Summary
In the current crisis it seems that just about all resort real estate segments—hotels; condo hotels; fractional and wholly-owned residential—have fallen equally far and equally fast. In fact, not all resort real estate segments fell as fast or far, nor, accordingly, will they recover at equal speed or volume. What segments are likely to recover first…at what price points…and in what locations?
Analysis
In “Resort Real Estate: Preparing for the Recovery,” published by HVS, author Andrew Cohan has provided a very incisive analysis of how resort real estate crashed and how it’s likely to recover.
Cohan begins his analysis by taking care to distinguish between the various segments of real estate that exist in the overall resort real estate marketplace and that exist, in various mixes, in most of North America’s larger resorts.
Cohan’s basic distinction is between resort lodging real estate and resort residential real estate (let’s leave that mongrel hybrid, the resort condo-hotel, aside for a moment).
Demand for resort lodging, as is the case with most urban and suburban lodging, is driven by change in GDP, in other words by economic activity. If GDP grows, demand for resort real estate lodging inventory will grow, first on the part of transient guests who wish to stay and later by investors looking to own resort lodging inventory. (God bless those who get the timing right. Investing in resort lodging properties by new players in the category is often classic late-cycle real estate investing. See various American and Canadian institutional real estate funds.)
Demand for resort residential real estate, Cohan argues, is not a function of change in GDP but by change in personal wealth, particularly among the wealthier households most likely to invest in resort residential real estate. Demand for resort real estate peaked in 2006, when household wealth, supported by strong investment markets and strong values for principal-residence real estate, was at wild highs and the wealth effect was in full rage.
But resort real estate began to soften in 2007, with credit markets beginning to tighten and principal home values declining, and then 2008 brought Armageddon for resort real estate, with Cohan pointing out that resort real estate markets across North America saw in 2008 a 23% decline in the average resort real estate sales price and a 31% drop in total number of vacation homes sold.
Resort lodging did not see these kinds of declines in 2008, and though 2009 has been abysmal for resort lodging, logic and history tell us that demand for resort lodging will begin to recover as GDP growth begins to recover, which could come as early as 2010 or, we all hope, no later than 2011.
But demand for resort real estate could take much longer to recover because personal wealth, especially in affluent households, has taken a much bigger hit than GDP and could take much longer to recover. The semi-wealthy household that has seen its wealth drop from $3MM to $1.5MM in the last two or three years, if it doesn’t already have a vacation home, may not be stepping up to buy one soon, especially if they’re heavily mortgaged against an extravagant primary home (that itself has declined wickedly in value).
There will be resort real estate sales, Cohan says, but certain products in certain price points in certain locales will likely recover their selling strength quicker than the resort real estate market at large.
What will come back quicker, according to Cohan?
- Resort real estate markets in drive-to resort markets. (A point made after 9/11 as well, and perhaps true for a while, before life returned to excess normality.) The idea here is that people will seek resorts that don’t require expensive flights to reach and that can be reached more often, which connects to….
- Use: Resort real estate buyers will be more focused on value, especially value through use. Buyers will either want to use the resort property as often as possible or will only want to pay for what they believe will be their typical level of use by buying fractional real estate or by joining private residence clubs
- Preservation of service and amenities: Cohan makes an interesting point when he says that the household that was worth $10MM in the glory days became accustomed to the highest level of service and the highest quality amenities. Now that they’re worth “only” $5MM or $6MM they may not be able to afford a $4MM vacation home any more, but they want the service and amenities they used to know, if someone can deliver them a $2MM home that can somehow be packaged with that higher-level service and amenity package
So should you rush out to buy resort hotels in anticipation of a GDP recovery? Should you be looking to buy up resort real estate landbanks or standing inventory in drive-to markets that can be positioned as offering good real estate value with outstanding service?
Not yet! It remains to be seen how much lower resort hotel demand will sink before we know what value looks like in owning resort hotels. And resort residential real estate demand may be so slow in coming back that in the near- to mid-term there will be better distressed real estate opportunities, in other real estate categories. One thought: Demand for resort real estate can’t and won’t recover until the primary-home real estate market has stabilized and regained pricing power, leading to a re-strengthening of the wealth effect.
As for the resort real estate mongrel known as the condo-hotel, demand for transient stays in well-run resort condo hotels may well begin to recover as we see GDP recovery in the next year or two. But that lodging demand recovery won’t suddenly turn typical resort condo hotels into cash-flow machines, and so it could take a good while before real estate buyers are lining up to pay increased prices for condos in resort condo-hotels.
Overall, Cohan’s thesis makes strong intuitive sense. Simply put: Low-stake resort real estate wagers (e.g. renting a resort hotel room for two nights) is a bet people will resume making well before they resume making high-stakes bets on owning residential resort real estate, in fractions or especially in whole.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
