Condo Hotels: a Hassle Free Option

by : Bob Waun

An estimated 40,000 to 60,000 condo hotels are being developed for sale in the next 1.5 years. Who will buy all these condos? Is there a bubble in condo hotels? Does the consumer even demand condo hotel units?

The real estate markets may have slowed, but we all must remember that we have been setting records in sales volume. The slow down is a reversion to an average historical pace.

Unlike traditional condos, condo hotels have not been over-built or over supplied. In the Miami area alone there are 60,000+/- traditional condominiums on the market or coming to market. The national supply of condo hotel units is less than this figure. The 3 largest markets for condo hotels in The United States is Las Vegas, Orlando and Miami; these are also three of the strongest hotel markets with high demand from baby boomers for retirement residences. 78.2 million baby boomers will reach retirement age in the next 14 years. The demand for condo hotel is just beginning to awaken and supply is a fraction of the overall second home or hotel development market.

Also, unlike traditional condos, condo hotels can produce hassle-free rental income.

The hotel market is marking another record year and demand is growing, this market underpins the potential investment value of condo hotel sales. If supply of new hotel product is constrained by construction costs and as many existing hotel rooms are converted to condo hotel ownership, the economics for condo hotel owners could improve.

As mortgage lenders to the condo hotel consumer, we have had the opportunity to get to know many buyers and learn first hand their motivations and demographics. For the most part our clients have been real estate investment minded and savvy second home buyers who are seeking a second home for less than two to eight weeks per year for personal use. They have owned other forms of rental properties, and many have invested in commercial real estate. They often site the desire for appreciation and tax benefits before a 'cap rate' but they often have a thorough understanding of the income potential of condo hotels.

We are seeing a rise in the number of buyers who are using funds from a 1031 exchange to purchase a condo hotel unit. The average age of our borrowers is 51 years old, solidly in the baby boomer demographic. The majority are self-employed or with an average of 13-years in their present employment positions. Notably, a majority of these buyers have expressed interest in purchasing more than one condo hotel unit in various destinations, for personal use, diversification and to stagger seasonal cash flows from properties.

For over 20 years, the resort market for condo hotels has proven a viable alternative to traditional condominiums and second homes. The most numerous examples are in ski country, where families have purchased and used condo hotels as second homes with a rental program to offset costs. But this next generation of condo hotel buyers may look different as more people understand the advantages to this real estate product.

Broad acceptance of condo hotel as a second home market has yet to fully develop. The media is full of conflicting stories about condo hotels, and consumers are reasonably skeptical. The broad market is not the early adopters of any new concept, the niche buyers are the first consumers to embrace any product, and condo hotel is proving no different.

Some projects have niche themes to attract a specific narrow demographic of buyer. For instance, college alumni who wish to have condo hotel ownership for sporting events are purchasing. Downtown pied-a-terre locales that appeal to suburbanites or corporations who frequently send employees to a city center condo hotel destination are just beginning to come to market and attracting a new buyer class. Resorts that offer lifestyle services and amenities are finding 'member-minded' buyers who may live around the corner. These new consumers will define the next phase of this industry.

A condo hotel is more than real estate, it's a lifestyle purchase, a long-term investment and a trend that is just beginning to identify its demand.