The Costa Rica Mixed-Use Resort Pipeline: Sustainability and Changing Market Conditions

Costa Rica's Pacific coast has been a target for tourism investment. This article examines status of the development pipeline in light of sustainability considerations, and explores how sustainability will be incorporated in feasibility analysis.


It is widely known that Costa Rica has experienced a vacation real estate and tourism boom in recent years.  HVS has completed over 20 engagements in Costa Rica since 2006 and I have personally been involved in more than ten feasibility studies and valuation assignments for clients in the country's Pacific coast vacation markets. A further indicator of the high activity level is the size of the local hotel development pipeline.  At the beginning of 2008, the development pipeline for luxury hotel room inventory for the Pacific coast markets of Costa Rica contained approximately 2,000 rooms of new supply situated in  twelve separate projects, compared with an existing (operating hotel room) inventory of approximately 500 luxury hotel rooms.

In February of this year I was invited to represent HVS at the 3rd annual Costa Rica Hotel Investment Conference, sponsored by a public private partnership consisting of KPMG's San Jose office, the Costa Rica national tourism commission (ICT) and the national foreign investment promotion organization (CINDE).  Costa Rica's president, Oscar Arias, addressed the welcome dinner for sponsors and presenters. He noted the nation's desire to continue to stimulate growth in tourism and tourism related investments, as the sector had become established as an engine of economic development in the last decade. 

Arias emphasized that while these economic goals were good for the country in creating jobs and generating income, such initiatives would always be subordinate to the goals of 1) preserving and enhancing the nation's natural resources, 2) promoting environmental balance and bio-diversity, and 3) making progress as a nation toward carbon neutral status. The president's remarks were quite timely, as several days earlier the Costa Rican environmental protection agency for the first time exercised its authority to shut down a major lodging facility over sanitation violations.

Traditional Occupancy & Average Rate Analysis

By the time of the February conference, the North American credit crisis was already in its seventh month. Several of the projects in the Costa Rica resort development pipeline were to have acquired construction financing in the second half of 2007 and to have begun construction in early 2008. Due to the low level of activity in North American lending markets during this time, these projects became stalled at the construction financing stage.  At the conference, I presented a short study examining the impact of the deceleration of projected new supply on overall market occupancy and rate levels. 

A simplified supply and demand model showed that both industry revenue and market- wide occupancy would be enhanced by a slowdown in the pace of new supply entering the market, comparing luxury hotel room inventory growth of 300 rooms per year with growth of 500 rooms per year.  The occupancy and average rate conclusions were further supported by reviewing Smith Travel Research (STR) data from the Maui/Lanai, Hawaii market in the early 1990's, where a similar spike in luxury hotel supply took place.  In the Hawaii case study, market-wide hotel occupancy dropped by ten points when the luxury hotel room supply tripled in the 1989 to 1991 period, and ADR growth stagnated for the following four years. In summary, both a supply and demand model and an actual case study supported the conclusion that the deceleration of the development pipeline that was beginning to materialize in Costa Rica's Pacific coast markets would have positive implications for market area occupancy and average rate levels in the short term.

Alternate Analysis Incorporating Sustainability Principles

Sustainability in Costa Rica: Not Just Talk

In January, 2008 a team comprised of Yale and Columbia University researchers released the first comprehensive country rankings of "green-ness" based on an Environmental Performance Index, or EPI.  The EPI incorporates 25 categories of statistics and indicators to arrive at a composite score between zero and 100, with 100 representing a "perfect" EPI score. Five countries of the 149 analyzed scored an EPI of 90 or higher.  Of the five, Costa Rica was the only country representing the Americas (Switzerland and three Scandinavian nations round out the top 5).  This accomplishment is even more compelling when one considers that Costa Rica has a per capita GDP that is less than one third that of any of the other "top five" countries.

Examples of how Costa Rica has institutionalized sustainability in the tourism sector are several.  First, its Blue Flag program, designating quality standards for the nation's beaches, has become a symbol of local pride.  When a popular tourist beach lost the Blue Flag designation in 2007, residents and local government quickly mobilized to remedy the situation and have the status restored. 

Another program administered by the ICT, Costa Rica's official tourism organization, has established sustainability rankings for hotels, ranging from one to five "Leaves".  The levels awarded are based on an analysis of the hotel's commitment to the local community, to nature, and to minimizing environmental impact.  For example, the Best Western Jaco Beach Hotel was recently awarded a 4-Leaves recognition, representing 80% compliance with the program's principles.

Incorporating Sustainability in Feasibility and Valuation Practice

The United Nations convened the World Commission on Environment and Development in 1983 to address growing concern about the global nature of environmental policy.  The commission became known by the name of its Chairperson, Gro Harlem Brundtland.  In 1987 the Brundtland Commission released its findings in a document entitled "Our Common Future".  In this document, sustainable development was defined as that "which meets the needs of the present without compromising the ability of future generations to meet their own needs."

