What ever happened to the condohotel?

A recent article about Tampa’s strong hotel market and declining condo starts brings a question to mind: What ever happened to the condohotel?

When residential real estate was on the upswing, high-end hotels were paired with condos in several projects, within the past several years when condohotels were a hot new real estate trend.

The condohotel concept involves selling a percentage of renovated or new hotel suites as residential units, offering amenities like hotel service and the ability to make money off your unit when not residing in it. The industry embraced the trend — several high-profile projects, including the under-construction Trump International Hotel and Tower in Chicago were launched — but with the decline of the residential market, some say condohotels have weathered the storm. Others insist condohotels have felt the sting of the industry slump.

Lodging Econometrics reports that there are 166 condo hotels in development throughout the U.S. According to a recent TheStreet.com article, approximately 60 condo hotels at various
stages of development in Florida alone, and by 2008, there will be
several hundred condo hotels in U.S. and around
the world.

Joel Greene, president of the Miami-based Condo Hotel Center broker, said condohotels are at least 10% of every hotel project currently being built, TheStreet.com reported in July.

However, those new construction numbers don’t mean the units are flying off the market. The same Joel Greene — in the same month — told the New York Times that his condohotel sales were down 30 to 40 percent in the past year.

The New York Times reported that there is some hope for condohotels — a "second wave," if you will, that includes second- or even
third-tier destinations. Niche
locales including Biloxi, Miss., South Bend, Ind., which would allow alums to
attend Notre Dame games, and Wisconsin Dells and
Pigeon Forge, Tenn., where families could vacation, are the current hot spots.

Yet demand has fallen in more established condo-hotel
markets like Orlando and Las Vegas, the Times reported. Several projects in those areas have been called off and sales are stagnant at others. The Times’ example involved condo-hotel developer Robert Falor, whose combined Breakwater and Edison hotel projects in Miami Beach — that would have carried Nicky Hilton’s name — went into bankruptcy in the last year.

I interviewed Falor about two years ago — before the Breakwater — about condohotels for a real estate magazine called Chicago Agent. He told me about one condohotel he’d renovated in which space was expected to sell for $750 a foot and sold for almost twice that.

“We felt it was a demand,” Falor said. “People told us it was crazy, it would never work in Chicago, Boston or D.C., yet we found a tremendous amount of demand.”

But that was 2005. Earlier this spring, Falor seemed to have felt the tide turned. “There’s no market for condo-hotels right now,” he told the Miami Herald. “We took advantage of what drove the highest values at the time.”

Which brings us back to Tampa, where things are looking rather bleak for the hospitality-home concept. When condo sales softened in Tampa Bay in early 2006, plans for several condohotels were stalled or cancelled, including the planned Waterfront Fairmont, the Tampa Tribune reported.

What’s interesting, however, is that Tampa’s hotel market has remained strong. About 20 new hotels are in various development stages in the area — six are currently under construction with 12 more scheduled to break ground in the next year.

The Tampa Tribune cited rising room rates and hotels’ strong profit potential as reasons banks are willing to get behind hotel projects in cities such as Tampa, which have strong convention and business trades.

In other words, demand. But that doesn’t signal death for the condohotel. The secondary markets may not boast the glamour of South Beach, but they offer a viable use for a piece of property that will have value for years to come — as a vacation spot, college football weekend home and more.

And, if the hotel market can stay strong — note that rates are rising nationally — that offers more reason for secondary-residence-seeking buyers to purchase a condohotel. The more guests that need rooms, the more condohotel owners will be able to rent out their condos.

Forget hoping for appreciation: an investment property that offers that fast a return is a find indeed.