by J. Richard McElyea and Gregory Cory
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We may be witnessing the start of
a new era of recreation, with tourism poised to become one of the world’s
largest industries by the end of the decade. In the United States, the
“baby boomers”, the most experienced and sophisticated travelers of any
generation in history, have entered their primary earning years and should
continue to set aside part of their growing disposable incomes for personal
vacations. |
A massive market outside the U.S. and Europe also is becoming enfranchised
with the disposable income and time to enjoy recreation. In fact, some
estimate that this market, largely concentrated among the Asian countries,
has greater growth potential than the American and European markets combined.
Although this suggests a bright future for the investment and development
of destination resort properties, the resort market is currently facing
difficulties resulting from the recession, overbuilding and uncontrolled
costs.
Moreover, resorts present challenges not encountered in most other property
types. Unlike traditional real estate, they are extremely operationally
intensive and service-oriented and face seasonal business patterns.
Little has been written on the distinct market of resort properties,
particularly in comparison with the great deal of published information
on traditional hotels. This article examines the evolution and condition
of what has become a segmented market, the trends in resort facilities
and services, and investment and development opportunities.
The Evolution
of Resorts
Resorts mean different things to different people. For some, a resort
merely must provide relaxation and recreation. Others may want a resort
to improve health and well-being, or require beautiful surroundings and
the highest quality of food, entertainment and service.
The resort industry has evolved to meet this diverse set of needs,
balancing basic amenities with new and changing facilities, services and
experiences.
Traditional Resorts
Historically, the most famous resorts in North America were free-standing
properties, such as the Greenbrier in White Sulphur Springs, West Virginia,
and the Arizona Biltmore. Most of these grand old resorts were built by
wealthy individuals or railroad companies and offered a wide variety of
recreational amenities with little commercial activity or real estate offerings.
Subject to highly seasonal occupancies, they often were closed during a
large part of the year.
Planned Resort Communities
During the 1960s, planned resort communities started to emerge, such
as Sea Pines Plantation on Hilton Head Island in South Carolina and Costa
Esmeralda in Sardinia. These resort communities contain a variety of overnight
accommodations, extensive amenities and real estate offerings, including
luxury resort hotels, resort condominiums, moderately priced hotels and
cottages, second homes and extensive retail shopping areas.
Mega Resorts/Fantasy Resorts
In the past eight years, a new type of resort has entered the marketplace
- mega resorts or fantasy resorts. These are best exemplified by Chris
Hemmeter’s resorts in Hawaii (Hyatt Regency Waikaloa, for instance) and
the Disney and Hyatt Grand Cypress hotels in Orlando, Fla.
These resorts combine lodging, meeting facilities and an array of amenities
and activities, many with fantasy themes. Capital and operating costs thus
are extremely high, requiring high room rates and occupancies throughout
the year.
The Orlando resorts have tapped a strong year-round market, but those
in Hawaii have not been as successful.
Despite their attraction, the long-range viability of the more elaborate
of these resorts is in question.
Boutique Resorts
For the market segment that does not like big resort hotels, a strongly
emerging product is the small boutique resort hotel that caters to the
high-end of the market and emphasizes service, quality and privacy. Boutique
resorts, such as the Ventana Inn in Big Sur, California, and the Jumby
Bay on Antigua, have 50 to 100 rooms and serve select markets.
Boutique resorts target upscale individual travelers and small business
meetings. They tend to focus on lodging and related amenities, with limited
shopping and residential development. They do not try to provide “everything
to everyone”, but rather promote a mystique and market niche.
The Business/Meetings Market
Probably the most significant economic trend in resorts over the past
20 years has been the strong shift to conference business as one of the
major contributors, if not the major contributor, to resort occupancy.
Although a limited number of “pure” resorts rely almost entirely on
FIT (free, independent traveler) occupancy, most have had to make major
efforts to attract conferences and business meetings as an economic necessity.
For most large resorts, between 45 and 70 percent of occupancy is now in
the form of group business.
The business/meetings market requires first-rate facilities and services.
Corporate meeting planners generally desire a self-contained resort with
everything in-house, including a multitude of recreational activities.
Resorts and Traditional Hotels
Although the major national and international hotel chains were slow
to enter the resort market, they are now the dominant players in large
resorts. However, there are significant differences between operating a
resort and a traditional hotel in a major urban center.
Resorts cost more to build than traditional hotels, but they generate
more revenue from longer guest stays, higher occupancy rates and other
on-site services. In 1990, occupancy rates for the top 25 resorts averaged
76 percent, compared to 71 percent for the top quartile of traditional,
full-service hotels, according to a study by Pannell Kerr Forster. Room
rates averaged $136 per night in those resorts versus $94 in traditional
hotels, while resorts’ net operating income as a percentage of total revenues
was 30 percent higher.
Other primary differences include:
| Occupancy: Traditional hotels typically cater to weekday travelers
and thus face an occupancy threshold they cannot surpass without penetrating
the weekend-meeting or FIT-getaway markets. Resorts, on the other hand,
face strong seasonal fluctuations in occupancy. Good properties can achieve
occupancies of 80 percent or higher during a majority of their peak operating
seasons.
