other luxury brands, are taking a serious financial beating right now. Bear in mind that these are all established, credible, well known brands. Unlike Panama, they do not need to convince many consumers that what they sell delivers on their promise. In addition to reputations for exceptional products, all of these brands are also known for SERVICE. Even still, all of them are suffering. Seriously, who knows if it will EVER be en vogue again for the common folks to pay $6 for a cup of coffee, $500 for a hand bag or $2,000 for a friggin’ watch.
In the meantime, while more established high end brands suffer, Panama continues to pursue a dying trend. The utter lack of reputation, quality or service that Panama can rely on to support this strategy is obvious to anyone who has spent significant time in country. So, how much longer will the real estate market in Panama cling to the hope of selling $500k city condos, $750k beach homes and $5M ocean view farms?
My only conclusion is…
HAVE WE ALL LOST OUR MINDS?!
Just five years ago, one could purchase a nice home or apartment in Panama City for under $200,000. A comfortable, 3-star hotel stay would run you $85 per night. What changed since then?! The economic factors (a global financial boom propped up by an inflated U.S. housing market) that led to Panama’s absurd current asking prices have since REVERSED. I REPEAT, the glory days where any McMansion in Boresville, Arizona was valued at $650k are OVER, vamoose, kaput, dead, muerto, finito, done!
In addition to the feverish speculation that drove such prices to ludicrous levels, the gas on the fire were the low interest rates and “creative” financing that allowed so many rank and file gringos to believe that they too should and could own a 4 bedroom house with a Jacuzzi and travertine-laden sinks. The speculative bubble has long since burst and the financing has vanished. How far must prices drop until they again meet demand? To give you an idea, a reliable source and real estate professional in Orlando, FL recently told me that savvy buyers can find cash deals in the Orlando area for as little as $30k. NOT A MISPRINT. Thirty large in dead Presidents gets you a dwelling in Orlando! Somewhere, Adam Smith is smiling.
So if the party is over up North, how, whom or what would continue to support such ludicrous prices in Panama City, Panama and nearby beach areas? If the bottom has fallen out of such quasi-comparables as Ft. Lauderdale, Tampa, North Miami and even Costa Rica, why would a globe shopper pay a premium for real estate in Panama?
I could be wrong, but I thought the whole reason foreigners were considering Panama in the first place was because it was a VALUE play, not for the hope of some impossible upswing or that Panama could hope to convert itself into “the new Miami”, and surely not overnight.
SO, WHAT NOW PANAMA?
Despite all this gloom and doom, I do believe that Panama still has a great opportunity to capitalize on its new found popularity. But I’m afraid the country needs to accept a major ego blow with some class and formulate a new plan…and tout de suite! Clinging to the madman’s strategy that Panama is deserving of higher property values than established brands like Miami just won’t work.
That being said, here ARE a few strategies that I think COULD work for Panama:
- Focus on Tourism – if there aren’t hotels, destinations and things to do that will keep real estate buyers entertained, nobody is going to move here. Ask Costa Rica how this works. Tourism first, real estate second…in that order.
- Radically Improve Service – pathetic service in Panama is deserving of an entire series of articles. Service culture must change dramatically if Panama hopes to compete in any industry long-term.
- Loosen Immigration – talent in Panama is sorely lacking, yet it is a nation surrounded by countries whose collective workforce would jump at the chance to work here (Nicaragua, Costa Rica, Colombia, Venezuela). Create short-term and long-term work programs to attract the best and brightest of the region and let them teach Panamanians. Pretty soon, we’ll have a culture that gets things done.
- Crack Down On Crime – crime is rampant in Costa Rica is getting a foothold in Panama. Time to nip it in the bud and earn the title of “safest country in Latin America”.
- Overhaul City Transit – a few thousand immigrants move to Panama and now we have 9 to 5 gridlock? Jeez, what would it be like if all those condos ACTUALLY receive full-time residents? Fix it now!
- Protect / Promote National Parks – this country is so rich in history and natural wonders, yet the country does a terrible job of protecting and promoting both. Want to be able to promote the nation as unique? Then identify and celebrate the uniqueness you already have!
- Pass Progressive Development Laws – take a breather, learn from these early mistakes, and draft laws that will actually foster sustainable growth.
