From Boston to Los Angeles, developers are busy converting existing hotels to one of the hottest concepts in the lodging and real estate industries today — condominium hotels. In many cases, developers are working with branded hotel companies to build mixed-use luxury properties in city centers and resort markets. These complexes typically include a hotel, residential units, office space and retail stores.
So, why have condo hotels become so hot? For starters, developers can sell off hotel units prior to construction, enabling them to obtain construction debt and equity more easily than if they were building a traditional hotel.
Additionally, the inclusion of attractive condos within hotels can typically garner a higher sales price per square foot, allowing developers to generate cash flow to cycle back into the facility or new projects, according to Regent Street Advisors, an affiliate of The Plasencia Group, a hospitality consulting firm and financial advisor.
During the past few years, while the hotel industry was in the midst of a cyclical downturn, condo hotels have been an attractive way for developers to get deals done. In fact, many luxury hotels would not have been built without a residential component, says Dan Peek, managing director at Regent Street.
Lenders are more willing to finance condo hotels with only 20% equity because they are banking on projected condo sales prior to construction. Traditional loans require about 30% to 40% equity, says Peek. “Assuming sales happen as projected, the loan is guaranteed by condo purchases.”
Additionally, partnering with luxury and boutique brands can help turn up the heat even more on this already hot segment. So, it's no surprise that developers are turning to upscale brands like Four Seasons as well as Marriott's Ritz-Carlton, and Starwood's St. Regis and W hotels. Even some other luxury brands, which haven't traditionally offered a mixed-use residential component, are entering the playing field, including Hyatt's Grand Hyatt, Mandarin Oriental, and Hilton's Conrad.
“Let's not ignore what drives corporate development — profit,” says Jim Alderman, senior vice president of development at Starwood Hotel & Resorts Worldwide.
In Manhattan, The Related Cos. and Apollo Real Estate Advisors developed the new Time Warner Center, which opened to great fanfare in 2004. The center includes The Mandarin Oriental luxury hotel, as well as The Residences at the Mandarin Oriental — luxury condos ranging from 540 sq. ft. to 8,400 sq. ft.
The complex also encompasses Time Warner World Headquarters, The Shops at Columbus Circle, One Central Park condominiums, 211,000 sq. ft. of Class-A office space, Jazz at Lincoln Center, and 504 parking spaces.
“There's no question about it: The Mandarin Oriental name is a great selling tool. There's a certain ‘buzz’ about becoming a permanent guest here,” says Susan de Franca, president of residential sales at Related Cos.
Related and Apollo own 50% of the 251-unit luxury hotel, while Mandarin Oriental owns the other 50%. The hotel's 65 residential apartments, located on floors 64-80, have sold at prices ranging from $2.5 million to $30 million. Unlike some other condo hotel projects, where the condos are rented out as hotel suites when not in use, the residences at Mandarin Oriental are used only by owners and their guests, says de Franca. “This was a decision we made with Mandarin — to ensure exclusivity for owners.”
Mandarin Oriental owners were willing to pay higher prices to buy luxury apartments at the upscale hotel complex, where they have access to all the hotel services and amenities. “Certainly the price per square foot is higher than the building next to us, but our residents have access to our pool and fitness center, plus they get priority treatment at our restaurant and spa,” says Kristin Ruble, director of sales and marketing at The Mandarin Oriental.
Flurry of new projects
With the success of the Mandarin Oriental in New York and the high demand for serviced hotel apartments in urban markets nationwide, the hotel company has teamed up with CWB Boylston to open a similar property in Boston in September 2007.
CWB Boylston is building a 150-room Mandarin Oriental hotel, 50 ultra-luxury residences, 35 rental apartments, retail shops and restaurants in the heart of Boston's Back Bay. Almost all of the residences have been sold — sans advertising or marketing — for $2 million to almost $10 million, says CWB Partner Robin Brown.
Developer Espirito Santo Group also is realizing success with the branded mixed-use model. It partnered with Hilton's luxury Conrad brand to open the first newly built Conrad hotel in the U.S. last year in Miami. The Conrad Miami is part of the Espirito Santo Plaza and includes 203 rooms, 116 residences and 11 penthouse suites. Since the complex opened, the Conrad name has helped drive condo sales, as well as generate business from office tenants in the complex. Many tenants have rented meeting space in the hotel, and some of the executives have even bought condos at the Conrad.
“This is truly a project where everyone benefits. The synergy works,” says Bill Ross, president of Estoril Inc., which is working with Espirito Santo to sell condos and lease office space. Some 93% of the complex's 300,000 sq. ft. of office space is leased out, making Espirito Santo Plaza one of the fastest lease-ups in Miami history, says Ross.
There's no question about it: Buyers are willing to ante up more money for a branded luxury condominium than a similar condo in another building. “The brand is important because people are buying into a lifestyle, and the brand is an extension of that lifestyle,” says Mark Ellert, a partner at Langford Development LLC and president of IAG Florida.
Langford is developing The Regent Orlando in Winter Park, while IAG serves as the development manager. IAG also is the project manager of Luxury Resorts International's The Atlantic, a Fort Lauderdale condo hotel which is part of Starwood's Luxury Collection. “The brand implies a sense of credibility to the buyer and certainly to the transient traveler,” says Ellert.
Starwood's Alderman agrees, adding that Starwood is currently working with top developers around the world and plans to add a residential component to all of its St. Regis hotels. Future development of St. Regis, W and Luxury Collection properties will also include a residential mix, says Bill Linehan, Starwood's vice president of marketing and brand alignment.
