The Rocks Luxury Residence Club in Scottsdale, AZ

It is a humbled, but hopeful fractional segment of the vacation ownership industry that’s gathering this week in San Francisco. The 11^th annual Ragatz Associates Fractional Interest Real Estate Conference brings together developers, hoteliers, operators and service providers to chart the future of a business battered in recent years by the economy and a weak lending environment.

“The fractional business took a serious hit in the last couple of years,” says Richard Ragatz, founder of conference organizer Ragatz Associates. He says annual sales for the segment topped $2.3 billion in 2007 but slid to $530 million last year. “There were signs in the last month of 2010 and the first couple months this year that sales are beginning to pick up, but we still have a long way to go.”

We chatted with Ragatz last week as he made last-minute preparations for the conference, which is expected to draw about 225 attendees. Like the industry, the conference peaked in 2007 with 750 attendees. Last year, 250 people attended.

What were the major reasons for the decline in the fractional and residence club business?
There were several major causes. The most important ones were the uncertainty over the country’s economic stability as well as a total lack of consumer financing. Also, a lot of whole ownership second homes came to market, decreasing prices and causing people to wonder where the value is in fractionals.

Is there still interest in fractionals among consumers?
The segment’s troubles seemingly have nothing to do with the concept. People still like it. We continue to do focus groups and consumer surveys and when compared to timesharing and whole ownership, fractionals pop up as number one in people’s thinking process. But many people continue to sit on the sidelines not willing to pull the trigger for a high-cost discretionary item at a time when they still have uncertainty in their own portfolios.

Were there many casualties among active projects?
Probably 10 or 15 projects went out of business. There were 125 projects in active sales in 2009. In 2010, we counted about 104 in sales, although some of the 125 projects from ’09 may have still have been active but didn’t make any sales in 2010.

What kind of lessons did the industry learn from this downturn?
Developers, especially those at the high-end private residence club level, realized the prices they were asking in 2006, ’07 and the first half of 2008 were beyond rationality. They got a little greedy in terms of the pricing. Also, they overbuilt the product, causing people to wonder where the value is in buying shared ownership. Secondly, they over amenitied and over-serviced the projects, triggering excessively high annual dues.

Have they changed their ways?
They’re cutting back some of the excess services and amenities they offered before. The size of the fractionals has been decreasing, which helps broaden the market.

What about changes to the marketing process?
Developers have become more sophisticated in the marketing and sales process. It’s more of a rifle approach rather than shotgun. There is more broker networking in the local communities and more social media marketing. They’re getting more rational in how they proceed with the product and the process.

Are any new fractional developments on the horizon?
We continue to do feasibility studies for new projects. There are some very interesting projects out there with some of the major brands, not necessarily all hospitality brands. There are 10 new projects that have come on board in the past year, and there will be some major announcements in the next six months with some unanticipated consumer brands entering the marketplace.

Are developers returning to the same markets or are they exploring new ones?
There is greater dispersal of the product. Four to six years ago, nearly half of the projects were in ski areas like Aspen and Vail.
Today, it’s less than 25 percent [in ski locations]. It doesn’t mean developers have stopped developing in ski areas; there are just more projects oriented to spa, urban markets, golf and beach.

What’s the focus of the conference?
There is a little more concentration on consumer trends and research into how high-end consumers make decisions in today’s economy, not just real estate decisions but all discretionary spending. There will also be more concentration on marketing, especially social media marketing.