New Wave Investments
Hotels with indoor waterparks are making a splash in drive-to markets.
In 1994, resort
pioneer Stan Anderson expanded his Wisconsin Dells, Wis.–based Polynesian
Resort to include an indoor waterpark. Wisconsin
lenders were willing to fund the development because they had been financing
outdoor waterparks for years. Despite the steep construction costs, the project
was a success, and soon hotels with indoor waterparks were viewed as even
better hospitality investments than their outdoor counterparts.
Indoor waterpark hotels and resorts create weatherproof
vacations and capture year-round revenues. In 2004, these resorts achieved
higher occupancies and revenues than any other lodging investment. While the
Midwest leads this trend — of the 62 U.S.
hotels with indoor waterparks, 28 are in Wisconsin
and 14 are in Minnesota — these drive-to
resorts are becoming popular in several U.S. markets. The Northeastern and
western regions have the next highest concentration of parks. By the end of
this year, the number of parks will grow to 92 and will include more than
16,000 hotel rooms, a fourfold increase in the last five years.
Like other niche properties, hotels with indoor
waterparks are unique development and investment opportunities that may provide
greater returns than more traditional properties. Carefully examining these
investments is the first step toward understanding the rewards and risks
associated with indoor waterparks. Analyzing costs, development trends, demand,
financing, and profitability can help commercial real estate professionals
determine if these opportunities make sense in their markets.
Who's Investing and How
A few specialized developers and family-run operators
kicked off the indoor waterpark development trend, and now individual investors
are gaining entry into the market by purchasing hotel-condominium units at
these properties. In many instances, baby boomers are putting money into these
higher-performing investments instead of the stock market. Beyond making money,
individual investors like the idea of owning a place within a resort setting
where they can spend time with their families.
Currently most indoor waterpark resorts offer condominium
units for sale because it provides additional pre-construction revenue. While
waterparks generate substantially higher incomes than ordinary lodging, they
also are more expensive to build. A successful resort requires a large initial
investment — indoor waterparks can cost as much as $300 per square foot to
build, not including hotel construction costs. As a result, many indoor
waterpark resorts cost between $40 million and $55 million, excluding land
costs. Even with favorable financial terms, the sticker shock of these projects
deters many investors. For that reason, pre-selling hotel suites to individuals
as wholly owned condominium units offers benefits to both the resort’s
developer and the condominium buyers.
The Condo Advantage
Currently, 11 percent of all indoor waterpark projects in
the pipeline have a condominium component, and successful waterpark resorts are
using this strategy. For instance, several Wisconsin Dells properties,
including Kalahari Resort & Convention Center, Wilderness Hotel & Golf
Resort, Great Wolf Lodge, and Chula Vista Resort, have developed condominium
guest rooms that were pre-sold prior to construction.
The advantages to the developer are twofold. First,
revenue generated from the condominium sales prior to construction reduces the
project’s equity requirement and helps to secure a construction loan faster.
Second, the developer benefits from splitting the revenue with individual
condominium owners when units are rented out as hotel rooms.
Along with buying a condominium investment, unit owners
gain access to the resort’s amenities — restaurants, bars, spas, golf courses,
and recreation-entertainment facilities, including the waterpark. For example,
in the Midwest, the attraction is similar to
buying a vacation cabin on a lake; however the condominium investment requires
little maintenance, provides year-round instead of seasonal use and possibly a
better investment return, and offers additional income opportunities if the
owner decides to rent the unit as a hotel room.
Condominium owners do not have to place their units in
the hotel’s rental pool. They can opt not to rent their units or they also can
choose an outside agency to handle the unit rental. However, research indicates
that most condominium buyers choose to place their units in a resort’s rental
upscale resort projects cost from $66,400 to $323,500 per available room to
build, with the average cost being $172,000 PAR. For a 300-room resort, that’s
an average project cost of $51.6 million.
The additional costs associated with building an indoor
waterpark as part of a hotel or resort vary. Low-end projects can cost around
$167 psf to build, while heavily themed parks with state-of-the-art features
such as sound, lights, and animation can run in excess of $400 psf, including
furniture, fixtures, and equipment. Costs vary depending on the size, price
tier, and entertainment value that the developer wants to achieve.
There is a direct relationship between the number of
hotel guest rooms and the size of indoor waterpark the operation can support.
The waterpark sizing multiplier accelerates with the number of hotel rooms. For
example, while a 100-room hotel can support a 10,000-sf indoor waterpark, a
hotel or resort with 200 or more rooms can support about 200 sf of waterpark
per guest room. Therefore, a 300-room hotel or resort can support a 60,000-sf
waterpark. A hotel developer considering the addition of a 60,000-sf indoor
waterpark can expect to add about $18 million to the total project costs.
Despite steep development costs, hotels with indoor
waterparks can be lucrative investments. A survey comparing total project costs
with the amount of cash generated revealed that upscale waterpark resorts’
revenue more than offset building and operating costs. Due to higher
occupancies, waterpark premiums, and higher food and beverage spending, these
resorts generated a cash-on-cost return ranging from 14 percent to 24 percent
compared to returns of 10 percent to 12 percent for comparable properties
Overall, research indicates that hotels with indoor
waterparks achieve higher occupancies, higher room rates, and higher room
revenues than traditional hotels. Still, investors who are considering this
niche property should conduct thorough market analysis and due diligence to
arrive at an independent decision about a project’s viability. It’s critical to
analyze the developer’s feasibility report; study the prospectus, public
offering, and planning documents; review the financial projections; and
understand the source, use, and distribution of funds.
with indoor waterparks are gaining popularity among hospitality investors and
consumers alike. As these projects continue to expand into new markets,
commercial real estate professionals should carefully analyze the associated
costs, benefits, and risks to determine if hotel waterparks are a good
investment for them.