I wrote this article in fall 2006, it wasn’t far off mark…
“Condo Hotels: The First Wave is just hitting the beach
U.S. consumers will close on the purchase of nearly 8,500 condo hotel units in 2007. Estimates claim 20,000 to 40,000 condo hotels are being developed for completion in the next 2-3 years. Who will buy these condo hotel units and why?
The First Wave
78.2 million baby boomers will reach retirement age in the next 14 years, where will they retire? Condo hotels could be a viable part-time retirement residence alternative for future retirees. Travel, mobility and luxury are stated goals of the next generation of retirees. Luxury hotel amenities and services, prime resort locations, and professional management services make condo hotel ideal for part-time residents.
When compared to a traditional second home, condo hotel allows flexible, anytime use, without time constraints; hassle-free rental and maintenance. Because it is whole-deeded ownership, condo hotel tracks the appreciation and valuation of traditional condominium ownership more closely than fractional and timeshare.
The demand for condo hotel is just beginning and supply is a fraction of the overall second home or hotel development market. If only 1/2% of the boomer generation opts to own a condo hotel, demand could exceed 350,000 units, 5 times the present development pipeline and 5 times as many hotel rooms are currently in NYC (71,000).
The U.S. hotel industry is marking another record year, underpinning the potential value of condo hotel as a cost effective second home alternative. If supply of new hotel product is constrained by construction costs and existing hotel rooms are converted to condo hotel ownership, the economics could further improve.
Guarantying Heads in Beds
When a consumer buys a condo hotel for personal use, the destination has nearly guaranteed a future visitor/stakeholder. In theory and practice, occupancy rises, asset utilization improves, shoulder seasons become “owner appreciation weeks”. The economic benefit to the community, resort project, and dispersion of risk/expense among new condo hotel owners is undeniable. Where a single hotel owner/operator assumes 100% of the project risk, a condo hotel with 200 units and individual unit ‘personal use minded’ owners may accept a lower cap rate and care more about the quality of services and amenities than the hotel’s ROI. Improving the guest’s experience as well.
200 Owners, Endless Nightmares
The media, legal counsel and hospitality industry has been quick to point out the numerous possible pitfalls of a condo hotel structure and the whims of multiple owners. Consumers need to recognize that any rental income is seasonal and erratic, but to disclose any rental program potentially violates securities laws. Developers walk a tight rope of disclosure, registration and risks.
As a mortgage lender to condo hotel consumers, we have talked with many buyers about their motivations and demographics. Most of our clients have been real estate investment minded and savvy second/third home buyers. Seeking a vacation home for less than 2-8 weeks per year. Many are people who have owned other forms of rental properties or are experienced commercial real estate investors. They often site the desire for appreciation and tax benefits before a rental income. Some are simply making a long term bet on price appreciation. They realize that in most cases, any potential rental income will not cover their mortgage, insurance and tax payments.
Condo hotel buyers are typically savvy, well healed buyers. Many buyers are using funds from a 1031 exchange. With a average age of 51 years old, our borrowers are solidly in the baby boomer demographic. Notably, a majority of these buyers have expressed interest in purchasing more than one condo hotel unit.
For over 20 years, the resort market for condo hotel has been a viable alternative to traditional second homes, with numerous examples in ski country, where families have used condo hotels as second homes with a rental program to offset costs.
Broad acceptance has yet to fully develop and the media is full of conflicting stories about condo hotel so consumers are reasonably skeptical. Projects marketing to a narrow well-defined demographic of buyer like university alumni, downtown Pied-a-Terre locales that appeal to suburbanites are just beginning to come to market, attracting a new buyer class. Resorts that offer lifestyle services and amenities are finding ‘member-minded’ buyers who may even live around the corner. These new consumers will define the next phase of this industry, and subsidized luxury will be the core value.
A condo hotel is more than a piece of a hotel, it’s a lifestyle purchase, a long-term investment and a trend that is just beginning to identify its demand.
By Bob Waun, CEO Vacation Finance, America’s First Second-Home Lender tm, www.vacation-finance.com 0r waun@vacation-finance.com
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