Multifamily Trends - Volume 9 / Number 1 - Feature
Hybrid Hospitality
by Mark Hornberger, FAIA
Tapping into the desire of baby boomers for urban and urbane living, combined hotel and condominium developments are growing in popularity.
In society fiction, 1930s-era movies, and real life, a group of wealthy individuals has long enjoyed the privileges that come with living at the finest hotels. Today, as the cachet and convenience of hotel life attract growing numbers of people who once would have opted for single-family homes or vacation cabins, hotel development has begun to focus on hotel residences, condominiums, and fractional ownership units as key project components. The trend, which is driving developments in metropolitan centers and resorts alike, is spurred by the same demographic cohort that has shaped real estate markets for years: the baby boomers.
Urban downtowns are newly attractive to couples that no longer have children at home and are ready to relinquish the long commu tes and high-maintenance houses that are part of a suburban lifestyle. For those who can afford it, the most seductive alternative is a luxury residence that shares all the amenities of an adjacent four-star hotel. This low-maintenance, high-service model also appeals to a segment of a successful younger population, and hotel developers are offering a trendier model of the hotel residence tailored for this particular group.
The concurrent boom in resort hotel residences is, in part, the flip side of the urban story. While 50- and 60-year-olds may want to shed the responsibilities of a big family home, they still want gathering places for their families—grown children in their 30s and 40s with children of their own. What better place for family reunions than in a home at a first-class resort with all the hotel amenities? Modern families are responding to the intergenerational allure of a picturesque setting, a diversity of activities, a high-quality residence with room for everyone, and access to fine restaurants, spa facilities, and daily maid service.
The rise of the hybrid hospitality project has been a boon to many hotel developers who recognize that adding fractional and condominium components supports and helps to justify the new development. With sales of the units to help pay for initial development costs, developers hope to turn a profit more quickly. While hotel and condominium lenders, who remain wary of products that cross categories, are still scrutinizing the mixed-format model, the success of recent hybrid developments is changing the way many investors, developers, and individual buyers look at residential real estate.
The success of the hotel condominium model has spurred development in every major city, with the luxury hotel brands leading the way. But the buzz among hospitality professionals is that the condominium hotel trend, in which fractional ownership of the condominiums is changing the structure of many hotel projects, ranks as the most powerful change to hit the industry in a decade. The popularity of the concept is so new that Smith Travel Research, the lodging industry’s leading research firm, does not yet keep figures on the number of condominium hotels in the United States. Jan Freitag, director of client services for the company, confirms that the concept “definitely is the hot topic today. Every major player, the major hotel owners in the country, are looking at hotel condos, hotel condo conversions, hotel condo construction to see if it fits their portfolios.”
Demographics aside, the generative force in the growth of the hotel/residential market is the diversity of product types that put the purchase of a second home within reach of a wide range of buyers. The urban pied-à-terre and vacation home are not new phenomena; what has changed in recent years is the availability of new ways to own that getaway property. There is a variety of models providing a way to invest and offering consistent yield, appreciation, and value-added opportunities—no matter what the motivation of the purchaser.
For some new city dwellers, the hotel residence replaces their suburban house. Others want to be able to return several times a year to a “home away from home.” Still others seek short stays in a choice location or perhaps several holidays a year at a variety of destinations. In order to support not simply vacations but whole new lifestyles, the development and hospitality industries have created a panoply of options. There are buy-in opportunities at multiple thresholds, from smaller units in the range of $150,000 to $300,000, to elegant, spacious condominiums at $5 million and up. And, as the performance of real estate has outpaced other ventures for a number of years, investment in hotel residential properties has continued to grow.
The success of the hotel residential model is not surprising in such cities as Boston, San Francisco, and Chicago that have always been home to large numbers of urbanites. However, in places like San Diego, Sacramento, and Phoenix, where newly livable downtowns are welcoming residents to everything from renovated lofts to new apartment complexes, the concept has found unexpected acceptance. “We are dealing with just a fraction of the high-end market, but the dynamic has been remarkable,” says John C. Kratzer, president and chief executive officer of JMI Realty in San Diego, developer of the Metropolitan Condominiums, the first mixed-use hospitality project to include condominiums in southern California. “Most of the 38 condominium units were presold one at a time, with limited marketing, before we opened. A number of our residents came from the local community.”
Kratzer and his partners understood the hybrid model from their experience as owners of resort units in Beaver Creek, Colorado, and saw the potential for an urban model. JMI Realty examined the mix and unit counts carefully before launching development of the San Diego property. Located on the top ten floors of the Omni San Diego Hotel, the luxury residences range in size from 1,600 to 2,500 square feet and have been a strong draw for empty nesters and second-home buyers from places like Texas and Arizona who want to escape to the temperate climate of southern California during the hot summer months.
This way of life also appeals to younger buyers. W Hotels, the self-described global lifestyle brand, is planning a 225-room hotel and 26 loftlike residences in Scottsdale, Arizona, scheduled to open in 2007. W, known for its hip aesthetic, is targeting young urbanites with a design that features sleek one- and two-bedroom living/entertainment nests in the project’s residential component. In September, W announced its second Hotel & Residences project in Arizona, this one in Phoenix adjacent to the America West Arena. Due to open in 2008, this “urban retreat” includes 190 hotel rooms and 170 residences.
