September 1, 2006
By Jennifer Martin
Residences in hotels are more popular than ever. But they come at a premium. Who's buying them? Are they good investment properties? And when should you buy? We examine the pros and cons of homes within hotels. St. Regis Hotel San Francisco welcomes not only guests, but residents as well. The 22nd to 40th floors are dedicated to 102 luxury residences. The first six floors provide amenities, including the Spa and Fitness Center.
Hotel residences have come a long way since the 1950s, when Eloise, the children's book character created by Kay Thompson and Hilary Knight, pestered her neighbors at the stately Plaza Hotel. Back then, tea rooms abuzz with celebrities, politicians and powerful businessmen were considered the premium amenity of life at these posh pensions. But today's buyers of hotel residences are no longer just the super-wealthy. They are also successful baby boomers and empty nesters, and they care less about star-gazing than they do about health clubs, business centers, room service-in short, efficiency and amenities. So it's not surprising that world-class hoteliers such as the Ritz-Carlton, Four Seasons, St. Regis, Conrad Hotels and Le Meridien are developing hotel residences in multiple cities-products that have been extremely well-received worldwide.
This year, 32 projects with 4,831 hotel residences were expected to open worldwide, while another 27 projects with 5,025 units will open in 2007. You don't have to look far to see major names on these projects: The Trump International Hotel and Tower in Chicago. The St. Regis Resort and Residences in Costa Rica. The Four Seasons Hotel in Seattle. The Ritz-Carlton Highlands in Lake Tahoe. From a concierge who arranges dog-walking to a masseuse who comes to your bedside, these hotels offer five-star amenities while also letting buyers maintain full ownership of their properties. While the cost of these units generally ranges from $200,000 to $9 million, some fetch much higher prices. Financier Martin Zweig bought a penthouse at the Pierre Hotel in New York for $21 million in 1999; it recently hit the market for $70 million.
Why are hotel condos in such demand? Primarily because time, not money, is the new commodity. "We don't remotely look at this as a real estate transaction. People are really bu ying into a lifestyle," said Jeffrey Snyder, vice president of residential development for Starwood Hotels and Resorts, which built a St. Regis hotel residence in San Francisco that opened in November. The tower's 102 residences, which spanned from 1,500 to 4,500 square feet and ranged from $2 million to $5 million, were virtually sold out within a year of the project's announcement.
"By living in your own residence on top of a hotel, you don't have to worry about going to the supermarket or dry cleaner," Snyder said. "The concierge buys your theater tickets, there's a gym nearby, there's in-room dining. For the owners, these types of amenities free up the time to do those things that really bring them pleasure."
Hotel residences also have mushroomed because of Sept. 11, 2001, which caused the tourism industry to fall on hard times. Banks were more leery about lending money for new hotel projects, so hotel developers planned residential additions as a way to secure up-front funding from outside investors. The product proved to be explosively popular and, five years later, hotel condos have expanded beyond the traditional resort markets such as Florida and the Caribbean, reaching into Chicago, New York, Las Vegas, Boston, Toronto, Atlanta, Washington, D.C.-anywhere there's a major urban population.
Many hoteliers allow buyers to place their condos into a rental program during the weeks or months they're absent. Owners benefit from the hotel's aggressive marketing program, location and brand recognition. But analysts warn that buyers shouldn't expect to recoup their mortgage payments unless they're purchasing at the very low end.
"It's not an inexpensive proposition for any buyer to enter into," said Realtor Andy Weiser of Ft. Lauderdale, Fla. "The developer has to build to a very high level of quality, even down to the finishes. The buyer is probably paying for much grander stuff than they might normally have, especially if it's a vacation condo."
