Condo Hotels: Cool or Cooling?
Remember the heady days of late 2004 and early 2005, when condo hotels were the biggest buzz in lodging and replaced timeshare as the product du jour? Remember back, too, to last year and early this one, when a conference on condo hotels seemed to pop up weekly and condo hotel developers accumulated frequent flyer miles by the bushel?
Seems the bang has gone out of the buzz; what was touted as a fresh route to development comfort has on occasion turned into a legal headache. And despite a healthy pipeline of condo hotels, the profile of the concept remains far higher than the reality.
Not that the bloom is totally off the rose; in anomalous markets like Las Vegas and Orlando, there's still vigorous condo hotel activity. But in a universe of millions of hotel rooms, condo hotels — where individual owners can put their units into a hotel rental pool program — are a tiny fraction.
According to Scott Berman, U.S. advisory leader for hospitality and leisure in the Miami office of PricewaterhouseCoopers, only a few dozen condo hotels are operating. “In the scheme of things, this is a very small segment of the market,” he says. “It's getting a lot of attention, but relative to total supply, I think there are something between 30,000 and 50,000 rooms out of millions.”
Berman and other lodging observers suggest that the condo hotel market reflects the larger market. “The general sense of the real estate market is there's been a softening over the past 12 months regardless of product type or geography,” Berman says, “so the sale of condominiums in a hotel environment falls under that.”
In areas with high barriers to entry, high land prices and recreational opportunities, condo hotels are doing better, he says.
“I think there is a movement that the condo hotel product is on its last legs, but I don't subscribe to that,” Berman says. “What's going on is a good thing in that it's allowing developers and operators to scrutinize these sorts of deals much more. Projects where there is a compelling story will continue and those that are not as compelling are falling by the wayside — as they should.”
Easy for a consultant to say. What of a developer like Robert Falor, the Chicago man who in 2005 was the poster boy for condo hotel development?
According to a recent article in Chicago Business, Falor, or his Falor Companies, have been named as defendants in 36 lawsuits since 2002. Fifteen are still pending. Among them is one in which Falor is being challenged for his decision to drop a condo conversion at the Hotel Blake in Chicago's Printers Row. That effort was one of a dozen-plus the Falor Companies president and CEO was trumpeting less than two years ago.
Falor's troubles, like his projects, extend to Miami, his other key outpost. According to the same article, an investor in the Breakwater & Edison, a failed Falor-led condo-hotel project in South Beach, accuses Falor of transgressions spanning mismanagement of the development to diverting money to unauthorized uses. Falor told Chicago Business that suit is full of “false allegations,” suggesting that the plaintiff is trying to force a buyout of his interest.
Falor attributes many of the suits to the failure of his former company, Nationwide Business Supply, a distribution business whose coffers shrank even as its obligations lingered. Nationwide was particularly affected after the terrorist attacks of Sept. 11, 2001.
What bedevils many condo hotel efforts is structural. Funding may not even be the leading issue.
“There's a lot of potential exposure to the variety of entities involved,” says R. Mark Woodworth, executive vice president, PKF Consulting, Atlanta. “You've built this 300-room hotel, carved it up, sold off 300 condo properties, the brand name is on the roof, people are managing the property, and the owner is unhappy and decides to litigate to cure any problems the owner believes you've caused. If I'm the owner, there's an awful lot of people I'm going to chase after to get my problems resolved.”
David Neff, a condo hotel specialist in the Chicago firm of Piper Rudnick who has represented Falor, won't discuss specifics. “The hotel industry in Chicago is doing well, the condo industry is not doing so well,” he says. “The hotel market has remained strong, if not gotten stronger, while the condo hotel market has weakened. Purchasers have not warmed to the condo hotel concept and there's a glut of pure condos as well. That confluence of factors has caused a slowdown in the sales and development of condo hotels.”
Falor could not be reached for comment. He's not alone in his troubles, however. Even some tourist destinations are hurting.
“I believe there's been more pullback in the appetite of consumers for condo hotels than there is with straight residential condos,” says Richard Hollowell, partner, Rachlin Cohen & Holtz, a Miami-based accounting and advisory group. “The typical profile of a condo hotel buyer is somebody seeking a second home. They want to come down for a month or two and have a professional manager take care of the property while they're gone.” That's why they'll choose a major brand or professional hotel management company.
This spring, a mezzanine lender told Hollowell he was looking to make a loan on a hybrid condo hotel-condo project that had presold half of its units by December 2005. “There hasn't been one sale in the last six months,” this lender lamented. “He says, 'Richard, what's going on here?'”
Hollowell told the man that while the remaining units are saleable, they may fetch far less than the $1,000 to $1,100 a square foot they sold for in early 2005.
Condos and condo hotel units “were way overheated here” in the 2004 and 2005 “boom years,” Hollowell says, “and there's going to be an overhang of inventory in both those segments for a couple of years.”
Tempering Hollowell's downbeat assessment is Michael Spiers, director of sales and marketing for the real estate department of the venerable Cheeca Lodge resort. The “flippers and investors” have receded, though some are holding onto their property in anticipation of another good sales opportunity, he says. In the meantime, though the market has cooled, the unemployment rate in Florida is at an all-time low and 1,500 people a day are moving into the state.
