The economy is dying on the vine while $4 gasoline and rising unemployment have consumers putting purchases of everything from cars to houses on hold. Hotel chains, fearful of faltering occupancies as vacationers decide that backyard barbecues are more reasonable than a resort stay by the beach this summer, are scaling back plans for new construction. Condominium development is moribund, and the apartment, office, retail and even industrial sectors have all fallen off.

Contrast all that with the timeshare segment, a business with its own unique law of economics. One company after another in vintage military attack mode — “Damn the torpedoes, full speed ahead!” — is pressing on with fresh construction projects this year and next. Executives of the leading companies appear practically oblivious to the realities of recession or even slowdown. In the whole of commercial real estate, timeshares appear to be one of the few sectors resistant to the vagaries of the economy.

Howard Nusbaum, president of the American Resort Development Association in Washington, D.C., a trade group representing developers and management firms, reports that the industry has enjoyed 13% growth annually over the past five years. He expects 10,000 new timeshare units to be delivered to the market this year, the same as 2007 when sales volume reached a record $10.6 billion, up from $1 billion in 1990. A bonanza of expansion may lie ahead, he believes, as baby boomers retire in greater numbers and seek vacation alternatives. Fewer than 6% of American households are invested in timeshares, and Nusbaum figures the industry has only skimmed the cream off its potential market so far.

“We weren't part of the overheating of the real estate market or the subprime crisis,” Nusbaum says. “We have our own sales and marketing forces and we are fishing every day for customers. Hotels don't know what to do when the phone stops ringing. Timeshare developers know how to keep prospects showing up for their sales presentations in good times and bad.”

Steven Kent, an influential analyst at Goldman Sachs & Co. in New York, boldly predicted in June that the timeshare industry would enjoy 10% sales growth this year, even as housing prices in major cities have dropped 15% or more. To achieve that 10% gain, developers and resort operators need to attract 412,000 new buyers of timeshares, a feat Kent calls achievable. Instead of reducing their construction plans, many chains instead are ramping up sales and marketing efforts to combat customers' qualms over the economy.

Charting growth

The fearless style of leadership in timeshares is personified by executives like John Sutherland II, the senior vice president of sales operations at the Family of Orange Lake Resorts in Orlando, Fla. The timeshare operator has 3,000 units spread among its 26-year-old Orange Lake Resort & Country Club in Orlando and smaller facilities in Panama City, Fla., Lake Geneva, Wis., and southern Vermont.

A new eight-story tower with 156 units is under construction in Orlando and due to be completed in December. The firm already is considering next year's projects.

The $39 million construction cost of the latest tower, equal to $250,000 per unit, hardly seems to concern Sutherland and other executives at Orange Lake. They're confident that the shared condos, promoted as one-week units to be used biannually at prices averaging $20,000 apiece, will sell out in short order.

“We don't sit around worrying about the economy, because we can't afford to,” Sutherland declares. “We work right through a bad economy. The expression is, we keep reloading the wagon here. We don't worry about the mule going blind. And we don't worry about what the competition is doing.”

Sales and marketing are everything in timeshares. Orange Lake's profit-and-loss profile is typical: sales and marketing run a huge 55% of the cost of a new timeshare unit. According to Sutherland, the actual construction cost represents a mere 25%. Corporate overhead is 8% or less. The rest is all profit margin, with higher costs for cement and steel having little impact on the bottom line so far, Sutherland says.

But the future poses challenges for timeshare developers, starting with capital and financing. Most timeshare buyers put little or no money down, and pay high mortgage rates often exceeding 15% spread over 10 years.

Developers, who extend most of the timeshare mortgages, in the recent past have paid 7% for their own money, and then thrived on the spread. But that assumed in many cases that loans could be securitized or packaged for sale into the secondary market. That market hasn't completely shut down, though the window of opportunity has narrowed.

Bluegreen Corp. in Boca Raton, Fla. raised prices 8% in January and then sold $60 million worth of timeshare-backed securities into the secondary market to a group led by Branch Banking & Trust Co. in Winston-Salem, N.C., in late March. Similarly-packaged securities were sold into the market by bigger names such as Marriott, Wyndham and other developers after that.

