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Are Condo Hotels a Smart Investment?

Stunning architecture, world-class amenities, room service to your residence at anytime – these features of condo hotels are quite enticing and seductive aren’t they? Throw in consistent monthly cash flow while you are unable to use your unit, and this formula of home ownership sounds quite attractive. Owning a piece of a world-class hotel brand is ultra-prestigous as well, isn’t it. Imagine declaring that you own at the Ritz-Carlton or Canyon Ranch.  There is a reason for the term ‘brand equity’. When you buy into a luxury condo hotel brand, you immediately inherit all of the best that the brand has to offer…don’t you?

There is no doubt that hype and highly sophisticated marketing and pr machines are painting a very rosy picture of the lifestyle gained through condo hotels, but are they better deal than straight condo purchases? The good news of highly successful development launches are constantly seen via the media.  But on the flip side, there are also situations like Canyon Ranch Miami Beach (see more of the story here) where condo hotel owners have been kept in a merciless purgatory waiting to see if their beloved brand will fade away into a less prestigious hotel operator. Through this post, we’ll examine if condo hotels are a smart investment by looking at the pros and cons involved.  We’ll also take a look at what is behind the latest NAME craze trend in luxury real estate.

Condo Hotel Big Name Game

In dealing with many developers as part of our real estate development sales and marketing services, I have been privy to the latest methodology behind bringing luxury condos into a complicated, yet incredibly fast-moving market.  The name of the game at the moment is NAMES.  The bigger and sexier the names, the better for the overall profile of the development.  This holds true for condo hotels and standard condo development.

The Rise of the Starchitect

Condo hotels are hot once again after a cool period following the Great Recession. They follow the huge current market trend of big name desirability for new developments. It’s happening everywhere in Miami. Starchitects are the latest craze.  Architects like Philippe Starck, Enrique Norten and Zaha Hadid are no longer just well-known in the circles of architecture and design, they are full-on celebrities in the mainstream media.  The announcement of starchitect collaboration on new projects instantly turbo-charges pro formas for real estate developers.

Fashion Joins the Real Estate Game

Fashion designers are now attaching their names into luxury real estate developments as well.  Fendi and Armani have made the leap into the ultra-competitive Sunny Isles, Florida  new condo development arena. And through a initial cursory review, they appear to be successful transitions.  This makes sense as I have long through that the connection between fashion and real estate has been an interesting one.  The latest news that I am hearing is that the Armani Residences have had a stellar launch, selling out the majority of the building within the first weeks on the market. A smart move for Gil Dezer and Giorgio Armani. (I have a special appreciation for Giorgio as I had one of my first photo shoots with him personally for Vogue when I first started modeling in Milano).

Porsche Drives the Interest of Billionaires

Heck, even luxury car manufactures like Porsche are jumping into the real estate game.  Porsche Design Tower in Sunny Isles has been an incredible success. I have no doubt that when this building is set for occupancy in 2016, it will be the most talked about condo development on the planet.  When 2% of the world’s billionaires buy into a condo project, you know that there has to be something special about it. Having Porsche behind an incredible lift system that allows residents to park their automobiles outside of their condos 20, 30 or even 50 stories in the sky is very cool.  Now that we have examined the power behind brands and names, it’s time to look at condo hotels as investments. (note that Porsche and Armani towers are not condo hotels, they are conventional towers).

Condo Hotels as Investments

This brings us back to the original question of …are condo hotels a smart investments?  The short answer is that it depends upon your needs, first and foremost. If you plan on using your new condo as a vacation home for only a small percentage of the year, a condo hotel opportunity is an interesting one that should be examined.  The hotel program for condo owners makes renting out your unit a systematic and organized process.  Hotel brands generally have ‘smart’ booking software that is able to raise and lower hotel room prices precisely based upon demand. That type of pricing sophistication is an excellent resource and will generally allow you to make the most money per night on rentals as opposed to trying to rent the unit out yourself on a nightly basis, which generally isn’t too feasible. For the sake of ease and simplicity, many owners that are not in a hotel rental program choose to rent their condos out for longer periods of time, so that there is less work going into constant guest bookings and turn-over.

Keeping an Eye on Revenue Splits

With that said, if you have an interest in the systematic approach and enjoy the comfort that a hotel’s professional marketing brings, then your first important item to examine will be the revenue split with the hotel operator.  The exact terms of the split vary between condo hotels.  Previously, I have seen splits range from 35% to 60%, with a higher split meaning that you will keep more of the monthly income. However, it is important to realize that the split alone does not give you the full picture. In the end, your monthly cash flow will really matter, not the split alone.  There are situations where a 60% split with a lessor hotel brand is worse than a 35% split with a stellar, premium brand.  This is true because the ADR (or average daily rate) and average occupancy are also prime factors in determining what your monthly bottom-line will yield for you condo hotel investment. Premium brands like the Ritz-Carlton and W Hotels bring in ADRs and occupancy that are stronger than the weaker brands.  In order to make your final decision, you will want to compare multiple condo hotel revenue platforms and analyze where you feel the best value is based upon the specific numbers and data that the brands are supplying to you.

