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Is it Time to Cash in on Condo Hotels?

Baccarate Condo Hotel

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Tuesday, May 27th, 2014

Have you ever left from a vacation at a luxury resort only to wish that you could extend your stay forever?

If so, you’re not alone. Luxury condo developments offer high net worth individuals the ability to do exactly that — own a luxury vacation home at a world-class resort, live in it, and enjoy the amenities when you’re there with the option, in many cases, to rent it out when you’re not.

What’s a Condo Hotel?

Condo hotels are typically high-rise luxury four- or five-star hotels that include impeccably furnished condominium suites in some of the most prestigious hotels and resorts in the U.S. and around the globe.

Properties range anywhere from $1 million to $60 million, as is the case of the penthouse suite just listed at the exquisite 50-story Baccarat Hotel and Residences, a Starwood Capital and Tribeca Associates project in Midtown NY.

Operated by exclusive hospitality groups such as the The Ritz Carlton, Trump International, Four Seasons, Sonesta, and the W Hotel, to name a few, condo hotels offer amenities ranging from full-service spa facilities, state-of-the-art gyms, world-class dining, and 24-hour room service to private rooftop pools, concierge, valet parking, and baby-sitting services — all in the privacy of your own home.

Rental Revenue

When owners of luxury condo hotel units are not using their properties, they can opt to place their units in the hotel’s rental program.

A professional management company handles the renting of the condos and all maintenance of the units and the common areas, operating the amenities and providing all guest services.

Rental revenue splits are typically in the 50-50 range. Condo hotel unit owners leverage the name recognition of a leading luxury hotel brand, their national affiliations, advertising dollars, central reservation systems, and management expertise, and as such, they benefit from higher rental revenues than a traditional condo owner.

The management company typically pays for the operating expenses, and the condo owners pay for real estate taxes, insurance, and capital improvement.

Investor or Enthusiast?

Condo hotel buyers are typically high net worth lifestyle enthusiasts or investors.

Lifestyle enthusiasts tend to buy at their favorite resort destinations and use their condos no more than five or six times a year. They enjoy luxury accommodations and the amenities and services provided at luxury hotels, but they don’t want to deal with the headaches associated with owning a second home. They want their property managed by someone else, ready to be used when they need it.

Investors, on the other hand, are less interested in lifestyle and more focused on pure return on investment, emphasizing cash flow and appreciation.

Most investors are hands off, don’t wish to be involved in the day-to-day management of the hotel condos, and look for investment opportunities in condo hotels that are operated by well-established, professional management companies.

Condo hotels are not just appealing to U.S. buyers, either. Europeans, South Americans, Chinese, and Russian high-net worth individuals and investors are buying condo hotels in favorite destination spots such as Florida, New York, Mexico, and Dubai, to name a few.

History and Trends

Condo hotel developments boomed from 2002 to 2008 as a result of the SEC issuing favorable guidelines on how to market and sell projects without engaging in the sale of a security under U.S. security laws.

Successful condo hotel projects popped up everywhere from beach and ski resorts to many metropolitan areas. But the boom went bust in 2008 as a direct result of the beginning of the Great Recession.

Many condo hotel projects were unable to close on sales when prospective buyers faced economic challenges and opted out of their contracts. The economic downturn caused many buyers to reconsider their purchases. Some could simply no longer afford ownership on a unit, while others questioned the overall value proposition.

Furthermore, buyer wariness was exacerbated by lenders no longer willing to make condo hotel loans on the same terms as traditional loans for second homes. It also didn’t help that the recession had affected the travel industry particularly hard, driving down occupancy rates and prices and leaving owners worried about anticipated revenues not covering their cost of ownership.

While it’s clearly too early to state that we are at the beginning of another condo hotel boom, there is no denying that hotel residences are becoming widespread as the economy continues to gain momentum and the real estate and housing markets continue to recover.

As well, according to the National Association of Realtors, while the sales of single-family homes increased by only 0.5% in April of 2014, condo sales were up 7% month-to-month.

Baby boomers looking to trade down are exceedingly more interested in condominiums, and the post-recession mentality has many Americans looking to streamline their way of living.

Developers, well aware of the housing recovery, continue to believe that demand for condos will be strong for the foreseeable future. These trends, coupled with a more favorable lending environment and continued demand from high net worth lifestyle enthusiasts looking for luxury resort amenities in the privacy of their own homes, will lay the foundation for continued growth in the condo hotel segment.

Whether buying at the Plaza in New York City, the Trump Hotel in Las Vegas, the St. Regis in Deer Valley, or any other lifestyle destination across the globe, people are beginning to realize once again that being on vacation even when you’re at home is a great way to live.

Until next time,

Paul Benson for Wealth Daily

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