Condotels catch on fast - maybe too fast

Thousands of units under way in major real estate markets
By: Glenn Roberts Jr.: Inman News
Charlotte Chipps, an Ohio schoolteacher, bought a condominium-hotel unit last year in Daytona Beach, Fla. A developer had bought up a couple of hotels in the area and converted the buildings into condotels - which allow buyers to purchase individual units and gives them the option to enroll in a rental program that opens their units to hotel guests for a share of the rental income.

"It was sort of a whim," she said. "I do own a house in the Daytona area that I rent. I had just that little bit of experience. I'm not a person with any money. I just thought that this would perhaps be an investment for me. If values continued to go up, I would keep it for two or three years and make $20,000 or $30,000."

Meanwhile, at the southern end of the state, a swarm of new luxury high-rise condotel projects are in the works. The surge of condotel developments has hit other coastal markets too, and there are several high-end projects under development in downtown Las Vegas.

Condotels run the gamut from aging, low-rise hotel conversions to ultra-luxury, new high-rise towers backed by big-name developers and hotel chains. The condotel movement even has its own association, formed this year: the National Association of Condo Hotel Owners, or NACHO.

Condotels are not just a flash in the pan, says Dante Alexander, president and CEO for the condotel association, though they aren't typically a cash cow for owners, either - and buyers should be aware of all of the costs and complexities associated with these properties.

"People like to refer to it as a trend," said Alexander, who formerly worked for Starwood Hotels & Resorts Worldwide Inc. "Now, admittedly, it's a segment. But it is really going to be much more than a segment." Condotels, he said, will represent "a significant quotient of hotel real estate in the country," and they are already making waves in some international markets.

There is a risk of over-building in some popular condotel markets, and lenders have heightened requirements for projects, though Alexander said he expects a cooling-off period and a shift by condotel developers to broaden the range of prices and locations for the projects to appeal to a larger pool of buyers.

"Everybody is pulling back a little and appropriately so. There is a little bit of oversupply going on. It shouldn't be a frenzied environment, and it has been a frenzied environment," he said.

While attending a real estate conference, Alexander said another attendee asked, "What if (the condotel market) implodes?" Alexander's response: "What if it doesn't?" Based on the demographic trends of baby boomers and their children, Alexander said he expects that in the next couple of years "we're going to wish we had more" condotels.

He advises prospective buyers to purchase a condotel unit because they plan to use it, not because they plan to quickly flip it and make a quick buck. A common misconception is that the rental profits of a condotel unit will generate profits for the owner. But with insurance and maintenance and mortgage costs, owners shouldn't expect to earn any money in the short term, Alexander said. "It's an expense. It's going to be like owning any other piece of property."

Jack McCabe, CEO for McCabe Research & Consulting LLC, in Deerfield Beach, Fla., said, "We're seeing a proliferation of condotels here in South Florida. The jury's still out as far as how good they are as investments. Most all of the buyers so far have been somewhat disappointed by the rental revenue that is generated. Usually it's considerably less than they thought when they purchased the unit. As long as they're looking at it as a vacation residence that may have the potential for appreciation and cash flow then it may be a very good buy for them. They should look at it on a more long-term basis."

The appeal of condotels is that owners and guests can enjoy typical hotel services, McCabe said. "They like having new, fresh sheets every night, the bed turned down and a chocolate on the pillow," he said. "They have become accustomed to a higher level of service than a condominium offers."

In the Fort Lauderdale area, a string of eight new luxury condotel projects are under way in a two-mile stretch of beach, McCabe said. The condotels are backed by such major industry players as St. Regis, W and Trump. "Most of these condo hotels are generally in excellent locations. In most cases their architecture is fairly unique, they are generally done by upper-crust developers ... and they provide a level of additional services not found in traditional condos," he said.

Unit prices can range from $1,200 per square foot to $1,450 per square foot, which is pricier than the $850 to $1,050 per square foot for traditional condos in the area, he said.

Owners who choose to enroll their units in a rental program typically are required to purchase additional insurance coverage and to comply with the hotel operator's room decor requirements. Also, these owners typically are not allowed to store any personal property in the units. "There are definitely restrictions on usage, on decorating and on storage," McCabe said.

Condotel units tend to be smaller than comparably priced condo units and have scaled-down kitchens, though larger units are available at the top end of the market. Alexander said that condotel units tend to have a 15 percent to 40 percent markup over traditional condo units, depending on the range of services and amenities and the hotel brand.

While condotels have been around for decades, the latest boom took off about three years ago in Miami, Alexander said. There are about 28,300 condotel units under development in Las Vegas, 11,600 units in the Miami-Fort Lauderdale area, 6,900 units in Orlando, and about 3,200 units in Tampa-St. Petersburg. Other popular U.S. markets for condotel projects include New York, Chicago, Myrtle Beach (South Carolina), Boston and San Diego, he said.

Alexander expects the large supply of condotel units slated for Las Vegas to be absorbed faster than they would in some other hotel-heavy markets, such as Orlando.

Robin Charles Glass, a real estate agent for Coldwell Banker Pacific Properties in Honolulu, said the resale market for condotels in Hawaii has been healthy -- some sellers have realized a profit of about 20 percent or 30 percent, he said. Some lenders have been more reluctant to offer loans for condotel units, in some cases requiring a down payment of 50 percent, though Glass said there are lenders who are willing to offer 80 percent financing for condotel-unit purchasers.

"Generally these units don't generate cash flow (for owners)," Glass said. It's important for buyers to study how well a condotel building is maintained, he also noted. "When it's a brand-new project things look all shiny and new. In a couple of months you can determine how well a building is maintained."

Resale activity lately has been slow for condotel units in Hawaii. "Seldom do I ever see someone selling these things these days."

Charlotte Chipps, the Ohio schoolteacher who bought a condotel unit in Daytona Beach, Fla., said that the Daytona area real estate market has slowed to a crawl since she bought her unit, and she may hold onto it longer than she expected. "Unfortunately I paid top dollar. I bought it last year when prices had gone up. The whole Florida market has sort of stalled now. It is something that I will probably try to hold onto for my grandchildren."

Instead of enrolling her unit in the hotel program offered through the building, which gives back about 45 percent of the room rental proceeds to unit owners, Chipps makes her own arrangements for room cleaning and rents her unit directly to guests. The rental rates are low in the area - it's not uncommon for hotels to rent for $40 a night - and Chipps tends to seek higher rental rates during busy seasons.

It has not been a cakewalk for owners of condotel units in the same building. Chipps said that owners have engaged in a legal battle with the developer, who controls some commercial and common areas of the property.

But she is hopeful that the investment will pay off in the long run. "As Daytona continues to grow that property is going to continue to be more valuable. Change is coming."