Rates: Traditional hotels provide deep discounts on the weekends,
whereas resorts are inclined to do just the opposite. During off-seasons
and “shoulder” seasons (typically the fall and spring months), resorts
also may offer rates at almost half those of the peak season, often along
with inducements traditional hotels typically cannot provide.
Retail Shops: Traditional hotels typically achieve limited retail
sales, mainly of convenience items. Resorts, however, offer souvenirs,
arts and crafts, designer resort wear and logo items, which help their
retail departments contribute more to the bottom line.
Food and Drink: Resorts can achieve much higher per capita food
and beverage revenues than traditional hotels. This is due to menu pricing,
the greater number of meals captured on-site and the higher occupancy per
room.
Amenities: Traditional-hotel amenities typically are limited
to an exercise room, pool and the concierge’s ability to arrange off-site
activities. A resort provides a wide range of amenities, such as golf and
tennis, that can be major revenue generators. Golf, in particular, has
been a primary reason why resorts have attracted business meetings. |
Current Market Conditions
Economic Research Associates’ surveys have found occupancy rates and
room rates have fallen somewhat since 1990. Resorts worldwide began to
suffer that summer as fear of war in the Persian Gulf restricted travel
and the economies of many industrialized nations slowed or entered recession.
The resort market also has been hampered by overbuilding. Widespread
development in the 1980s was fueled by the protracted economic growth of
the U.S. and other nations, as well as a large influx of capital from foreign
investors, particularly from Japan and other Asian countries. Much of this
increased activity was focused on high-end, luxury properties that were
considered the most recession-proof.
Government attitudes toward resort development exacerbated the trend.
Countries like Mexico began to look at tourism and resort development as
a mechanism for economic development and thus created various incentives
for resort and hotel construction.
Cost overruns in acquisition, construction and operation have also weakened
the market. Japanese and other Asian investors often acquired or developed
properties for fees that could not be supported predicated on traditional
operating guidelines.
For example, the amount of investment per room in many of the luxury
resorts built in Hawaii in recent years has exceeded all normal parameters.
Several have been built or purchased at a cost of over $500,0000 per room.
Applying the rule of thumb that a hotel needs $1 per night per room for
every $1000 invested, an investment of $500,0000 per room requires $500
per night, which is not being achieved.
Few of the premier properties built recently in Hawaii are meeting debt
service. Recent development encouraged by Bali at Nusa Dua resulted in
so much overbuilding that major properties such as Hyatt, Hilton and Sheraton
are operating at less than 50 percent occupancy. Tourism and hotel occupancies
in the Caribbean also have slipped temporarily.
Trends in
Resort Facilities and Services
To thrive in an increasingly segmented market, resorts will have to
focus on amenities and services. Some major trends in facilities and services
are described below.
Health Spas and Fitness Facilities
With people more concerned than ever before with health and well-being,
it is not surprising that fitness facilities are now considered a basic
amenity for resort and hotel properties.
Some resorts are adding on-site health spas to complement existing
fitness centers. Health spas pamper guests while offering educational and
medical programs designed to monitor health and guide nutritional habits.
Some even offer holistic, “New Age” programs like yoga, acupuncture and
meditation. Spas have higher capital and payroll costs than fitness centers
and also require highly skilled personnel.
Soft Adventure Programs
Many new and larger resorts have begun to provide a variety of off-site
excursions for guests who want more adventure and fantasy than traditional
resort activities offer. These “soft” adventures—white-water rafting, three-day
hikes, wild-game hunting—typically require guides and provisions and include
some element of thrill.
Gaming
Casino gaming is spreading across the U.S. as state and local governments
legalize such operations to generate tax revenue. More than a dozen states
already allow some form of casino gaming on land or water.
Gaming in a resort setting has become more common as existing casino
operations have developed resort facilities to broaden their market appeal.
However, the proliferation of casino gaming may reduce its appeal as a
tourist draw.
Ecotourism
The resurgence of environmentalism is creating a new submarket of “ecotourism”—sojourns
to Amazonian rain forests or trips to study Galapagos tortoises. Because
of the nature of these tours and the fragile environments in which they
operate, this market is best addressed by smaller boutique resorts and
service providers that can guarantee a quality recreational experience
with minimal environmental impact.
Market Opportunities
Southeast U.S.
Blessed by warm weather and proximity to much of the U.S. population,
the Southeast should continue to provide opportunities for resort investment
and development, particularly in coastal regions and in central Florida
near Orlando.
Florida has been successful in generating relatively high occupancy
patterns. Orlando, in particular, has become the region’s dominant tourist
destination and may have the most successful resort environment in the
entire country.
West Coast and Southwest U.S.
The recession and significant overbuilding have contributed to lowered
occupancies in major resort operations in the Western U.S. The Southwest,
particularly Phoenix, Arizona, has suffered the most from a proliferation
of high-end hotel rooms, poor real estate markets and slow economic growth.