Sustainability principles have since been incorporated, in varying degrees, by several real estate industry professional organizations. The Royal Institution of Chartered Surveyors (RICS), a UK-based independent professional body analogous to the Appraisal Institute, adopted a sustainability policy in 2005.  In June of 2007, RICS further clarified the policy by publishing a Sustainability Guide for Property Professionals.  The policy states that RICS expects its members to "promote sustainable development through their professional activities and advice." The sustainability guide emphasizes the consideration by the appraisal profession of a "Triple Bottom Line" of environmental, economic, and social components.  These three perspectives are further detailed in the sustainability guide by property lifecycle stage as described in Figure 1-1 below.

Figure 1-1


Property Lifecycle Stage









Greenfield/Estate Management

A safe, secure integrated development, rural regeneration public access and rambling rights

Maintain and enhance natural amenity and biodiversity. Use of land as food plains.

Improved land and asset values, stimulate local investment, intrinsic value and nontangible assets of open space amenity


Planning and Procurement

Provision of local labor, development of local skills through training initiatives, quality urban design and public realm, planning sustainable communities, community involvement at the design stage

Minimize energy demand, renewable energy supply, minimize environmental impact, increase use of recycled materials, ethically sourced products and services, enhanced public transport and walkability

Local economic generation, responsible and profitable growth. Attracting investment and build local capital.



Better design, respect for people, minimization of disruption, noise, dust light, considerate contractors scheme

Carbon amelioration, waste minimization, maximize recycling, construction environmental management plans

Use of local suppliers and labor, quality of design and materials as an agency tool or selling point


Occupation and Use

A better quality of life, built to last clean, working and friendly

Energy efficient operation, effective maintenance, occupier recycling schemes, greywater etc.

Use of local suppliers and contractors. Increase in occupier productivity through sustainable facility management


Demolition and remediation


Minimization of disruption, noise, dust, light, considerate contractors scheme, improved amenity

Maximize recycling, minimize waste to landfill. On site remediation, creative use of demolition waste

Improved spatial use, improved land value and economic uplift from urban infill. Presumption in favor of development on brownfield sites leading to a shorter planning period

Application of the Sustainability Filter to Costa Rica Market Dynamics

When presented with a change in the size of the development pipeline for luxury hotel supply in Costa Rica's Pacific coast resort markets last February, I assessed the impact on the traditional hospitality economic indicators of occupancy and rate.  As appraisers and valuation professionals, we are trained to focus on such indicators.  An update of economic market area developments since February would continue to support a favorable environment for tourism related investment projects.

Economic Feasibility Indicators

  • During the first six months of 2008, despite slowing US economic growth, as well as rising global food, fuel and airline prices, international arrivals to Costa Rica increased 12% over the same period in 2007.  This statistic follows a ten year compound average growth rate in arrivals of over 9%.
  • The larger globally branded coastal hotels continue to report occupancy rates in excess of 75%, consistent with 2007 levels. 
  • At the governmental level, the Arias administration achieved an annual budget surplus in 2007, after years of deficit spending, which has continued into the first two quarters of 2008. 
  • Not coincidentally, Standard & Poor's recently (July, 2008) raised Costa Rica's long range debt rating to "BB". 
  • Though the US real estate downturn has affected the volume of vacation home sales in the Pacific coast market of Costa Rica, Canadian purchasers represent an increasing source market for middle market vacation home projects.

We routinely track developments such as those noted above, to maintain our expertise and market knowledge.  However, our appraising and valuation training does not greatly assist us in assessing the social elements of feasibility and valuation, nor the environmental impacts, as described in the chart above.  Taking guidance from the RICS chart on sustainability, we can further enrich our analysis of the deceleration of the local market development pipeline growth by examining social and environmental consequences of this change as well as the economic ones.  If we examine the change in the rate of new supply introduction through a social and environmental lens, we might make the following observations:

Social Feasibility Indicators

In the approximately thirty miles of Guanacaste coastline between Culebra Bay and the Tamarindo area at least ten mixed-use resort communities of 500 or more acres each are operating, planned or under construction. Many more single or multi-building residential condominium projects are also in initial planning or construction.  Some of the social consequences of the slowdown in the development pipeline are:

  • A reduction in anti-development sentiment among local residents.  Anti-developer sentiment quickly grew in the local community in 2006 and 2007, as residents began to feel powerless over increasing density of coastal development.  "Save Tamarindo", a grass-roots organization, successfully attracted governmental attention to the need for more comprehensive urban planning.  Official regulatory plans (called Plan Regulador in Spanish) are now being developed for each of the coastal cantons, or counties of Costa Rica.  The Tamarindo area's Plan Regulador was the first to be completed in the first quarter of 2008 and it introduced new coastal building height restrictions for the area.
  • Had the resort development pipeline not slowed in recent months, the need for several thousand employees to staff the planned resorts would most likely have stimulated an increase in illegal immigration from neighboring countries and an associated shortage of housing and support services for the labor force.
  • The road paving capability of local municipalities is beginning to catch up with the demands of tourists and developers (with the help of resort developers in some cases). Before many roads were paved, local residents and their children often walked or rode their bicycles through unhealthy dust storm conditions which were exacerbated by heavy construction and tourist bus traffic on the dirt roads during the December to May dry season.
  • Perhaps the sustainability principles' respect for, and involvement of, local communities and cultures would influence some of the architectural decisions taken by developers. Is it appropriate to build a gated community that is a replica of a Tuscan village or a Balinese shrine in Guanacaste, Costa Rica?

