RSBA & Associates 
Hospitality Consulting Services
400 Spear Street, Suite 106
San Francisco, CA 94105
Email: rickswig@rsbaswig.com
Web site: http://www.rsbaswig.com
 
,
 Despite Lack of Long-Term Data, Hotel
Developers Favor Hybrid Projects
-
The Fractional and Condominium Component Not
a Proven Solution to Development Prosperity
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by Rick Swig, June 2005

In 2005, fractional, condominium and residential inclusions are becoming a typical part of any hotel development. Almost any new hotel project includes one of the aforementioned components to justify and support the viability of the project.

There are fundamental methods to measure demand, positioning opportunities and revenue potential for traditional lodging projects to confirm or deny the feasibility of a hotel development or acquisition for potential owners.  Additionally, there is further public information available to identify incremental revenue possibilities and expense margins for forecasting purposes.

Quantifiable forecasts for hybrid hospitality projects are simply not as clear, since many seem to be based on concept and aspiration versus historical data. Research indicates that there is consumer desire to own a second home as a real estate investment with the combination of consistent yield, appreciation and value-added opportu-nities.  The prescription may be a condominium, which can yield financial returns as part of a hotel’s inventory, or a fractional ownership location, which provides a vacation home option without the upkeep headaches. Common sense and wishful thinking validate these directions, but where is the reality check?

Nearly half a million people invested in vacation property in 2003, which was up 24% from 2001. (New statistics are expected to show a similar pattern for 2004.) This was during a similar period when traditional hotel occupancies and room rates were declining. At the same time, worldwide sales of high-end fractional ownership and non-equity residence clubs rose to $515 million, which was a one-year increase of 38%. With upscale fractional investments ranging from $50,000 to $1 million per unit or share, there seems to be a market for consumers, who are now known as the “rational rich,” to invest in the ownership rights of two weeks a year instead of traditional year-round ownership complete with the headaches of perpetual upkeep.

At the same time, some hotel companies are purposely including fractional and condominium components as a development tool because it is a perceived way of paying off initial development costs and turning a profit more quickly.  This formula, although meeting with some success, is not a proven long-term solution to development prosperity.  From the point of view of both a consumer and devel-oper, however, the new condo, residence club or frac-tional ownership structure might not be the panacea.

Consumers are now experiencing surprise from double-digit increases in periodic maintenance fees. Soon there will be the potential for large incremental investment sur-charges resulting from hotel brand requirements for product standards and maintenance of the physical plant quality due to typical wear and tear. In addition, the resale value of fractional and condominium ownerships in the new wave of development remains largely unproven.

Developers are faced with the consequences of consumer market depth. Beaches, lakes and mountains have been the foundation of second-home ownership, so what of the urban development of non-traditional, mixed-use, hotel-residential projects? Although in 2003, fractional ownership grew 120% in sales volume (2004 is expected to exhibit a similar trend), the product base is still limited, while the potential depth of demand has not been fully quantified. Abundance of inventory that has historically been the Achilles’ heel of traditional hotels will impact this hotel business as well.

Fractional and condominium hotel development is aimed at providing incidental overnight stay demand with an alternative option. This will have impact on demand for traditional hotel rooms. Again, there is no broad-based and long-term research to clarify the potential for displacement and financial impact on hotels.

The only sure thing in the evolution of alternative hospitality residence products is that it is new territory. The learning curve will certainly be long term and require at least a couple of product cycles. Fasten your seatbelts and get ready for the ride. 
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The views expressed in this article are those of the author and not Real Estate Media or its publications.

Rick Swig is president of RSBA & Associates, a hospitality industry consulting firm based in San Francisco. He may be contacted at rickswig@rsbaswig.com.

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Contact:
RSBA & Associates
400 Spear Street, Suite 106
San Francisco, CA 94105
E:mail:   rickswig@rsbaswig.com
Website: www.rsbaswig.com
Tel:  (415) 541-7722
Fax: (415) 541-5333

 
Rick Swig Article Index:
Travelers Prefer Innovation, Creativity Over Predictability, Discount Pricing / Rick Swig / March 2005
Recent Occupancy, ADR Growth Still Do Not Spell Post-9/11 Relief; Total 2% revenue growth over four years has not kept up with national annual average inflation growth of 2.5% / Rick Swig / RSBA Associates / November 2004
Hotel Success Hinges on Relationship Between Owner, Asset Manager, GM / Rick Swig / August 2004
Hotel Operators Can Gain Market Share Through Distinctive Brand Images; A 100-room boutique hotel can develop more identity within a market than its 1,000-room competitor  through customer impact points / Rick Swig / May 2004
Hotel Operators Must Share Blame with the Economy for Stagnant Performance / Rick Swig / RSBA Associates / January 2004
Investors Seeking Opportunistic Hotel Buys Are Likely to Come Up Empty Handed  / November 2003
Hotel Sector Remains in the Game Despite Reaching Strike Three; Occupancies are now beginning to improve compared with last year and a poor first half of 2003 / September 2003
Some Stability Has Returned to the Hotel Sector, But Its Staying Power Is in Question; The Plundering of Lower Market Tiers Has Cost Upscale Hotels / May 2003
New Business Practices Essential to Lodging Companies’ Success / February 2003
Unreliable Market Trends Yield an Uncertain Direction / October 2002
The Bigger They Are, The Harder They Fall / September 2002
News of Boutiques’ Demise Is Greatly Exaggerated  / May 2002
Management by Spreadsheet Erodes Full-Service Hotel Core Values / Feb 2002
Hotel Lenders Face Challenges In Tough Climate / October 2001
Where We Are Now Depends on Starting Point / Summer 2001
Solid Management Practices Can Improve Franchise Value / May 2001
Hotel Market Stagnation To Continue / January 2001
Here Today…but Tomorrow? / November 2000
Ready, Willing, and Unable? / August 2000
Independent Hotels: The New Brand Alternative / June 2000
Ankle Biter Syndrome / January 2000
Redefining a Mature Hotel Sector / November 1999
Focus On Operations Is Not Enough / August 1999
What’s Next?? / May 1999
Growth Through Management  / Feb 1999
Expect a Subdued Market in 1999 / Feb 1999
Hotel Real Estate: Back to Fundamentals / Nov 1998
The Hotel Investment Barometer For Institutional Investors / 1998
The State of Independents / 1998
Success (or Survival) of Boutique Hotels and Resorts / 1998



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