|By Tom Stieghorst, South Florida
Sun-SentinelMcClatchy-Tribune Business News
Apr. 1, 2007 - A few years ago, condo-hotels practically sold themselves.
With real estate prices marching upward, the idea of owning a condo unit on the beach and covering some of the expenses through hotel rental payments seemed irresistible.
"We weren't salespeople, we were order takers," recalled Joel Greene, president of North Miami-based Condo Hotel Center. "I was averaging a sale every third day and I didn't even meet many of my customers."
Today, the market has sobered up. Condos aren't selling and condo-hotels are caught in the same downdraft.
In West Palm Beach, plans for The Harrick, a 138-unit condo-hotel at Lakeview Avenue and South Dixie Highway are on hold. "We're redesigning it as a hotel," said developer David Gostfand. "The condo market is a little quiet at the moment."
For tourism, the downshift could signify that some buildings financed by condo-hotel speculation weren't necessarily good ideas. It could also delay the construction of new hotels announced but not yet started.
About 1,250 condo-hotel units have been opened in the past two years in Broward and Palm Beach counties, with another 2,500 units approved or under construction. That's a small number compared with the 15,500 units proposed for Orlando or the 32,800 going up in Las Vegas. But if condo prices continue to cool, buyers could walk away.
That hasn't happened yet, said Peter Hall, a broker at the W Hotel in Fort Lauderdale. But Hall said he knows of one partnership that had deposits on seven condo units in Fort Lauderdale. Faced with closing on all seven, plus maintenance fees and taxes, the partners balked. They unloaded the units to secondary buyers, but at "fire-sale prices," Hall said. "They got out for pretty much what they put in," he said.
Condo-hotels arose out of the tough financing environment for hotels in the late 1990s. Cyclical overbuilding had left lenders leery of lodging, especially the full-service hotels that had kitchens, restaurants and meeting rooms.
While lenders today will loan 70 percent of a hotel project, then they were offering to finance only 50 to 65 percent. To generate some upfront cash, developers began selling some rooms as condos. Since part of the building would be a hotel, owners could put their units in a rental pool when not using them, generating income.
The idea caught on and spread to developments in which the entire building operated as a condo-hotel.
At about the same time, the Federal Reserve cut interest rates to historically low levels, sparking a real estate boom. Condo-hotel units that sold for $650 a square foot in the late 1990s are offered at $1,200 to $1,400 a square foot now.
"The big question is with all these projects coming along at one time, are there enough luxury buyers?" said Jack McCabe, president of McCabe Research and Consulting, a Deerfield Beach real estate firm.
Buyers typically deposit 10 percent of the unit price when they sign a contract, and put in another 10 percent when construction starts. The balance doesn't come due until the building is finished and the sale closes.
McCabe said that the pace of presales has slowed dramatically over the past six months. Builders that haven't gotten out of the ground yet will find it much harder than in the past to sell enough units to qualify for a loan.
"Some of these buildings aren't going to be completed in the time frame they had originally projected," McCabe said.
While a separate breakout of condo-hotel prices isn't available, condo prices in Broward County fell 6 percent in January compared with the same month a year earlier. In Palm Beach County, condo prices were 2 percent above January 2006.
The slowdown has given pause to many condo-hotel buyers, said Hall. "The general public is sitting on the sidelines, waiting to see what's going to happen with the residential market and interest rates," he said.
Some developers have dodged the long and risky task of building from scratch by converting existing hotels to condo-hotel ownership. At Fort Lauderdale's Pelican Beach Resort, which was bought last year by Condominium Ventures of America, about 60 of the 159 units have been sold at prices from $540,000 to $890,000.
"It's an existing property with an existing track record," said Ken Harris, president of Atlanta-based Condominium Ventures. "We wanted to sell what you could touch and see and feel."
Many developers are starting to scrounge for buyers in distant locations, especially Europe, where a favorable exchange rate makes buying a U.S. condo less daunting. Others emphasize that coastal real estate isn't being made anymore.
"The market for oceanfront, particularly on the sand, is going to continue to be strong," said Debbie Orshefsky, attorney for a partnership that plans a 28-story building with 226 condo-hotel units where Ireland's Inn now stands.
But some developers concede that buyers must get a low price per square foot to have any hope of a return on their investment.
Jim Clarke plans to begin construction on Clarkes Hotel, a 92-unit condo hotel in downtown West Palm Beach, within 60 days. "We're virtually sold out, but our prices are low," said Clarke, who estimated an average unit costs $375,000.
Clarke cites a rule of thumb among hotel developers that to be profitable rooms should rent for a tenth of 1 percent of their building cost. If a buyer acquires a unit for $500,000, that translates to room rates of $500 a night.
"That's kind of hard to sustain down here," Clarke said.
Tom Stieghorst can be reached at firstname.lastname@example.org or 305-810-5008
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