The prospect of buying into a brand that exemplifies an exclusive lifestyle can be enticing, adds Joseph Long, executive vice president of acquisitions and development at San Francisco-based Kimpton Hotel & Restaurant Group. In fact, a developer of a branded residential hotel is not only selling prospective buyers the actual units, but a whole package that encompasses the hotel brand's image and added services, says Long.
Kimpton, which is actively discussing several potential mixed-use projects with developers, is currently working with The Falor Cos. to convert the Mayfair Hotel in Coconut Grove to a condominium hotel. Most of the individually owned suites will be rented as hotel suites to transient travelers when not used by owners. Kimpton will also be managing a new Hotel Palomar in Dallas, a mixed-use hotel with residential condos and retail shops. The hotel, which will be Kimpton's fourth Hotel Palomar, will open in late 2006. Unlike the Mayfair, the units will be sold as homes and not rented as hotel rooms, says Long.
Without a doubt, the right brand and hotel operator can help developers succeed with their mixed-use condo hotel projects, says Robert Falor, Falor's CEO and president. Based in Miami and Chicago, Falor owns and operates 11 condo hotels in key markets including South Florida and Chicago. The company recently announced the acquisition of the Hotel 71 in Chicago and plans to convert it to a branded luxury condominium hotel. It is the company's third condo hotel project to be announced in Chicago in the past 12 months.
Falor will spend $18.5 million to upgrade the 456-unit hotel, which will include a new 7,000 sq. ft. spa. The hotel will then be branded and units will be sold to individual buyers for $395,000 and up. Falor is currently looking at other hotels in Boston, San Francisco and New York to convert to branded condo hotels.
“We believe this hotel model will continue to grow. The more we educate consumers, the more demand there will be,” Falor says.
Dollars and sense
Developers are catching on to the many benefits of the condominium hotel structure. For starters, selling hotel rooms, suites or penthouses to individual owners helps developers pay for their hotels while spreading the risk to multiple owners. This model has worked particularly well during the hotel industry downturn as lenders weren't as willing to finance traditional luxury hotel deals.
“Condo hotels have become an achievable way to finance hotels,” says Brent Howie, president of Clearwater, Fla.-based Provident Management, which owns a group of condo hotels including The Mutiny Hotel in Miami and Ocean Point Suites in Key Largo.
Yet, developers also must keep in mind that the individuals who purchase units are not lenders. “They have their own reasons for purchasing and they are not doing it to loan you the money to buy your hotel,” says Howie
Developers must also keep in mind the inherent risks. Rising rates could deter some buyers from purchasing condo hotel units. Also, increasing construction costs can make it difficult for developers to price pre-construction sales. If costs go up, for example, the unit becomes more costly to build, eating away at profits. According to Regent Street's Peek, developers also have to remember that the basic rule of real estate applies big time to condo hotels: location, location, location.
Worth the Price?
Condo hotel units may be more expensive than similar traditional condos, but there are reasons for this: Buyers don't have to worry about maintenance, and they have the opportunity to recoup some of their costs through hotel rentals.
And, unlike traditional condo units, condo hotel owners have the added benefit of being part of a hotel, which attracts a constant stream of guests through brand marketing and toll-free reservation systems, say developers.
Developers can justify a higher sales price for hotel condos — particularly branded luxury projects — because they can offer owners hotel services and amenities. A higher price tag enables more money to be allocated to the project. The result: more luxurious finishes, larger hotel suites, extravagant spas, and more.
The cash flow generated by residential sales at The Regent Orlando at Winter Park, for example, enabled Langford to build a higher-quality product. “Here we built an ultra-luxury suite hotel and our buyers helped pay for it,” says Ellert.
Certainly, the cash flow doesn't end after condos are sold. When owners allow the hotel company to rent their units when not in use, developers continue to split the rental income — usually 50/50 — with the owners. This can be a willing proposition long-term, as long as developers make it known upfront that the rental arrangement benefits the owners as well, says Howie, adding that it's important to give buyers a financial incentive to buy at your property.
Some hotel companies, for example, are now asking for upfront fees from owners to pay for hotel services, in addition to the 50% or more of all rental income collected by developers. Savvy buyers and developers should be leery of these types of arrangements.
Robyn Parets is a Boston-based writer
Quick Primer on the Hotel Condo Model
There are many variations of the condo hotel model. One of the more popular concepts includes the straightforward condo hotel, whereby a developer sells most or all of the hotel rooms. The owners can then elect to occupy their condos or put the units back into rental inventory when not in use.
The hotel operator rents the units out — just like regular hotel rooms — and revenue generated is typically split 50/50 between the owner and the developer. The developer, in turn, continues to own common spaces, such as restaurants, spas, pool area, and lobbies.
Another quickly emerging model is the mixed-use luxury hotel with a residential component. In this structure, the luxury condominiums on the top hotel floors or in an adjacent building are sold to individuals, many of whom occupy the apartments full-time.
These units are not part of the hotel inventory, yet owners have access to all hotel facilities and services, such as daily housekeeping, room service, the gym, pool, and more.
In some cases, developers encompass both models in a project, which may include some condos that can be used as rentals and some high-end homes that are not rented to transient travelers.
Regardless of which condo hotel model is the most appropriate for a project, developers should keep in mind that condo hotels can be one of the most lucrative and risky hotel structures, according to industry veterans.
“There are certainly lots of risks involved — sales risks, interest rate risks and liability,” explains Dan Peek, managing director of Regent Street Advisors, a hospitality consulting firm and financial advisor. “Yet, if executed properly, the potential rewards outweigh the risks.”
— Robyn Parets