Hotel condos, on average, cost about 25 percent more than a comparable non-hotel condo, and monthly maintenance fees can range from 50 cents to more than $1 per square foot. And appreciation rates are still a wild card. On one hand, some are escalating rapidly. The three-bedroom hotel condos at the Viera at MonteLago Village in Lake Las Vegas resold for 50 percent more than the developer's original price last year. But on the other hand, analysts say it's difficult to predict the investment value of most modern hotel condos because they're still in their infancy.
"My best advice is, don't buy it as an investment. Buy it because you want to use it," said Realtor Kevin Tomlinson of Miami Beach. "There is risk involved with these types of purchases-for example, you're susceptible to market fluctuations in tourism." Rental income can fluctuate as well, and the hotel's share of it could be 45 percent or more. To increase your potential for cash flow and appreciation, analysts advise choosing high-quality hotel brands with strong name recognition in prime locations. Also, try to buy in the preconstruction phase.
"You want to get in as early as possible, when you're at first-tier pricing and the selection of available units is at its greatest," said analyst Joel Greene, president of the Condo Hotel Center, a sales and advisory firm in Miami. "You don't want to get into it when it's 85-percent sold and it's been picked over by hundreds of people before you." There are other caveats. In most cases, the hotelier controls the common areas and doesn't give the condo owners many voting rights. "If the hotel management company decides that a parking lot needs to be replaced, the owners don't have any say in it," Tomlinson said.
However, Tomlinson and other Realtors say hotel condos can be a very satisfying purchase for many people, such as frequent vacationers, business travelers who often visit the same city, empty nesters who want their children to be able to use their condo unit on spring break, or CEOs who want to provide the unit as a perk for top-performing employees. Analysts recommend consulting a financial advisor before purchasing the unit.
It's also worth investigating the range of products available. Four-star brands such as the Hotel Palomar, W Hotels, and Omni Hotels have started developing residences to target buyers who previously were priced out of the market. Also, many hoteliers offer two types of products: residences (exclusive units that typically are not allowed into the hotel's rental program) and normal hotel condos, which usually sell for less and can be re-rented.
The Elysian, an intimate, European-like development scheduled to break ground in Chicago later this summer, offers residences for $2.4 million to $7 million but also offers hotel condos (or "suites") for $490,000 to $925,000. CEO David Pisor said more than 65 percent of the residences and 70 percent of the suites have sold. "For people who buy the suites, this is really more of a third or fourth home purchase," he said. Residence buyers, meanwhile, are generally year-round residents looking to upgrade from an existing condo or to get away from a cumbersome house in the suburbs.
Analysts note that new hotel condo projects still are selling out before they're built. Not long ago, two new Intrawest hotel condos at the MonteLago Village Resort sold out within three hours after hitting the market. With a golf course and plenty of boutique shops and restaurants, Lake Las Vegas is especially popular with snowbirds. "Once you're out here, it's like you're in a whole other world," said Larry Peterson, director of sales for MonteLago Village Resort.
With more baby boomers reaching retirement and looking for an easier lifestyle, the demand for hotel condos is likely to continue even as prices rise. "People understand it's a super luxury product," said Matthew Hall, vice president of corporate communications for Millennium Partners, which has developed Ritz-Carlton and Four Seasons hotels and residences nationwide. "We've incorporated health clubs, movie theaters, restaurants and so many other amenities....We're actually trying to market a little village. It's not so much a condo as it is a destination."
Some of the country's most famous, historic and elegant hotels, including The Fairmont in Chicago, are converting either partially or wholly to condo units. In New York City, about 1,200 rooms were converted in 2004 and 2005, up from about 200 in 2001 and 2002. The conversions occurred in hotels such as The Stanhope, St. Moritz, St. Regis and The Plaza, where the fictional children's character Eloise romped and played in the 1950s.
Predictably, South Florida has the greatest selection of hotel condo inventory due to strong domestic and international demand. The Orlando and Miami-Fort Lauderdale areas could have as many as 10,000 hotel condo units in the next few years, up from fewer than 1,000 units five years ago, said Realtor Kevin Tomlinson of Miami Beach.