Keys to Buying Smart

Real estate value appreciation potential is another important point to consider.  However, this is another tricky point in that you can’t completely fall in love with the appreciation potential of condo hotels.  Much like other real estate, appreciate is highly dependent upon larger macro-econmoic influences. You can purchase the most beautiful new condo hotel unit in the city, but if the real estate market is crashing hard, you are not going to realize growth in your equity until the market rebounds. That being said, it IS important to look closely at your acquisition price on a dollar per square foot price basis and compare the potential price paid to other similar condo hotels within competing luxury hotel brands.  You should also look at the dollar per square foot values of other nearby condo towers, whether they are condo hotel or not. (I built skyfiveproperties.com to provide easy comparable dollar per square foot sales and rental information with ease – feel free to use it to analyze any Miami condo hotel deals that might be of interest to you). The old adage states that…you make money on the buy not the sell. Buy smart and you’ll be in a good position for the future.

Always Negotiate

Keep in mind that everything is negotiable. You might hear statements from attractive and polished sales agents stating, “well our X Brand is the best of the best, we simply do not negotiate.  The price is the price.” Ignore those types of comments. Unless the unit that you want is the absolute last condo hotel unit available for sale in the building, a better deal can be made. I live on the other side of the table as well.  Coming from the side of the developer, there is always flexibility with buyers to get a deal done. There are quotas and sales schedules that need to be met for all.  The name of the game is to sell the tower and then move onto the next project. It’s also worth mentioning that there are a variety of negotiating gambits that are often played out by the sales staff.  If you would like to learn more about those and have to inoculate yourself against them for a competitive advantage, contact me directly.

Owners and Operators are Different

To be clear, it’s the responsibility of the condo hotel operator to take reservations, operate the front desk, maintain the property and keep up the sexy amenities (like concierge, spa, fine dining, bars, pools and fitness facilities).  Notice that I have stated condo hotel operator.  I have said that because it is important to understand that most condo hotel operators do not own the development.  It’s a easy point to get confused by and has been the subject of quite a bit of litigation in the past.  The vast majority of condo hotels are owned by real estate developers who pay a luxury brand like Ritz-Carlton or Conrad Hotel fees to provide the operational services.

Research the Developer

The division of ownership between developer and condo hotel operator gains prime importance if the developer is having financial difficulties.  This brings up another important fact for potential purchases of condo hotel residences – research the actual developer of the project. Their track record and financial strength is just as important, if not more, than the hotel brand that the project is named after.  I have been chronicling the saga of Canyon Ranch Miami Beach where residents are quite concerned that the bankruptcy of the developer and subsequent lender has the building in flux. Since the developer controls the common areas and hiring or firing of the hotel operator, the worst situation would be for a new group to come in and switch operators to a lessor brand or worse yet, shut down the amenities completely to make a point through some kind of legal battle with the HOA.

Condo Hotel Owner Expenses

The condo hotel unit owner will generally be responsible for real estate taxes, HOA fees, insurance, debt service and any unique expenses that could be part of an agreement with the hotel operator.  Unit owners do generally have the option of taken part in the hotel rental pool or remaining apart from it. Some owners who have the extra time on their hands have reported that the advent of online rental platforms has allowed them to outperform the rental pool by keeping 100% of the income, while still offering their renters the variety of services and amenities that a luxury hotel offers. This segment seems to be growing stronger and stronger as technology and app designs continue to improve. Social media is also quite helpful to those who wish to keep control of their own unit rentals.

Timing is Now Good, but be Diligent

All things considered, a condo hotel purchase is nothing to take lightly.  It has a degree of complexity greater than a typical single-family home or condo transaction.  However, don’t be dissuaded by the the added risks.  The rewards are also great.  Owning a trophy condo from a magnificent brand can be a source of tremendous personal pleasure along with being a solid investment.  You simply need to work with individuals that give you the proper perspective and data on how your deal stacks up against comparables. I would advise against working directly with the sales associates within the sales centers.  Form your own acquisition team – someone that is totally focused on your interests.  If you are able to make a smart move, by buying into the right building at the right time,  your condo hotel purchase will be a wonderful event.

Currently, in Miami there are a number of intriguing condo hotels in prime areas including: the Setai, the W Hotel and 1 Hotel and Homes.  Additionally, there are many more pre-construction projects being built that incorporate this type of unique investment.  My last words are – enjoy the process of shopping…at the time of writing this blog post, the market is very stable and strong for condo hotel investments.

 

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About the Author

Kaya Wittenburg

Blog Author and CEO

Kaya Wittenburg is the Founder and CEO of Sky Five Properties. Since the age of 10, real estate has been deeply ingrained into his thoughts. With world-class negotiation and deal-making skills, he brings a highly impactful presence into every transaction that he touches.

He is here to help you use real estate as a vehicle to develop your own personal empire and feel deeply satisfied along the way. If you have an interest in buying, selling or renting property in South Florida, contact Kaya today.

   
Feel free to call me at: (305) 357-0635
or contact via email: info@skyfiveproperties.com