So my dear Panama, I sincerely hope you don’t fall flat on your face. Besides not being the kind of person that celebrates the failures of others, I also have plenty to lose if you DO go down in flames. But c’mon man, let’s get realistic here! I’ll end with a quote,
“In economics, the majority is always wrong.” -John Kenneth Galbraith (Canadian-American economist. 1908-2006)
| Written by Casey Halloran |  |
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Filed under: Business, Living & Retirement, Politics, Real Estate on April 6th, 2009
“faster than a French surrender” – We take offence to this comment which is nothing more that gratuitous French Bashing for no good reason save a lousy one-liner.
The 1940 armistice of the French government was a betrayal of its people by callous leaders. We put them on trial after the war.
The 1940 debacle is as funny to us the French as 9/11 is to Americans.
Once again, you’ve hit the target Casey. When did Panama get the idea that it was a luxury market? The answer to that is easy and can be summed up in one word – TRUMP. When the Trump Ocean Club project was announced in late 2005 everyone thought it signaled Panama’s entry into the world of luxury real estate. After all, if “The Donald” was going to put his name on a tower in Panama City, that must mean we’re a world class destination. Well, doesn’t it? Turns out that Trump would put his name on a pair of dirty underwear if there was enough money tied to the deal. As the property market is collapsing in the US, Trump is returning to his former status as a three time loser who’s only talent is being able to lose billions of dollars of other people’s money. The prices set by the K Group for the Trump Ocean Club in early 2006 immediately caused condo prices to double almost overnight in Punta Pacifica and led to the speculative frenzy we’ve seen over the past few years. By the time the Trump Ocean Club is completed, having the name “Trump” associated with the project will be a liability and not an asset. I suspect this project will implode and this will mark the beginning of the end of the speculative bubble and will lead prices down just as quickly as it led prices up.,
Then again, I could be wrong and it just may be different here in Panama. Somehow, I doubt it.
RE: My French dig, you are right, I should have been more sensitive. Lord knows the French have been very forgiving of my fellow gringos over the years. I’m just glad we have President Obama over there now to apologize for all our offenses, past and future. To be fair, I wasn’t specifically referring to France’s performance in WWII. France’s history of military near-success extends well beyond that: http://en.wikipedia.org/wiki/Military_history_of_France
One question though…do you actually read this blog, or do you have a Google news watch list of anti-French jokes? If the latter, you have a LOT of time on your hands.
Paul:
Thanks for the comments! You are more optimistic than I am when you say, “When the Trump Ocean Club is completed”. You sure about that one? I realize his involvement in Panama is ceremonial at best, but given that he already bailed on the Mexico job, why should this one be completed?
Is Roger Khafif so well heeled that he will build it (as advertised) without sufficient sales? They’ve been telling us it’s sold out for 2 years, yet are running ads everywhere. I thought this post in the NYT blog was very interesting, especially the comments:
http://raisingtheroof.blogs.nytimes.com/2009/01/09/trump-project-in-panama-downgraded/
In his email to Sam, posted on your blog, Roger himself said they’ll be done in May of 2010. Boy, they’d better triple the crew I saw down there if they’ve any hope of meeting that (already moved) deadline!
In the meantime, why won’t somebody PLEASE pursue a project that builds/promotes $125k, developer financed, bare bones retirement homes? I realize it’s easier said than done, but YOU WILL make a mint!
I just heard a piece on NPR: applications to the USA’s top 10 Universities is up during the recession. Why? Because VALUE sells. Something can be expensive…so long as it’s worth it. Overpromising has been a theme in Panama over the past few years which inevitably leads to underdelivering: high expectations are hard to match. Whatever happened to the days when people stumbled here on a bad weather re-route to CR and realized they wanted to stay for a while?
Casey, I saw the NY Times article you’re referring to ealier this year. Like you, I’ve been somewhat confused over the immense amount of marketing dollars that the Trump project is spending since we have been told for at least two years that the project is “sold out”. To me, the most interesting tidbit from the NY Times article was the disclosure that the project has been using the reserve account to make current interest payments. Although this is not unusual in commercial real estate projects, it means that they are using borrowed money to pay back borrowed money. Not a good sign. And now that condo sales have nearly come to a complete halt, it’s not likely that the Trump project will be able to generate enough new cash flow to make their scheduled interest payments without continuing to tap this account. If the reserve account dries up, that’s the ballgame (construction stops).
Combine this with a story this morning in La Prensa that Panama Canal container traffic is down by over 15% in the first two months of 2009 and it’s looking increasingly like Panama is not immune to the worldwide financial crisis. This being the case, we all know how residential and commercial real estate has fared around the world.
One last thought. Over the past several years the vocal Panama real estate promoters have called Panama “The Dubai of the Americas”. Given the collapse of that market, the comparison is accurate, but not for the reasons the promoters think.