“It's harder to sell pooled mortgages this year, which is why we bid our mortgages out earlier than usual,” says David Pontius, president of Bluegreen. “But the market hasn't dried up, which has been a pleasant surprise to all of us. The investor pool has come to learn the timeshare business and its dynamics. The paper continues to sell.”

Developers like Bluegreen have alternative financing avenues to fall back on. The company has a $150 million line of credit with Branch Banking and another $75 million credit line with Textron Financial Corp. in Providence, R.I. Recently Bluegreen said it would file a notice of intent to issue more stock or debt. “We're a natural negative-cash flow business,” Pontius observes. “We need to ensure that we have a variety of credit lines open. So we're willing to explore all options.”

High default rates

Default rates on timeshares are high. For the first quarter, Bluegreen reported a default rate of 7.9%, higher than the 7.3% rate in early 2007, but lower than the 8.5% default rate of 2004 and 2005.

Starwood Hotels & Resorts Worldwide management said after first quarter results were announced that it expected to be able to sell timeshare notes before the end of the year. The White Plains, N.Y.-based company had expected to record a profit of $40 million to $45 million from such a sale. Now management figures the profit gain to be closer to $30 million to $35 million as interest-rate spreads narrow.

The difference hasn't been enough to keep the company from opening new timeshare resorts on the island of Kauai in Hawaii, in Cancun and near Scottsdale, Ariz. There is new construction underway on more resorts in Palm Springs, Calif., Los Cabos, Mexico, Bal Harbour, Fla., and Steamboat Springs, Colo.

Starwood also has plunged headlong into the fractional marketplace. While timeshares represent deeded contracts typically for one week's worth of ownership per year to a property, fractionals usually range from four to 13 weeks and are aimed at a much more affluent audience.

Starwood has sold out its fractional units at the St. Regis Hotel in New York and is selling fractionals at its Phoenician Resort in Arizona and at the St. Regis Aspen in Colorado for prices ranging up to $1.5 million and more.

Even if the U.S. property markets sink further into a slump, international expansion may be what buoys many timeshare developers' portfolios. David Matheson, a vice president and spokesman for Starwood, suggests that the company's Cancun and Los Cabos investments are harbingers. He figures the worldwide timeshare industry's $13 billion in annual sales splits up roughly this way: $10 billion American, $1 billion in the Caribbean, $1 billion in Mexico with the final $1 billion spread around the rest of the world.

“The rest of the world looks pretty untapped,” Matheson says. “Mexico looks very underdeveloped in timeshare properties. That is very interesting to us.” What keeps Starwood building at such a frenetic pace? Matheson says that investor demand is still running high. The company can afford to keep making its own mortgages on the timeshares it develops, he explains, even if the securitization market breaks down.

“As a large company, we can afford to make our own mortgages. Smaller developers would be more stressed over this issue,” Matheson says. He concedes that all timeshare developers are under pressure to show growth. “You put up a hotel and it has recurring revenues,” he observes. “You build a timeshare and sell out and there are no more revenues outside perhaps the maintenance fees people pay. In the timeshare industry, companies have to keep building or their revenues go flat.”

For many hospitality companies, timeshare represents a small but significant fraction of revenues. In the first quarter, for example, Marriott had total revenues of $2.95 billion, and timeshares represented $326 million, or 11% of that.

The scale of the big chains' sales base gets bigger every year. The industry's largest developer, Wyndham Vacation Ownership in Orlando, which now has 17,000 units spread over 145 resorts, built 300 shared condos per year nine years ago when Alan Litwack, vice president of development and acquisitions, joined the company. Last year it added 1,500 units and Litwack expects to exceed that number in 2008.

The company is finding that the stressed condo market has given it some unexpected openings. It recently took over a so-called whole-ownership 267-unit condo development in Panama City, Fla., from a developer who went bust, and hopes to take advantage of options to build two more towers on adjacent land once slated for conventional condos.

