Presented at 2009 NYU Hotel Investment Conference by Bjorn Hanson — Photo by HVS
New York Times, August 21, 2009 — Photo by HVS

The recession has changed resort real estate shoppers’ purchasing power, values and behavior. Further, resort real estate and hotels may recover at differing paces. This article examines implications for developers, resort planners, and lenders.

A substantial number of consulting assignments at HVS involve multiple components of mixed-use resorts, including hotels and various combinations of whole ownership real estate, shared ownership real estate (e.g. fractional or timeshare) and major amenities, such as golf courses, casinos and marinas. It is important to note that while each of these components is part of the resort mix, they vary in the timing, length, and depth of their reactions to changes in market conditions. Therefore, as economic conditions continue to evolve, developers and land planners need to address the scale and mix of components with more care, in order to maximize success.

Divergent Drivers of Demand

Demand for lodging accommodations and demand for resort real estate have distinct drivers. It is well documented that there is a strong correlation between lodging demand and Gross Domestic Product (GDP) growth rates. Unlike other types of real estate, hotels by definition offer a transient service, so occupancy levels can almost immediately react to external factors, such as economic conditions. As shown in the chart below1, the long term trend is clear. For more detailed discussion of this relationship see the recent article by Jim Butler2.

Based on this correlation, we can expect hotel demand to recover in parallel with the economy at large.

Resort real estate purchasing, however, is not as strongly correlated with GDP growth rates. The principal driver of demand for resort real estate is wealth. That is, as the ranks of the wealthy have grown steadily in recent decades, the number of qualified buyers has increased, and so has demand for second homes, vacation homes, and fractional ownership interests. Internal Revenue Service data show that in 2007 approximately 1.5 million families reported earnings in excess of $400,000 per year, representing the top 1% in income, and a healthy number of qualified resort real estate purchasers.

However, 2007 appears to have been a turning point for the wealthiest of American families. According to the annual Merrill Lynch Capgemini World Wealth Report 20093, the number of High Net Worth Individuals (HNWI) in North America declined by 22.8% to approximately 2.5 million individuals in 2008 compared with 2007. Worldwide membership in this elite group dropped by 14.9%, to 8.4 million individuals. The study defines HNWIs as individuals who hold more than $1 million in investable financial assets. The population of Ultra High Net Worth Individuals, with over $30 million each in investable assets, dropped even further, by 24.6% in 2008.

The statistics above reflect measures of personal resources. Compounding the contraction of these resources has been a parallel restriction in availability of mortgage loans, further reducing the purchasing power of the vacation home target market.

It is reasonable to expect that recovery of wealth will be a slower process than recovery of GDP growth, as many members of the resort real estate purchasing public lost substantial portions of their lifetime accumulation of wealth in the past 24 months. Consequently, resort pro forma statements should not presume that condominium and vacation home sales pace will return to "normal" at the same rate as hotel occupancy and ADR.

Divergent Market Cycles

The hotel transaction market is, appropriately, following the commercial real estate market cycle, while the resort real estate transaction market has more closely followed the residential real estate market cycle timing.

In the July installment of Steve Rushmore's Lodging Hospitality column4 he describes the current disequilibrium in the hotel transaction market, leading to transactions being executed at "liquidation value" rather than "market value". During such periods (whether the consequence of an excess of supply as a result of new construction or as the consequence of a restriction of demand due to frozen capital markets), the average marketing time required to effect a sale is extended. Those who must sell in such a market have no choice but to lower prices, and sellers who are not under duress leave the market. The liquidation-priced transactions that take place during these times are so named due to the lack of the "willing buyer and willing seller" that are necessary components of market value. At some point, when the assets offered for sale are few and historically bargain-priced, more buyers are attracted, prices are bid up, willing sellers return, and the market heads toward a new equilibrium.

For resort real estate, many destination markets peaked in 2006 when record price levels and transaction volumes were recorded. By the time of the sub-prime mortgage market crisis of 2007, the vacation home and resort real estate market was already entering the liquidation market phase of the business cycle in many destinations. As a measure of market size, the following chart details sales volumes of various resort real estate products in 2007 and 2008.

Resort Real Estate Sales Volume Changes

2007

2008

% Change
Annual Timeshare Sales (United States)

$10.6 billion

$9.7 Billion

-8%
Fractional Interest Share Sales (North America)

$485 Million

$263 Million

-46%
Private Residence Club (PRC) Sales (North America)

$1.2 Billion

$0.9 Billion

-24%
Vacation Homes Sold (United States)

$740,000

$512,000

-31%
Median Vacation Home Price (United States)

$195,000

$150,000

-23%

In mid-2009, it appears that excess resort real estate inventories are beginning to be absorbed in many markets and movement toward a new equilibrium is beginning. As an example of this market turning point, the chart below displays second calendar quarter residential real estate sales by the St. Joe Company, one of the largest developers of vacation home communities in Florida8. We should note that conditions vary by destination market area, so that severely oversupplied markets may not have yet reached the turning point in sales volume that is displayed below.

