It has often been said that the lodging and hospitality industry is cyclical, not only as it relates to the peaks and valleys routinely experienced from an economic standpoint, but also as it relates to the overall development of accommodation supply within any particular locale. This has been evidenced over time by the flurry of new construction revitalizing more mature destinations, such as South Florida and Las Vegas in recent years, as well as the introduction of conversion product in some emerging vacation areas.
Few product types illustrate this cyclical dynamic as well as the re-emergence of today’s condominium hotels. If you were following the industry in the 1980s, you remember that developers in markets including the U.S., Europe, and Latin America were building condo-hotels with little fanfare. But are we currently experiencing only a simple reenactment of condo-hotel development seen in years past or is today’s product— and its associated value proposition— fundamentally different?
The nature of both the second-home real estate and hospitality markets in many established destinations such as the Colorado mountains, and certain urban locations like New York City or New Orleans, may be looked to for part of this answer. These areas are presently enjoying a cyclical convergence where certain market factors are aligned: dramatically improving real estate market values, a strong near- to mid-term outlook for leisure travel and a comparatively “favorable” interest rate environment. As a result, the condo-hotel phenomenon is penetrating the marketplace with sales prices generally ranging from as little as $700 to nearly $1,200 per square foot, and is quickly engraining itself into these areas’ accommodation supply mix. We may expect to see condo-hotels having a profound effect upon the competitive landscapes in many of these destinations.
From a development standpoint, it is important to keep in mind that the condo-hotel structure represents a vehicle to finance new and/or conversion project development. In fact, in times when more traditional forms of project financing may be more expensive or greater than the project development can otherwise afford, financing development utilizing a condo-hotel structure may represent a worthy alternative. This is especially pronounced in both established resort and “jet-set” locations where the combination of area popularity and the cache of having a second-home attract potential buyers.
In such cases, the financial viability of the project must be assessed based upon a study of two distinctively different yet complementary business models — the “real estate development” model and the “hotel/resort operating” model. Within the real estate development model, today’s developer must be able to identify the proper price point that matches the condominium product being offered with consumer demand. With that element established, an estimate of the relative sales velocity upon which the product can be absorbed in the market can then be determined.
Scott Berman is a Miami-based principal in the global hospitality and leisure consulting practice of Pricewater-houseCoopers whose firm regularly serves as a key business advisory source to real estate and resort developers contemplating this product strategy. Berman noted: “Condo hotels are the ‘rage’ of the industry. Properly situated, these developments have the advantage of providing today’s real estate developer with both a mechanism to recover associated development costs quicker than other forms of development, but also offer longer-term security by providing the underlying management of the on going resort management function,” Berman said.
Leveraging their vast experience, many internationally recognized hospitality companies have forged leadership positions managing condo-hotels, and it is not unusual to see major brands associated with these developments in nearly all established and emerging condominium-hotel resort locales.
Berman advises that although these resort projects have gained popularity in a rather short period of time, successful resort developers must continue to best anticipate just how well a condo-hotel development will perform once opened and how that performance will meet or exceed the expectations of its “new” investors. Therefore, Berman said “incorporating flexible use rights into the condominium-hotel structure may be seen as a key way to help manage and exceed those investor expectations by enhancing the overall value proposition.”
In various instances, some experts have described the condo-hotel somewhere between a hotel and vacation ownership, an industry that has enjoyed tremendous success during the past two decades. Timeshare’s growth can be attributed to several factors, including: continually improving quality that offers consumers condominium-style vacation accommodations in destinations around the world; flexibility by way of multiple use options allowing owners to customize their vacations according to their own preferences; reasonable consumer protection that has created a strong, stable marketing environment; and the entrance of major hospitality companies into the sector— attributes, most of which, exist in today’s condo-hotel development environment.
The opportunity for owners to exchange or “trade” their use rights through a network of global resorts has been one of the most compelling motivations for purchasing timeshare in all of its manifestations. Many believe that it would also enhance the value proposition for condo-hotel owners by expanding accommodations alternatives to include vacations in resorts around the globe. Other benefits might include year-round travel services, as well as leisure and lifestyle offerings.
“Beyond bringing our core exchange option and value added benefits to condo-hotel developers, we are also a source of intelligence for what today’s consumers are looking for in vacation experiences as well as a resource for program infrastructure design,” said David Gilbert, executive vp of resort sales and marketing for Interval International, a global vacation exchange company.
“We’ve seen the industry evolve during the past 30 years to encompass a broad spectrum of timeshare product— from ‘traditional’ one-week fixed stays to flexible use points-based clubs to fractional ownerships,” Gilbert continued. “We’ve custom designed programs for a variety of our clients and there’s every reason to believe that our expertise would be a valuable asset to developers in the condo hotel arena as well,” he said.
While the development approach to the condo-hotel may not be entirely new, its application in today’s hospitality environment is clearly at the forefront.