Frostbelt's potential growth

Wyndham continues to add 200 or more units a year in the Orlando market, where occupancies range a robust 90% or better year-round in most resorts. But the company is also looking farther afield to the Frostbelt. Last year, it opened Glacier Canyon in the Wisconsin Dells and the West Yellowstone in Yellowstone Park in Montana. It's also in the midst of erecting a timeshare development in a tower on Sutter Street in San Francisco within an easy walk of Union Square.

“We are looking in Boston, Chicago and New York for urban timeshare sites,” Litwack reveals. The company already owns timeshares in San Diego, Seattle and Washington, D.C. “It's a real challenge to find the sites for timeshares in big cities, but we think vacationers are going to want to be in these destinations in the future,” Litwack says.

Marriott Vacation Club International, to cover all bets, is building on a variety of fronts. It opened a fractional development in San Francisco recently and a timeshare in Thailand, and announced a development in Dubai to begin in 2009.

Some 200 units opened recently in Las Vegas, and another 500 are planned there sometime next year. Marriott recognizes that Florida is still the king of timeshares, and accordingly is at work on developments in Marco Island and Singer Island, the latter north of Palm Beach.

Marriott added 1,000 timeshare units last year, bringing its system-wide total to 11,200, and is scarcely showing any signs of slowing its pace. “We are probably more aggressive now than ever before,” says Edward Kinney, Marriott's vice-president of corporate affairs and brand awareness. “We did $1.53 billion in sales last year, but that inventory is all gone. To provide value to our shareholders we have to keep introducing new product to sell.”

Meanwhile, Orlando-based Disney Vacation Club is working on a timeshare extension of its Disney Animal Kingdom Lodge resort in Orlando. It's building the first timeshare adjacent to the original Disneyland in Anaheim, Calif., slated to open in 2009. And the company has started work on a combination hotel-timeshare resort in Oahu slated to open in 2011.

Disney's expansion reflects the industry-wide growth occurring in Vermont, Colorado, and elsewhere, says Nusbaum of the American Resort Development Association. “You're going to see condo development increasing in places like the Wisconsin Dells and the Finger Lakes region of New York,” and also in the Caribbean, he adds. “Timeshare is truly becoming a global enterprise.”

H. Lee Murphy is a freelance writer.

Abysmal resale market for timeshare owners

The fuzzy part of the timeshare industry — and the trouble with betting on timeshares' future direction — is that much of the construction is undertaken with few of the disciplines that guide other commercial real estate segments.

There is little shared data on occupancy rates at existing developments, for instance, to gauge the need for new construction. Nobody seems able to identify a tipping point between supply and demand that might signal a danger of overbuilding within a particular market.

And resales could eventually muck up new development efforts. The typical timeshare owner who pays $30,000 for a condo share might get $3,000 or even less if he tries to sell it back to the original developer, who may not be willing to take it back at all.

Timeshare exchanges such as RedWeek.com have cropped up, but the resale market is bedeviled by a lack of organization, sky-high brokerage commission fees and a thin stream of buyers. Owners have been known to list their timeshares on eBay for $1 just to get out from under annual maintenance fees that can run as high as $1,000.

Ed Hastry, president of the National Timeshare Owners Association in Baltimore, estimates that there are as many as 3 million timeshare units on the resale market currently. They rarely go into default, he says, because lenders often resort to heavy-handed debt-collection tactics and fellow homeowners' association members exert pressure on their neighbors to keep up maintenance payments.

Hastry also acknowledges that anybody promoting a resale is usually overwhelmed by the potent marketing muscle of new development, in which prospects are wined and dined over long weekends paired with a high-pressure sales pitch to invest. “Timeshare developers are marketing geniuses,” Hastry says. “It's that marketing, he adds, that fuels “a merry-go-round of expansion that seems to go on and on.”

Could the merry-go-round grind to a halt? Few are willing to venture an opinion. “It seems crazy, but even in a mature market like Orlando developers continue to build like crazy,” says Lisa Ann Schreier, director of consultancy Timeshare Insights in Orlando. “Whether all these timeshare units get sold and occupied, we may have to wait and see over the next couple of years.”
H. Lee Murphy