Signs of a Turning Point in Resort Real Estate Sales

As market data will support, the hotel transaction market's trend of decline began at least twelve to eighteen months later than that of the resort real estate market. The hotel transaction market peaked in 2007, and registered solid volume into the first half of 2008. As noted in the Rushmore article, the hotel transaction market is currently in the liquidation value phase, with a very limited number of transactions being executed. Thus, there is a significant difference in market cycle timing for resort real estate as compared with hotels.

Post-Recession Target Market Composition

Many of the offering packages used to attract funding to resort development projects in recent years reference a seemingly endless pool of demand from the Baby Boom generation. It is true that this generation is the best equipped age group to purchase resort real estate. However, their existence is not a guarantee of sales success. A recent Consumer Travel Report by PhocusWright, a travel industry market research company, notes how recent economic conditions have impacted what they call "trailing-edge baby boomers", those currently of 45 to 54 years of age:

"Stuck in a middle-aged slump, trailing edge boomers with children in college, devalued homes and ravaged investment portfolios have been among the hardest hit by recent economic struggles. While boomers still represent a critically important consumer group, the permanence of their risk-taking and resulting financial scars will change the way this generation spends money for a long time, if not forever. Marketers should seriously rethink boomers' status as the golden target group, at least for the near term."9

An article in the July, 2009 issue of Harvard Business Review supports this sentiment through an examination of the 2008/2009 recession's effects on eight consumer trends. The analysis indicates that lasting changes may be most notable in the areas of consumer thriftiness and a desire for simplicity.10

Due to the decline in wealth that most HNWIs have experienced, the composition of target market segments has changed. For example, a resort offering $2 million luxury condominiums may have been targeting its sales efforts to families with net worth of $5 to $10 million. Post-recession, this group is smaller than it was three years ago and most likely now contains families that had pre-recession wealth levels well in excess of $10 million. It may be that this "re-constituted" target market has different needs and preferences based on their pre-recession lifestyle. For example, in scaling down their vacation home investments, such individuals may be more willing to compromise on features such as unit size than on the service levels and security features to which they are accustomed.

Post-Recession Purchaser Values

A very good synopsis of changing consumer values is contained in a recent profile of Marian Salzman, renowned trend spotter11. In the interest of brevity, her "Top 10 List" of consumer trends can be further boiled down to three core sets of driving factors:

  • Technology & Speed – We expect it, we want to be connected, it makes global become local, it blurs the distinctions of work, home, and vacation, and we often resent it and yearn for simpler times. It has changed the media, the way we get information and our sense of intimacy (do we have a Facebook, LinkedIn, or face-to-face relationship?).
  • Wellness & Sustainability – holistic, healthy, sustainable, green, threat of contagion (bird flu, swine flu, e. coli, etc.), reducing the carbon footprint, fit, energetic, active retirement - are all phrases that embody wellness values and will be considered in consumption and investment decisions.
  • Tradition – learning from history, growing up, deciding what has value, looking for reassurance, enjoying unrushed moments.

Implications

We have established that the hotel and vacation real estate components of mixed-use resorts can be expected to respond differently to the economic recovery that appears to have begun. We have also theorized that resort real estate purchase decisions will be made through a changed prism of consumer values. But what are implications for resorts that have excess real estate inventory to sell, for developers looking to strategize for the next positive development cycle, and for lenders and investors who want to minimize risk on existing and potential investments?

  • The predicted changes in consumer values described above suggest that regional resorts may see resurgence, relative to more distant and exotic destination resorts. While it may be difficult for the Atlanta resident to "get their money's worth" from a vacation home at Cap Cana that may require $2,500 per visit in air fare for a family of four, a similarly priced vacation home in the Asheville, North Carolina area may seem more practical on a year round basis. Such a destination allows for more frequent extended weekends, telecommuting, long summer stays, a possible substitute for summer camp for children, and comes wrapped in values of wellness, sustainability, and practicality.
  • In the fractional and private residence club markets, it will be more important than ever to devise share size and usage plans that reflect changed purchaser values. In more seasonal destinations, much purchased time traditionally goes unused. However, we can expect potential purchasers to be more focused on maximizing the utility of their purchases. The introduction of rental management programs to allow owners to derive revenue from unused residence periods, and/or the introduction of multiple share sizes in the same resort are innovations that can help this class of product better fit potential purchasers' needs.
  • As real estate ownership has lost some of its luster, it is likely that destination clubs may gain traction and become more significant purchasers, at the wholesale level, of resort real estate. Though these clubs do not have the benefit of thirty years of consumer protection driven legal framework, like the timeshare and fractional ownership market segments do, the industry is dominated by a few reputable players, such as Exclusive Resorts and Abercrombie and Kent. Possible industry developments include product extension from the ultra-luxury tier to luxury and upper-upscale, in order to attract a broader customer base, as well as possible market entry from hospitality brands, which could serve to boost consumer confidence in this product segment.
  • Design and architecture will play a significant role in delivering resort real estate products that allow purchasers to achieve value goals while maintaining expected luxury levels. It is not yet clear which cost saving measures, if any, will be best accepted by the market. For example, will purchasers react more favorably to a vacation home floor plan that economizes by offering fewer rooms or by offering smaller rooms; to smaller free-standing units or larger units in multi-unit buildings; to less luxurious finishes or less dramatic (and less costly) architectural features, etc.? As reduced purchasing power will most likely not be accompanied by lowered buyer expectations of quality, those developments that can offer a less costly product that does not "feel" less costly will have a competitive advantage.
  • Since the hotel and for-sale real estate components of mixed-use resorts will potentially be in different recovery stages at any given time, it will be important for development projects to have a clear focus on what is driving visitation and ownership, with land use plans adjusted accordingly. For example, a great marina site, close to rich fishing areas and naturally well protected, may be located in a fairly remote area via air or road access. There will most likely not be a need for a large globally branded hotel in such a resort. Perhaps a fractional ownership community structured around the peak fishing seasons with a rental management program can meet the transient accommodation needs without a hotel at all. In this manner, a resort at such a site can be successful if sized and targeted well to it primary source market.