At Cheeca, where units cost $500,000 to $1.2 million, the average year-round occupancy is 82 percent, Spiers says. “Carefree ownership” is the motivation to buy a unit at this four-diamond resort in Islamorada in the Florida Keys, where the owners are sophisticated “and want to diversify their portfolio,” he says. “If I can have half-an-hour with somebody, I can sell the unit.”
But it can be hard. Just 90 miles north in Miami, where brothers Seth and Adam Kaufman do sales and marketing for The Blue, a resort under construction along the fairways of the Doral Blue Monster, the units are 65-percent sold. Still, the “market right now is extremely slow,” says Adam.
Their target market is the golfer who wants “hassle-free ownership,” says Seth. Each of the resort's 15 buildings boasts 16 residences, and even though there's been a slowdown, “we're doing eight to 10 deals a month,” Adam says.
Richard Millard, chairman of hotel management company Tecton Hospitality, remains bullish, particularly about condo hotel development in luxury resort destinations like the Seven Stars Luxury Resort & Residences Tecton's managing on Turks & Caicos.
In Miami, Tecton is managing condo hotel sales at the Astor and the Strand Ocean Drive. While sales of those units are “pretty good” at the Astor and the Strand is sold out, things are better even farther south. At the Turks & Caicos project, where units sell for $750 to $1,500 a square foot, the units are not only sold out, only the first phase has been built.
“We're very brilliant right now, and the marketplace is very good in the hotel business,” Millard says.
“The condo hotel business is today emotionally in the same place timeshare was 15 years ago,” he says. “But it only takes those of us who are professionals to legitimize it, and it has to be legitimized, that's all.”
What makes a condo hotel difficult is “more owners,” says Lee Weeks, CEO of Coral Hospitality, developer of the 250-unit Sandpearl Resort in Clearwater Beach. That's a mixed-use development with 50 condo hotel units atop 200 hotel rooms, next to a tower of about 114 standard condominiums. A smaller sibling, the Vero Beach Hotel & Club, will offer 84 luxury suites.
Sandpearl is sold out, Vero Beach about half-sold, Weeks says. “Just as you see a slowdown in straight housing and condos, you see a slowdown in condo hotels. That's not say they're dead, just that they're slower,” he says.
Even Las Vegas is not immune. This summer, Las Ramblas, a high profile, $3-billion project backed by actor George Clooney, tanked. Developer Related Las Vegas blamed rising construction costs and slowed sales for a failure that forced Related to rethink its proposed 4,400-unit complex. The rethinking led to Related selling the 25-acre site off the Strip for $202 million — more than twice what it paid just a year earlier.
MIXING CONDO HOTELS INTO MIXED-USE
Bruce Ford of Lodging Econometrics suggests that condo hotels are being assimilated into the lodging business in mixed-use projects simultaneously featuring them, hotels, conventional condominiums and, in some cases, timeshare and/or fractionals.
Las Vegas, Orlando and southern California remain the hottest condo hotel markets, and in almost all cases, such units are part of mixed-use developments. “Any urban center hotel developed today has alternative lodging at the facility, whether it's a private residential unit you buy to own, a condo hotel unit, or a timeshare,” says the statistical firm's vice president of sales and marketing.
Seven condo hotel projects under construction in Las Vegas represent 5,000 hotel rooms, 6,781 condo units and 860 private residences, Ford says.
In Orlando, 16 condo hotel projects are under development, representing only 6,669 units. “In Orlando, they continue to build and build and build and build and build and build,” Ford says. “They continue to develop larger resorts farther away from the attractions. At this point, Orlando is second only to Las Vegas in terms of number of hotel rooms in existing inventory.” But several hotels around Disney World that were built when that tourist magnet was are likely to be demolished in the next five years. “The amount of projects going on down there and their scale have to lead to this demolition,” Ford says.
Between Los Angeles and San Diego, there are six projects in the pipeline representing 1,250 units, 1,137 of them condo hotel units, according to Lodging Econometrics.
These three markets are exceptions.
“I think that in many areas where people are building them, condo hotels don't make sense,” says Grand Theme Hotels President Richard Kessler, a veteran of all kinds of lodging development. Kessler has developed only one condo hotel, the Beaver Creek Lodge in Colorado. “If it won't work as a hotel, the people selling it will have to mark it up for profit, so that's another layer of cost over the basic cost of the unit,” he says.
Skeptical, selective and savvy, the developer of Grand Bohemian Hotels in Orlando, St. Petersburg and Atlanta says prospective condo hotel developers should ask themselves these questions: “Are you in a place of very high barriers to entry? Is it a place where you would enjoy owning something?”
(Kessler has just reduced the number of condos in the Grand Bohemian he's building in St. Petersburg, increasing the number of hotel rooms.)
“People are a lot more discriminating now,” asserts Jan Freitag, vice president of Smith Travel Research. “I think that people have realized that when they try to sell units to individual owners, a legal headache comes with it that may not be worth the return. If you don't presell the way you had hoped because there is a large amount of condos in a certain market — and not enough buyers — what you do?
“If you have a good location and were planning to build a hotel anyway, you just go back to that.”
For more information and related articles, go to www.LHonline.com
CONDO HOTEL ADVICE
For the owner: Make sure the project has emotional appeal; don't sell on price and incentives.
For the operator: Risk-assess your project for sustainability and owner expectations; it's good to under-promise and over-deliver.
For the developer: If you sell branded, deliver branded. Source: National Association of Condo Hotel Owners (www.nacho.us)
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