Environmental Feasibility Indicators

In addition to economic and social impacts, the size of, and pace of movement through, the development pipeline also has environmental implications:

  • Several projects we have reviewed in this market called for coastline-altering construction projects to implement better protected marinas along inland waterways that are not naturally large enough to support such development. While environmental impact studies are required by local licensing agencies, a strict economic analysis will only assess the costs of studies, approvals and construction, without economically quantifying the need to "maintain and enhance natural amenities and biodiversity."
  • SETENA, the environmental organization responsible for approving construction and development plans, is in the process of re-engineering most of its processes. The organization's capabilities were overwhelmed in recent years due the relatively small size of its staff and the rapid growth in construction activity. Four of SETENA's seven directors have left or been replaced this year and the agency's operational budget has been increased five-fold. As with road paving projects noted above, organizational, as well as physical infrastructure in Costa Rica is now getting a chance to catch up with the pace of coastal development.
  • In Guanacaste, water is a scarce and valuable resource. Community water projects to accommodate projected population and tourism growth in coming years have become political and economic lightening rods.  At the same time, resort developers are planning at least six golf courses in addition to the four that are currently operating. One or more of the proposed courses are planned to be developed in accordance with Audubon Cooperative Sanctuary Program (ACSP) guidelines which will minimize environmental impact. However, the traditional economic feasibility study techniques for a proposed development do not incorporate the opportunity costs of diverting scarce resources from one potential use to another.


We have chosen to view sustainability considerations through the lens of Costa Rica as a test market.  Costa Rica has seen a dramatic increase in tourism and tourism investment in recent years and has taken a stronger stand, as a nation, for sustainability principles than have most nations.  For individual developers, a slowdown in the project timeline can produce costly delays, and in some cases can tip the scales between completing the project plan or releasing the development parcel for an alternate use.  However, on the positive side, we have seen that the slowdown in the luxury resort development pipeline has given the country a chance to build both its physical and regulatory infrastructure to better accommodate and manage the projected growth.  In addition, we have hypothesized that the deceleration of new hotel supply in the market will serve to maximize economic lodging indicators of occupancy and average rate.

As appraisers in the hotel and resort industry, we naturally have a "pro-resort- development" bias. We prefer exuberant industry gatherings as were the norm in 2006 and early 2007 to the more cautious and anxious ones of 2008.  However, our craft is designed to eliminate any bias through rigorous economic analysis techniques. If supply and demand factors cannot support new lodging inventory in a market or market segment, feasibility results will be negative.

As the industry and its professional organizations, such as the Appraisal Institute and RICS, continue to codify sustainability principles into professional competence standards and procedural guidelines, it will be interesting to see how such measures are implemented while preserving the independent nature of the appraisal practice.  That is, economic feasibility analysis does not have a moral bias regarding intensity of development, and it is neutral to non-economic externalities of development.

Appraisers will continue to need guidance in incorporating non-economic factors in the data gathering, analysis and reporting phases of feasibility practice.  As some of the issues described in this article indicate, it appears that it may present a challenge for standards organizations to incorporate sustainability principles to appraisal practice with the same clarity and objectivity with which we use supply and demand models today.

As part of the HVS Miami office's commitment to providing valuable consulting services to our clients in the hotel and shared ownership industries, associates are in the process of developing a portfolio of sustainable consulting services. These services will be aimed at quantifying and minimizing negative impacts of hospitality projects on the triple bottom line (economic, environmental and social components), as well as realizing opportunities for cost savings and efficiencies presented by sustainable practices. These services are planned to debut in early 2009, and future articles will address them in detail.


  1. Newsweek Online, January 23, 2008, Green-Listed (EPI Study results).
  2. The Jaco News, June 15, 2008, Concern For a Better Jaco (Awarding Best Western the 4-Leaves Status)
  3. Our Common Future (1987), Oxford: Oxford University Press. ISBN 0-19-282080-X
  4. Surveying Sustainability: A guide for the property professional, RICS, June 26, 2007.
  5. Tico Times, Costa Rica Tourism Still a Bull Market, July 15, 2008
  6. Tico Times, Government Registers Budget Surplus, July 18, 2008
  7. The Beach Times, Standard & Poor Improves Assessment For Costa Rica, July 18, 2008
  8. The Beach Times, SETENA Board Members Go In Major Overhaul, May 2, 2008


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