Conclusion

As the statistics above illustrate, even in historically weak economic times, American families will buy 250,000 to 500,000 vacation homes per year. There will continue to be a market for resort real estate at all levels of luxury for the foreseeable future. However, as many of the factors discussed in this article suggest, demand for resort real estate and associated purchasing power have declined sharply and may rebound at a difficult to predict pace and extent. This recovery path will be somewhat independent of the recovery pattern of the hotel market. Developers who are attempting to dispose of remaining unsold real estate inventories and those planning future developments will need to be more creative than ever in tailoring their resorts and real estate products to a changed purchasing public.

During fieldwork on a recent assignment, we visited a resort property that exemplifies many of the values that appear to fit the "post-recession" parameters described in this article. The Painted Boat Resort is a 30-unit, quarter share fractional ownership resort located on a five-acre site with a small marina in the Sunshine Coast area, approximately two hours north of Vancouver, British Columbia via car and ferry. All 30 units are generously sized two-bedroom, two-bathroom floor plans, some with an extra sleeping loft, and are furnished and finished in the upper-upscale quality tier. In addition to the marina, amenities include a full-service spa with seven treatment rooms (managed by Spatality) and a 70-seat restaurant with a regionally renowned chef.

The ownership plan offers purchasers two consecutive weeks of residence in the peak summer season, and every fourth week during the rest of the year. Owners are encouraged to participate in the rental management program, under which they contribute unused time to the rental program in exchange for an approximate 40% share of room revenue. As usage is scheduled at least six months in advance, the operator of the resort has a good indication of future transient room inventory and operates the resort both as a hotel and as a vacation home resort.

For the developer, the resort fits the scale of its regional resort market and appears to have been a relatively low risk proposition. Share prices average $250,000 Canadian, leading to sellout revenue of about $30 million over the five to seven year sales period. In addition, the developer is the resort operator, and at any given time has 5 to 25 units available for transient use.

For Vancouver area purchasers, the resort is easy to reach, can be used for long weekends or full weeks throughout the year, can be rented when not in use, and can fulfill many of the values noted above. The investment of $250,000 Canadian also represents a low degree of extravagance and commitment compared with a whole ownership vacation condominium. This large one-quarter share size constitutes a fairly strong substitute for a full time vacation home, or alternately can provide for a substantially subsidized vacation property via the rental program. A side benefit for the community is that the Sunshine Coast now has a higher quality resort hotel with family-sized accommodations than could be economically justified by the seasonal transient market alone.

Developers and real estate marketing firms have always displayed great creativity in finding new product types and pricing mechanisms with which to promote real estate sales. Though many markets have significantly contracted, as recovery takes firmer hold, some of the ideas described in this article, and many others we have not yet thought of, will undoubtedly be successful in meeting the evolving needs of the resort real estate customer base.

Sources:

  1. PriceWaterhouseCoopers, LLC, presented by Bjorn Hanson, Ph.D. New York University, 2009.
  2. The Relationship Between GDP and Hotel Room Demand, Jim Butler, 4hoteliers.com, July 30, 2009
  3. 2009 World Wealth Report, Capgemini & Merrill Lynch, June 24, 2009
  4. A New Approach to Appraising Hotels, Steve Rushmore, Lodging Hospitality, July, 2009.
  5. State of the Vacation Timeshare Industry, United States Study, 2009 Edition, ARDA.
  6. 2009 Fractional Ownership Survey, Ragatz Associates.
  7. Investment and Vacation Home Buyers Survey, National Association of Realtors, March 30, 2009.
  8. St. Joe Company Press Releases, 2009, 2008, 2007.
  9. Consumer Travel Report, PhocusWright, April 27, 2009.
  10. Understanding the Post-Recession Consumer, Paul Flatters and Michael Willmott, Harvard Business Review, July, 2009.
  11. Trendspotter Column, American Way Magazine, May 15, 2009

About HVS

HVS is the world's leading consulting and valuation services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 1980, the company performs more than 4,500 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. Through a worldwide network of over 50 offices staffed by 300 experienced industry professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. For further information regarding our expertise and specifics about our services, please visit www.hvs.com.