Casey; I agree with you that all real estate markets have lost their way. The good news is that the global reduction in prices is just what the world needs. My working, college-graduated kids can (almost) afford a home where we live in Southern California and prices have come down 50%.
I do want to pass along a couple of thoughts in response to your question of how Panama can position itself in the global real estate market. And I would really appreciate your feedback and Paul’s also.
My first idea centers around building a jobs base and raising the incomes of as many “middle-class” people as possible. The government should do everything they can to attract global companies (tax incentives, free land, infrastructure, etc.). Two years ago, the State of Georgia bought land and gave it to KIA. The Federal government built highway interchanges and the bordering county and cities gave them access to sewer, water and power. KIA hired 2500 people and attracted another 2500+ jobs from their suppliers. In addition, many other support jobs are being created. Government support for business development is very rare in the U.S. and could be exploited in Panama.
My second idea centers around retirees. Currently in Florida there is a community called The Villages which is comprised of 35,000 homes with total build-out of 60,000. They are located in god-forsaken Central Florida, away from the beaches or any other natural amenity. And the homes are not the most architecturally appealing. But they are (NOW) selling 300+ homes per month and their prices have only decreased by a minuscule amount. Why? Because they have created a community that retirees WANT! The community is centered around hundreds of social clubs which are organized and managed by the residences, free golf on executive golf courses, and many recreation centers (pools) scattered throughout the community. In addition, there are two downtown areas with live music and dancing every night. All for $135 per month! In my opinion, Panama should replicate this project and give retirees what they want….golf and social networking at affordable prices.
Best wishes and continued success.
Paul, Matt, Jim:
All excellent points. Paul, regarding the 15% drop in containers thru The Canal, one has to wonder if THE project that might not be the slam dunk everyone thought is the Canal Expansion. If that project slows to a crawl or doesn’t receive sufficient financing…whew, look out!
Jim, I am totally in agreement with you regarding your ideas on how the Panamanian government should attract business. But isn’t that also what the U.S. should be doing right now? Seems the trend nearly everywhere is to blame, tax & deride business rather than find ways to attract and help it grow in a sustainable manner.
Thanks for all the great feedback. Let’s just hope a few developers are reading!
Casey
Great summary.
I agreed,Panama´s value ecuation as an enjoyable and affordable Country has been lost.
Somebody or everybody ´s greed change the formula of the product and consequently the positioning had to be change.Those who mantain or go back to the original formula first are going to be better sooner.
And there are markets were we still can make an impression , how about becoming the Country with the best valued time shares & fractionals , that will help tourism ,construction, and set the basis of a real residential tourism economy
Excellent article!!!!
Thank you for putting together such a comprehensive piece about the state of tourism and real estate construction in Panama. Panama is not cheap, eco-friendly, service oriented or innovative. I just spent $75 for a marginal hotel room in El Cangrejo that used to cost me $30. My 3 or 4 k.m. taxi ride to the Albrook terminal took nearly a half-hour at 3:00 in the afternoon.
Your seven points of light to help Panama to focus its tourism brand are right on the money. I suggest that you continue to lead by example. You and your parents have a very special hotel in a place that real tourists will want to visit in the years to come.
I have also given considerable thought to the real estate bubble and have been wondering for a couple of years why the real estate industry has been so reluctant to admit the obvious; that there is virtually no end-user demand for nearly a hundred luxury skyscrapers in and around the City and that prices are at ridiculously high levels.
Looking at Panama’s real estate industry from the outside really makes one wonder as to the amount and quality of information that consumers of real estate services really have.
You have to also wonder as to the power structure of the industry itself. Who calls the shots? Who releases information to the press? Is it the developers? The housing ministry? The banks? The brokerage agents? I honestly can’t figure it out and I’ve tried.
I’ve never been able to understand how Panama could keep up this “No problema, Everything is just fine” image while dozens of buildings were being cancelled in 2007 and 2008 and finished buildings had end-user occupancy rates around 25 to 30%.
Until very recently, the major newspapers have also been rather silent regarding the sustainability of the “boom”. Now, several online papers are finally beginning to question the basic fundamentals of demand, construction financing, infrastructure, etc.
Personally, I think that there is a day of reckoning in store for this “boom”. It may be a very gradual, sort of a slow slide into the abyss. I thought that this day would have arrived by now but construction delays and developer foot-dragging have caused delivery dates for many projects to be postponed 2 to 3 years.
