Five, count them, five luxury condo-hotels are going up along a 1.5-mile stretch of sunny Fort Lauderdale Beach, Fla. Sound familiar? Substitute “condo” for “condo-hotel” and history might be repeating itself all too quickly. Condo-hotel projects appear to be the multifamily industry's latest craze, but can the market handle the volume of product scheduled to come online within the next couple of years? “A lot of these projects saw initial success from speculative buyers, and because the first ones had highly successful initial sales campaigns, everyone said this as the hot new thing. So they rushed to get into condo-hotel building just like they did with the condos,” says Jack McCabe, CEO of Deerfield Beach, Fla.-based McCabe Research and Consulting. “Now we have a number of markets that are completely over saturated with condo development, and I think we are also going to see that [happen] in the condo-hotel sector.”
Developers, of course, are hoping that their hybrids will have staying power. The W Fort Lauderdale Hotel & Residences, which is expected to open in the first quarter of this year and includes 171 condo-hotel rooms and 341 hotel rooms, is nearly sold out. Yet, the developers admit they are not sure how long such success will continue.
“Right now, everything is being affected by the current marketplace, and everybody is looking around to see what is healthy and what is not,” says John Yanopoulos, CEO of Miami-based DYL Group, which is developing the property. “[I think] the condo-hotel business is still healthy but there is going to be a shake out over the next year.”
Clearly, though, the trend has momentum. The product type boasts a stronghold in major markets across the country, and new financial models help mitigate some of the historical risk associated with condo-hotels. Still, only time will tell whether the benefits outweigh the risks.
TAKING THE LEAD There's certainly no lack of condo-hotels to keep an eye on. More than 200 such projects are in development across the United States, according to the Scottsdale, Ariz.-based National Association of Condo Hotel Owners. Sin City claims the most condo-hotel projects with 32,000 units planned or under construction, followed by Orlando with 15,000 units, according to McCabe Research and Consulting. Hot projects include the highly anticipated CityCenter, a $7 billion MGM Mirage development in Las Vegas that will feature casinos, hotels, condos, and two hybrid condo-hotels.
Why are these crossbreeds so popular? For one, hotel developers, or condo developers looking for new opportunities can spread their financial risk among condo owners. Second, many of these are Class A assets, which are often a safer real estate bet than entry-level product. Plus, these projects are likely to bear the brand of a high-end hotel operator, such as Starwood or The Ritz-Carlton, which boosts buyer appeal even further.
“It makes financing a project significantly easier if there's a Four Seasons or a Ritz-Carlton or W [hotel],” says Marty Collins, president and CEO of Gatehouse Capital, a Dallas-based national real estate and management firm. “People trust brands. They have more confidence.” Gatehouse is developing several W-branded hotels and residences, including its largest to date—the $600 million W Hollywood Hotel & Residences at the hip intersection of Hollywood and Vine in California. The mega mixed-use masterpiece, developed in partnership with HEI Hotels & Resorts and Legacy Partners, will feature a 305-room W Hotel, 143 condos, 375 luxury apartments, and more than 50,000 square feet of retail space. The developer has released a limited number of residences, which have all sold.
DIFFERENT BREEDS Though anything involving a hotel and condos tends to get lumped under the generic term “condo-hotel,” these projects work in a couple of different ways. By strict definition, a condo-hotel allows buyers to purchase a unit with the option of entering the unit in a hotel rental program when not in use. The units tend to come furnished, and owners can access and utilize all of the hotel's amenities—even room service and housekeeping.
However, a growing number of multifamily developers are taking a different route, teaming with high-end hotel operators such as Starwood, The Ritz-Carlton, and Four Seasons to offer what's typically called a “hotel and residences.” The hotel and condos are built either in adjoining towers or with the condos directly on top of the hotel rooms. Unlike condo-hotels, the condos are sold strictly as residential units without the option to enter a hotel rental program. Condo residents still have access to all of the hotel's amenities.
Condo-hotels, as traditionally defined, started to pop up in the late '50s and grew exponentially in the '70s, especially along the Florida Panhandle, due primarily to a tax law that allowed condo buyers to write off expenses such as association fees and property taxes. However, in the '80s, this tax loophole was eliminated and condo-hotel development fell dormant for more than a decade. The product didn't resurface until after Sept. 11, 2001, when the hospitality real estate market tanked. The hybrid was a financial mechanism for hotel owners to recapitalize their projects by selling the units, Alexander says.
“The Western Whistler opened in Vancouver, British Columbia, in 2002 and was a tremendous success,” Alexander says. “It basically became the foundation for Wall Street to participate in condo-hotel developments.”
Today, the larger developers tend to build a mix of traditional condo-hotels and hotel and residences. New York City-based The Related Group is no exception. One of the firm's latest projects, The Viceroy Hotel in Snowmass, Colo., features a mix of traditional condo-hotel rooms and branded residences. “We use condo-hotels as a vehicle to stimulate sales of the total development,” says Ron Wackrow, executive vice president of The Related Lodging Group, a division of The Related Group. “In Snowmass, we are doing a full range of development. It satisfies a much broader spectrum of the market.”
