Condo Hotels Seen As Poor Investments

Purchasers of South Florida condo-hotel units should look at them as long-term lifestyle purchases – not investments, according to a new study.

“We maintain that owning a condo-hotel unit will most likely require injection of capital periodically,” said the study by the National Association of Condo Hotel Owners (NACHO) based in Scottsdale, Ariz. It looked at condo-hotel markets in Miami Beach, downtown Miami, Coral Gables and Fort Lauderdale.

That statement may dash the hopes of unit owners who expecttheir use of units to be covered by income from the rooms being rented out the rest of the year. The study has four detailed charts that resemble transportation timetables with various rates of return under different scenarios.

Many of the rates are negative, and the positive returns through 2011 never hit 1 percent, except in Coral Gables, which only has one condo-hotel project listed. In the case of downtown Miami, all the return scenarios are negative, meaning owners will have to pay in additional money.

The reasons given for the returns are a growing oversupply of units, plus high costs and expenses.

“It’s a groundbreaking report and confirms much of what we are seeing anecdotally and piecemeal throughout the area,” said Jack McCabe, CEO of McCabe Research and Consulting in Deerfield Beach. “It also points out that there is limited data to justify future room rates, occupancy, or positive returns, and fairly represent the risks and rewards for potential buyers.”

Condo-hotels are a relatively new, rapidly growing phenomenon in South Florida. They are attractive to developers because sales of units pave the way for overall financing of a project.

Despite the projected returns, condo-hotels may still be attractive to owners who would rather get some income instead of buying a traditional condo that sits empty because it can’t be rented like a hotel room.

The study ‘s returns were calculated based on a number of interconnecting variables, including the size and cost of the unit, the average room rent, occupancy rate, owner ‘s percentage of room rent, and homeowner ‘s association fees per square foot.

A growing oversupply of new projects is a major concern, as well. It presents a challenge to existing unit values, future appreciation and may have a depressant effect on future average room rates, the study said.

The study, which is being sold for $75 a copy, comes as two of the areas in it are changing rapidly, which could make comparison to historic occupancy figures tricky. A residential and entertainment community is emerging in downtown Miami, and luxury hotels are becoming the norm on Fort Lauderdale’s beach strip.

There is a good reason for an increase in some hotel room capacity. The National Oceanic Atmospheric Administration said Miami Beach has more tourists annually than Yellowstone, Grand Canyon, and Yosemite national parks combined.

Greater Miami, on the other hand, has seen a slight decline in occupancy.

Greater Fort Lauderdale occupancy is up and the average daily rate has topped $100 a night for the first time.

The question is, how many rooms are enough?

There are 15 hotel/condo-hotel projects planned for Miami Beach, representing more than 2,750 rooms. The study estimates that it will take until 2011 to fully absorb this new pipeline of hotels/condo-hotel units.

There are 15 hotel/condo-hotel projects planned for Greater Miami, representing 4,299 rooms. Only 18 percent of the new inventory will be
absorbed by 2011, but by 2012, it should be fully absorbed.

There are 27 hotel/condo-hotel projects in Greater Fort Lauderdale – which includes Hollywood, Hallandale Beach, Coconut Creek, Dania
Beach, and Weston – representing more than 6,400 rooms.

The study estimates that if all the units in Greater Fort Lauderdale are built, it will take until 2010 to absorb 10.2 percent of the planned units, until 2011 to absorb 25 percent of them and until 2012 to reach equilibrium between supply and demand.

The brightest spot in the local market, according to the study, is Coral Gables, where the first new hotel in 25 years is under construction. Based on its current selling price and other estimated variables, it shows a positive investment return of anywhere from 0.5 percent to 3.4 percent from 2008 through 2011.

McCabe said the real unknown is change in unit price when it comes time to sell: “How deep will the market be in the years ahead?”


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