I will say this much; if the T.O.C. and Los Faros projects run out of money and suspend construction, the day of reckoning could come a lot sooner and will be much sharper in nature. Also, I am somewhat confused as to why the T.O.C. promoters are advertising a building that is almost “sold-out”. If there are truly only a few units available, word-of-mouth advertising would certainly do the job.
As somebody who grew up in Panama, left in 2000 and now visit frequently, I often wonder about Panama’s real estate bubble. I think there are a few additional points to consider that are easy to miss for those who do not live in Panama City.
First, Panama is growing not on the back of US and European transplants, but rather on the backs of the Colombian and Venezuelan oligarchy. Do not underestimate the penchant for luxury either of these groups have. Panama now has 5 daily non-stop flights to Caracas. Lets be frank here, 95% of the people taking those flights aren’t tourists. The rich of Venezuela and Colombia come to Panama because it is safe, dollars are accepted, bank secrets are kept, it is reminiscent of home and, of course, it is close enough to home to watch over their business interests or otherwise.
Second, the real estate bonanza continues to be fueled by a significant portion of money laundering. Plenty of buildings in Panama have minimal occupancy. The owners quite frankly don’t care and are willing to sit on their hands and wait, if somebody is willing to buy at a high price down the road? Bully for the owners. Where so much construction is not financed in the traditional commercial markets and the expectations of owners are aligned with a certain level of loss/non-occupancy, the bubble burst mentality is harder to catch on.
Thats all I’ve got to say, you otherwise make good and valid points. Again, I’ve been expecting the bubble to burst for years but I think those two factors are among the things preventing, or at least slowing, the bursting of the bubble in Panama.
Panama Red, fantastic comments! I do wonder myself if the grey markets in Panama can support this pretend boom much longer, or if indeed there are the droves of Venezuelan, Colombian and other South American hot shots moving to Panama as is being hyped…so who knows? My gut says, it ain’t enough. At some point, even if it’s not the developers themselves, but the prospectors who are over-leveraged, the pin holes in the bubble will form. As soon as the market begins to flood with deeply discounted condos, the game is over.
the recession will be long and wide, still have 3 years to go, panama will not be spared, this kind of recession happens once every 80 years
everything will overshoot on the down side also (as it did on the upside) save your money and buy cash when we near bottom in 3 years for panama
What Sean said. I’m waiting 2 to 3 years to pounce on Panama City.
This article hits the nail on the head. Panama is wonderfully scenic country who has yet to achieve an identity worthy of upscale investment. I wholeheartedly agree that they need to invest in measures that will train their people which also means that in addition to creating incentives for foreigners to share their skills, their education system for the unrich must be improved and mandated.
Sandra
Casey,
a phenomenal article! Are you the dude that owns a B&B in Pedasi? Read about that in Panama Insider. Your comments about the deplorable Panamanian service culture are spot-on. Every day here I encounter their pathetic apathy. They just don’t give a s–t. You can see how much pride they have in themselves and their country by the garbage in the streets.
Bob:
Yes, my semi-retired parents and I have a B&B in downtown Pedasi. Come visit! I also operate a small travel agency in Panama City. My primary business remains our Costa Rica travel agency, which I’ve had for over 10 years and operate along with another gringo and one Brit business partners. Thanks for your comments.
Thanks for providing a great perspective on the state of the market. We’re trying to keep track of prices in real estate developments in Panama. We’re surprised at how “official” prices have held relatively firm – even when re-sales are often priced at 30% below developer direct. We’re plan to compile a list of suspended/stalled developments of which there are many, especially in Panama City. (An identical price/availability list from 2008 is a good indicator).
I agree, Value is the marketing strategy Panama should pursue.
Currently, Casco Viejo’s restaurant industry is running an experiment on how many high-end eateries can be sustained in one neighborhood, with the number at more than 20 and counting. With an average Panamanian income hovering around $500-$1000 a month, it would surprise me to see more than 10 of the new joints survive more than a year.
Relic Bar, marketing themselves to value driven locals and foreigners customers, are PACKED every weekend. A clean, wide open space, combined with no cover charges and $2 national beers, is demonstrating that operating a value driven business in Casco Viejo can make serious $$$.
Hopefully, the next value driven business will be $300-$700 dollar a month artist studio and 2 bedroom apartment rentals to recruit more young people in Panama’s most exciting neighborhood.
~Evan
~Evan
You are living in the old economy. Panama needs to pass universal healthcare in the same fashion as that inspired by President Obama. Once the entire nation of Panama has health care all of its problems will go away.