Is the Formula for Condo-Hotel Profit Changing?

The condo-hotel phenomenon actually erupted back in the early 1990’s when lenders were not financing hotel projects at the rates they are now.  Lenders would only finance 50% to 60% of a project making it harder for builders to begin development.  This spurred the concept of actually selling some of the units as condos to provide additional financing for the rest of the project.  As prices began to soar in the coastal cities, condo-hotel units became an irresistible investment opportunity.  Owning a condo on the beach, earning rapid appreciation in value, and covering the costs with rental payments the rest of the year was a formula that made perfect sense. 

Today, as conditions are correcting themselves in areas for Miami condos and Ft. Lauderdale condos, condo-hotels are caught in the same downshift as the regular condominium market.  Some builders that had originally purchased land with plans for a condo-hotel, are now building hotels without the “condo” component.   According to Tom Stieghorst of the South Florida Sun-Sentinel, “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.”  This is not to say however that the Las Vegas or Orlando markets are in a much better position to absorb these units.  Las Vegas condos are experiencing the same struggles.

Going back to the boom in the late 1990’s, many condo-hotel units that sold for $650 per square foot are now selling for $1400 per square foot.  The typical formula from a development standpoint is that a room should rent for one tenth of 1% of the cost to build that room.  If a buyer or investor purchases the room for $600,000, it would need to be rented for $600 a night for the builder to be profitable.  Now that prices are much higher, nightly rates are not matching up with this formula for profitability.  This is why some builders are switching their plans or changing the scope of the project. 

The market slow-down has given pause to many of the buyers and investors out there.  Now they sit on the fence so to speak and want to wait and see what happens to prices and rates.  Much of this waiting is just based on negative hype and not substantiated by numbers and statistics.  Many do feel though that we haven’t seen the worst of it yet.  On the other hand, many real estate professionals expect a come back later this year.  

Do to financing hurdles and high construction costs, many builders are purchasing existing hotels and converting them to condo-hotels.  This is similar to a condo conversion where builders purchase existing apartment properties and convert them to for-sale housing.  The idea for condo-hotels is to take an existing income producing property simply rehab it and sell a portion of the units as condos.  Often times there is then a hotel management company that will supervise the rental of the buyers’ homes when they are not there.  Builders are saving money doing this, but still facing the issue of finding enough luxury buyers. 

Buyers and investors from Europe have been a great asset due to the current exchange rates.  These investors are less worried about the local market conditions because the rates are favorable.  For example, the Worldquest Resort in Orlando, FL sold it’s first phase primarily to investors who never even came to physically see the project. 

NewCondosOnline.com has been handling the online marketing of this development for about a year now and most of their buyers are coming through the Internet.  By the time the foreign investors call the sales center, they have already gathered all the information they need through online resources like www.newcondosonline.com.  Without these foreign buyers, of whom many have no intention of ever coming to see their Orlando condos, there would have been potential problems very early on.  

This is the exact reason online marketing during these current conditions is so crucial.  The builder absolutely must open the sales channels to more potential buyers in order to capture enough pre-sales to keep moving forward.