PERSON OF THE WEEK: In concept, condo-hotels represent the best of both worlds (in this case, the worlds of residential and commercial real estate). In reality, however, this niche sector experienced the worst of both worlds during the economic crisis. But with commercial real estate recovering at a faster pace than residential real estate, how will this niche respond? This week, MortgageOrb speaks with Jim Butler, chairman of the Global Hospitality Group at Los Angeles-based Jeffer Mangels Butler & Mitchell LLP, on the near-future of condo-hotels.
Q: For the benefit of those who are not familiar with the concept, what is a condo-hotel?
Butler: The ‘condo-hotel’ phrase was widely used to apply to different types of hotel mixed-use projects. At one end of the spectrum were projects intended to be operated as hotels, where the hotel had few or no dedicated hotel rooms, and individual owners of condominium units agreed to arrangements by which their condo units were treated as part of the rooms inventory of a hotel.
At the other end of the spectrum were hotel projects with complete dedicated hotel-room inventory owned by the owner of the hotel, and additional for-sale condominiums that might – or might not – be added to the rooms inventory, through the hotel or otherwise. And, of course, there were lots of variations or combinations of different residential, time-share or fractional, entertainment, restaurant, spa and related components in other projects.
I prefer the term ‘hotel mixed-use’ for projects that combine a hotel with condominium or residential and other uses, and I use the term ‘condo hotel’ for the first type of project mentioned where some or all of the intended room inventory consists of condominiums sold to individual owners. I refer to the other end of the spectrum – where for-sale condos or residential units have been sold and are not intended to be a critical part of the hotel-rooms inventory – as hotel condos.
Q: How would you categorize the overall state of the condo-hotel sector?
Butler: With a few notable exceptions, almost any project involving a condominium component has been in deep hibernation since the financial meltdown. Hibernation, as you may recall, is an altered metabolic state that certain animals assume to survive long winters. They may actually appear dead if discovered in this state, and it takes a while for them to recover from this state to even a dazed wakefulness. It is not like a normal sleep, where they are easily awakened or metabolic functions are near normal levels.
For hotel mixed-use projects with condominiums in either a condo-hotel or hotel-condo structure, the key thing in the coming months will be determining whether the project is hibernating or whether it actually died of hypothermia during the big financial freeze-up. The conditions can be difficult to differentiate initially.
Q: What impact did the recession have on the condo-hotel sector, compared to on the overall hospitality sector?
Butler: The hotel industry suffered its worst downturn in modern history, with net operating income dropping almost 48% virtually overnight. It has now stabilized, and fundamentals – as well as values – are improving.
The condominium component of hotel mixed-use projects did not just fall by 40% or 50% – it stopped selling, or being financeable. Existing consumer contracts to buy the units fell out or, more often than not, defaulted. Construction funding locked up as Lehman Brothers filed for bankruptcy, banks were seized, and consumers were worried about whether they would still have jobs, much less whether they needed second or third homes.
Q: As the economy begins to improve, will the condo-hotel sector be able to improve along with it?
Butler: We believe that hotel mixed-use projects are an enduring and viable part of the landscape, but it will take some time for the condominium part of the equation to become viable again. As with all hotel projects, the viability will depend on a lot of factors, including location market segment, regime structure, amenities and value perception, consumer financing, and other factors.
The good condo-hotels and hotel-condos will awaken from their hibernation. The ones that froze will thaw and decay.