Yet, some developers avoid the traditional condo-hotel model due to a major securities risk, which stems from whether the units are classified as a financial security or as traditional real estate. The Securities and Exchange Commission classifies condo units in these projects as securities if the condo unit is sold to the buyer with the explicit expectation that the buyer will earn income or derive tax benefits through, for example, rental program participation. If that's the case, then only a securities broker can sell the unit.
“What's to [prevent] the MLS realtor from saying these units can make $300 a night, and you are going to get half of that?” Alexander says. “It's the developer's responsibility to make sure that is not going on, and too many of them don't have the ability to control that.” To avoid these SEC regulations, the majority of developers sell their units as real estate, which means the seller cannot promote the potential economic or tax benefits from a rental arrangement, nor project how much rental income a unit can earn.
Gatehouse Capital has a few condo-hotel projects under its belt but would rather develop branded hotel and residences. More and more hotel brands are saying no, too, including Starwood Hotels & Resorts Worldwide, the parent company of the W brand. “It's very cumbersome for a brand to deal with 300 owners. There are a lot of [financial] security issues you have to be careful of,” Collins says. “It's a slippery slope, and brands tend to shy away from them.”
While the condo-hotel model has proved popular since 2001, some developers expect to see the development of more hotel and residences projects going forward. “I would say the pendulum has swung more to doing a hotel with residences on top,” says Jim Borders, CEO of Novare Group, the Atlanta-based developer of TWELVE Hotels & Residences in Atlanta. “There were some condo-hotel deals that proved to be difficult in terms of dealing with a lot of different owners of the individual rooms. Also, in 2005 [for example], it was more difficult to get traditional financing than in '06 and '07.”
FORWARD THINKING It's too soon to predict the fate of either model as a large chunk of projects are still in the development stage. Real estate headlines, however, reveal a fair number of projects already biting the dust. Three condo-hotels in South Beach, Fla., declared bankruptcy or entered foreclosure in 2007. This included the 24-unit St. Augustine, a condo-hotel conversion project that went up for sale in an auction last year—no one even showed up.
“That tells me something,” says McCabe of McCabe Research and Consulting. “Investors are looking at these and saying, ‘Are these really going to be a winning proposition?' I think investors would say their greatest disappointment is that their rental returns have been minimal compared to initial projections. In many cases, the rental income has not even [covered] the monthly maintenance fees for the unit. When you throw in insurance and other things, they have been somewhat of a losing proposition.”
More recently, in December, The Related Group's $200 million luxury Florida condo-hotel, Icon Celebration, was put on hold. (Related executives declined to comment on this deal.) But the developer is going ahead with a number of other hybrids, including The Viceroy Hotel in Snowmass, Colo.; the 409-room W South Beach Hotel and Residences in Florida; and The Grand, a 3.6 million-square-foot development in Los Angeles that will include a 295-key Mandarin Oriental Hotel crowned with 266 luxury condos.
On the upside, these hybrids tend to be luxury product, which seems to be most insulated from the housing bust. “With the latest residential real estate adjustment, the most successful [condo-hotel] projects are rare air, very dense, high-demand products in difficult to develop locations,” says Alexander of the National Association of Condo Hotel Owners.
Location is critical, McCabe agrees. “Are these projects close to restaurants and shopping? In Vegas, are the casinos attached or part of multi-use projects with on-site gambling?” he asks.
These days, just claiming a beachfront location, be it South Beach or Fort Lauderdale, isn't always enough.
GAME ON
Condo-hotels go niche, catering to sports fans.
Devoted college alumni trek miles to catch their alma mater's football games. But finding a place to stay during a busy football weekend, especially in a small college town, can be tougher than earning that diploma. Enter Gameday Centers Southeastern, a Duluth, Ga.-based developer that partners with universities to develop condo-hotels within close proximity of college athletic facilities.
“People are crazy about their colleges and their sports programs,” says Dana Baus, vice president of sales for Gameday Centers. “The company's original president came up with the idea, and our first project at Auburn University sold out almost overnight, so we added another 20 units, which sold out really quickly as well.”
Gameday's projects mark a geographic shift for condo-hotels, which are typically located in resort towns or big urban locales such as Chicago and New York. Dante Alexander, president and CEO of the Scottsdale, Ariz.-based National Association of Condo Hotel Owners, expects to see more niche products surface in secondary markets. “The condo-hotel is ideal for any event or activity located in an area with periods of undersupply,” Alexander explains.
Gameday has built projects at Auburn University in Alabama, the University of Georgia at Athens, and Florida State University, and is planning to develop one at the University of Tennessee at Knoxville. The communities, decked out in college-themed décor, offer single suites up to three-bedroom/three-bath penthouses. Amenities include restaurants and clubrooms. Owners use the units for game days and other school events and have the option to enter the rooms in a rental program.