Environmental restrictions will continue to severely restrict resort
development on the California coast and other prime Northern California
sites like the Napa Valley. These constraints should help support the high
rates already in effect as well as increase occupancies. California desert
locations do not have the same growth constraints, but face strong seasonal
patterns that affect pricing and occupancies.
The Caribbean
One of the Caribbean’s strengths has always been the diversity of cultures
and recreational experiences among its various islands. The region historically
has been a popular destination for FIT travelers and cruise operators.
However, access to the islands has been difficult, with few air hubs
or convenient connections. This has added to travel time and costs, and
has made it difficult for large, five-star properties to successfully penetrate
the market.
The situation is likely to change over the next decade. Air access has
improved, with a major commitment by American Airlines to Puerto Rico and
the establishment of direct air service from Europe to Antigua, St. Martin
and other islands. In addition, Europeans are becoming a much stronger
guest market, further bolstering occupancies.
Mexico
Mexico has been one of the most aggressive countries promoting tourism
in the last 20 years, with the government building airports and other infrastructure,
and offering training schools to encourage foreign investment.
Recently, the government has taken additional steps to spur investment,
liberalizing restrictions on foreign land ownership in coastal areas and
promoting private-sector financing of infrastructure and tourism development.
With an improved investment and economic climate, several U.S. companies
are developing massive projects in such areas as Cabo San Lucas and Cancún.
Although Americans traditionally have provided 85 percent of the guest
market for Mexican resorts, the domestic tourism market is growing rapidly
in importance.
Asia
The continued strength of the Asian economies makes the Pacific Rim
perhaps the strongest opportunity for future resort investment and development.
The rapidly emerging Asian middle class has sufficient discretionary
income to patronize resorts, while continued relaxation of travel restrictions
between Pacific Rim countries gives them almost unlimited access to the
region’s wealth of recreational opportunities.
Moreover, resort development in Asia will be easier than in other parts
of the world due to government promotion of recreation and public support
for infrastructure funding. Examples include Malaysia’s development of
Langawi Island, the massive development plans for Bintan Island off Singapore,
and Indonesian developments in East Java.
Hawaii
Hawaiian resorts have experienced serious problems over the past two
years because of cutbacks in travel, particularly by the Japanese, and
the massive building boom in luxury hotel rooms during the late 1980s and
early 1990s that has left a significant surplus in the marketplace.
As mentioned previously, occupancies and room rates at many of the new
resorts are currently well below what is required by their high development
and operating costs.
Hawaii’s long-range outlook is much more hopeful, with most future tourism
growth expected to come from Asia. Japanese tourists will continue
to be very important, but Taiwan, Singapore, Korea and other countries
should provide continually increasing traffic. A recent survey of airlines
serving Asian markets concluded that Honolulu will be the leading destination
for Asian tourists over the next 20 years.
Outlook
Today’s soft markets have created opportunities for investors to acquire
and reposition existing resorts that are underperforming. Such strategies
should focus on markets that are currently soft, but that have strong long-term
growth potential, such as Arizona, California, Florida and Hawaii. Moreover,
stringent environmental regulations in these areas constrain or add to
the cost of new resort development, lending further credence to strategies
that emphasize the acquisition of existing properties.
New development is more likely in more rapidly growing markets such
as the Caribbean, Mexico and Asia that seek investment and are not as apt
to strictly regulate development. Despite some market difficulties, resorts
represent a good, long-term investment and development opportunity. Among
the factors pointing to their continued approval: the prevailing public
perception of vacations and recreation as entitlements; the rise of dual-income
households that have higher disposable incomes and plan short, frequent
vacations; and the increased use of resorts for business meetings.
Other positive trends include: the large, young and relatively affluent
middle class in Asian and other nations with greater travel access; and
the increased speed and ease of travel as political and cultural restraints
have fallen. However, because today’s travelers expect much from their
recreation dollar and face more opportunities on to spend that dollar,
resorts will have to anticipate changing consumer preferences and cater
to specific market niches.
To prosper in coming years, resorts also will have to learn the lessons
of the 1980s and keep costs in line with reasonable expectations of future
revenue. They need to pay as much attention to the bottom line as they
do to their guests.
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About the Authors:
J. Richard McElyea is Executive Vice President of Economics Research
Associates in San Francisco. One of the firm’s original executives, Mr.
McElyea has worked in resort, tourism planning and golf development for
more than 30 years. He has consulted on projects throughout the world,
including California, Hawaii and Vermont, Mexico, Spain, Portugal, France,
Scotland, Italy, Japan and China.
Gregory L. Cory is Senior Vice President of Economics Research
Associates in San Francisco. He has worked for more than 15 years on resort
and tourism planning and development projects worldwide, and has extensive
experience in the Southeast U.S., the Caribbean and Latin America, as well
as with destination ski resorts.
© 1998 Economics Research Associates - All rights reserved |
