Industry checks into hotel condominiums

Real Estate Weekly, Sept 7, 2005 by Daniel Geiger

Although recent data issued by city tourism and marketing organization NYC & Company indicates that hotel occupancies and room rates are on the rise amid a strong year of tourism, hotel developers won't part with a recent trend of including condominiums in new and redeveloped hotels, experts in the industry say.

"I think we're going to see more condo hotels if anything," said Shaun Osher, head of CORE Marketing Group, which handles the sale of hotel condos. "Condo buyers want the hotel service and the developers are able to build more of a building."

Hotel condos, condominiums built within hotels that share the hotel's amenities such as room service and housekeeping, began to increase in popularity in the late 1990s and especially in the wake of 9/11, when the hotel industry took a plunge. Buoyed by the red-hot condo market of recent years, presales of condo components have played a big role in helping to finance hotel development.

"Condos certainly helped hotels through some tough times and continue to pave the way for new hotels, because it's easier to pay down development costs for a hotel when you have condos that you know can be sold for a high profit," said Matthew Hall, spokesman for Millennium Partners, a hotel developer that has built a pair of Ritz-Carlton hotels complete with residential components in Manhattan. "Having a residential portion in the hotel is oftentimes what gets it built."

Millennium Partners developed a Ritz-Carlton hotel on the south side of Central Park and in Battery Park, both of which offer luxury condominiums, and just completed another hotel project in Boston. All three have experienced brisk sales according to Ritz-Carlton spokesperson, Vivian Deuschl.

"There is a certain cache attached to the Ritz-Carlton name that many people are eager to be a part of," Deuschl said. Indeed, most luxury hotels like the Ritz-Carlton and the Four Seasons can garner up to 25% more for their residences than the going market rate for comparable properties, a premium based on the prestige of the hotel's name and the access the condos have to its amenities. Consequently, hotel condos have appealed to a wealthier demographic, mainly those for whom the property will be their second home.

But with hotel fundamentals creeping up to levels that hearken back to 2000, one of the best years for the industry, many experts, while yielding that the overall trend is here to stay, wonder if hotel condos will continue to play such an integral part in new and redeveloped luxury hotels as they have in recent years.

"There is a big debate in the industry whether or not traditionally branded hotel companies should be going into the condo business," said Daniel Lasik, national director of hospitality at Ernst & Young. "Why not just do a hotel project that makes sense without a condo attached is what a lot of people are asking. There's certainly enough capital looking for a home for projects to get financed, with or without the money condos generate."

Rampant speculation about a national housing bubble has inspired some experts to question the wisdom of counting financially on the sale of condos to carry hotel development just when occupancy and room rates seem to have recovered enough to enable hotels to stand on their own. Worse still, residential real estate bubble believers have pointed to second and third homes--the category most hotel condos typically fit into for buyers--as particularly vulnerable to a price correction.

"In a place like Miami, you see all the condos and hotel condos and you wonder, if the bottom falls out of the market, who will buy all this stuff?" Lasik asked. "The hotel industry is making itself somewhat vulnerable to what happens now in the housing market." Hotels could always convert the condos to rentable rooms, but that would increase the size of the hotel and perhaps put a dent in room rates.

One answer may be for hotels to limit the size of their condo components in the first place. Such is the case with the Plaza hotel, which sold last summer for $675 million to Elad Properties. The failing 805-room hotel was originally slated for a major downsizing to a mere 150 rooms, but Elad has since reconsidered that plan--albeit under pressure from the city council and the mayor's office--increasing the hotel component to roughly 250 rooms. The rest will be condominiums that have optional access to the hotel's amenities.

Even Millennium, which helped get the hotel condo trend started over five years ago, has acknowledged that it plans to focus on straight residential developments rather than hotel projects for now.

"You can't just keep building these types of developments," Hall said. "Right now we're taking a break and focusing on regular condo developments."