These residents are energizing downtowns in cities that had never before enjoyed the benefits of 24-hour activity. As a result, they stimulate retail and entertainment development, support the cultural life of the community, and provide an impetus for improved public services. “The impact on the context is dramatic,” Kratzer says of San Diego. “The city is growing up before our eyes, creating an interesting variation in the urban model.” As Phoenix mayor Phil Gordon says, “Having a W adjacent to the arena will again show everyone that it’s increasingly cool to be in downtown Phoenix, even when it’s hot.”
The traditional role of the vacation home as a gathering place for families continues to invite buyers. But here, too, the heightened expectations of today’s purchasers are reshaping the market. In addition to recreational, educational, and cultural activities that appeal to their wide-ranging interests, these active people want high-quality living environments with room for family or friends and access to all the services of a resort.
Harry H. Frampton, managing partner of East West Partners–Western Division in Beaver Creek, Colorado, has developed everything from single-family homes to hospitality and condominium properties in the premier vacation destinations of the Mountain West. “Now residences are so accommodating and of such high quality, and the access to multiple activities so easy that vacationers come more often and stay longer,” he observes. “More than a second home, these residences have become a ‘second first home.’”
Among the growing ranks of part-time residents in popular resort destinations are new groups of buyers who have opted for a condominium hotel unit or for a fractional interest that provides them with limited use of the property. In these increasingly popular formats, the units comprise part of the hotel; when the owner is not present, the unit can be rented as part of the hotel’s inventory of rooms.
Chevis Hosea, vice president of land and commercial development for the La Costa Resort Villas in Carlsbad, California, is currently developing the residential component on the grounds of the resort and spa. “Our buyers are seeking a combination of high service, safety, and a return on their investment,” he says. “They can enjoy carefree use of their fully appointed luxury villa, with a bedroom and parlor, up to 120 days a year. In addition, they have full use of the resort, which has recently undergone a multimillion-dollar redevelopment. And the rest of the time they can lock off the parlor and rent the room.”
The first phase of the development, scheduled to be completed this summer, has already attracted buyers for 28 of the 39 units available. Among the purchasers are regular customers of the resort who want to own a part of it, as well as a group of patrons of condominium hotels who enjoy vacationing in the diverse venues now offering this product. The financial concept makes sense for these customers. “If you owned a beach house, you could rent it for $2,000 or $3,000 a week, in season,” explains Hosea. “With a villa at La Costa, you can rent your property for $400 or $500 a night, 365 days a year, when you are not in residence. Hotel management splits the rental amount, but in exchange you have an international marketing machine that keeps your property active in the luxury hospitality market.”
KSL Resorts, the La Quinta, California–based operators of the La Costa Resort, also manages the historic Hotel del Coronado in Coronado, California, which it owns with CNL Hospitality Properties of Orlando, Florida. In June, city officials approved a plan to expand the 118-year-old Victorian property to include up to 37 limited-term-occupancy cottages and villas. The condominium units, when not occupied by owners, will be split into smaller rooms and made available on a nightly basis to hotel guests. Condominium owners will be able to spend up to 90 days per year in their homes, up to 25 days consecutively.
Residence clubs provide yet another option for fractional, second-home ownership for those who want flexible access and high-end services at upscale resort locations. Unlike interval ownership or timeshares, which typically provide ownership of a specific week that may float within a season from year to year, residence clubs offer members the right to use the property at any time, subject to availability. Among the most successful clubs are those affiliated with the top hotel brands.
“Purchasers are attracted by the cachet of the Ritz-Carlton name and the level of service they can expect,” says Mike Ward, vice president, program development, for the Ritz-Carlton Club in Orlando, Florida. “For these buyers, the service and convenience are tradeoffs for their time. Residents can tailor packages of services they desire, from a chef who will prepare dinner in your unit to a ski valet who handles your equipment.”
At most clubs, members purchase a specific residence and are entitled to use the time they reserve in the residence in which they own an interest. At clubs where members purchase an interest in a category of residences, members are assigned time each year within that residence category. Most clubs also allow reciprocal use at other locations within the system. In addition, there is a fee for services.
Club members enjoy all the amenities of a first-class hotel that feels like home. Many fractional ownership properties cater to the purchasers’ desire to be “at home” by storing personal mementos such as family photographs and personalizing the unit when the owners arrive. “It’s an extension of the tradition of hospitality that best hotels have always provided,” notes Ward.
The hybrid model poses challenges for the design team, which must meet the different needs of condominium residents, hotel guests, and part-time owner/guests seamlessly. Integration of uses is the key, with plans—layouts, elevators, entrances, etc.—that allow the hotel to carry out back-of-house service functions without infringing on the privacy of the residents and also accommodate a smooth transition from an owner’s use of a unit to that of a hotel guest. As Ward says, “Understanding the complexity of the product type and making it simple is the art of design.”
While the reasons for purchasing a unit in a residential hotel development are as diverse as the buying options, the owners tend to share a desire for a quality of life marked by high levels of comfort, style, and convenience, often in an environment that sets the stage for sharing experiences with family and friends. At the same time, investment in a hybrid hospitality property promises financial as well as emotional returns—today and for years to come.
Mark Hornberger is principal and director of design for Hornberger + Worstell, Inc., a San Francisco–based architecture firm involved in the design of hotel residential projects.