Resort Report

Developments in This Industry Hint at a Closer Relationship Between Hotels and Time Shares.

As leisure time becomes a priority for more Americans, the resort property market continues to expand, generating many commercial real estate opportunities.

However, the definition of resort isn't always clear-cut. Some classify any hotel located within the tourist area of a destination market as a resort, while others consider only time shares as resort properties.

The reality is that these property types are the two major components of the resort industry. Both primarily are developed as recreation destinations, but maintain their profitability in different ways.

However, recent industry developments foreshadow a close alliance between resort hotels and time-share properties in the decade ahead. To take advantage of the opportunities in this market, commercial real estate professionals should become familiar with the industry and the changes taking place in it.

Resorts by the Numbers Hotels and time shares both are growing segments. The number of resort hotel rooms is expected to reach about 75,300 this year, up from 70,600 in 1999, according to the 2000 National Lodging Forecast from Ernst & Young's Hospitality Services Group. Resort revenues are expected to reach almost $3.5 billion in 2000, up from about $3.2 billion in 1999. Occupancies are expected to decrease 0.8 points in 2000 to about 67.4 percent, the report says, while room rates are expected to increase modestly to $184.53.

Currently, more than 2.2 million people own time-share interests throughout the United States, according to the American Resort Development Association. These properties are expected to boast almost $4 billion in unit sales this year, which represents a 300 percent increase in volume since 1992.

Demographics ensure that time shares will continue to be a popular vacation choice, according to ARDA. With the average age of today's time-share owner at 49 years and the prospect of 75 million people reaching that age in the next 20 years, the market has an ever-increasing population of prospective purchasers, the organization says. This expansion mirrors a trend occurring across the world, which saw a 182 percent increase in the number of resorts over the past decade.

Resort hotels and time shares differ in how they achieve profitability. Hotels must operate with a series of scheduled profit centers typically defined by the American Hotel and Motel Association's Uniform System of Accounts, which was established in 1926 and revised in 1977. Room, food, beverage, telephone, garage, and recreation all are independent operating departments within a hotel. In theory, each operating department is a profit center and should generate a positive bottom line. However, an operator may be willing to take a loss in a particular department to support the balance of the operating services.

In contrast, while time-share facilities generate some profits from rentals and departmental operations, they operate more in the manner of condominiums or cooperatives. The ownership of individual unit weeks or points alters the financial responsibility from the guest to the owner, who has a voice in the annual budget of the property. Because time-share operating costs are covered under a maintenance agreement (with an accompanying fee) and governed by a board of directors, management companies do not have the same reliance on the departmental bottom line as typical resort operations.

A Cost Comparison While resort properties can be quite profitable, time-share development costs are high. Visions of grandeur often set in when developers look at the prospect of generating upward of $400,000 revenue per unit from time-share unit sales. However, the cost of marketing the unit often approaches 50 percent of the sales value, so the threshold of entry into the industry is extremely formidable.

In addition, rising land costs make it expensive to develop time shares. In the Central Florida market, for example, land sales for time-share projects have exceeded $27 per square foot over the past year.

With prime sites difficult to find, the costs of obtaining local government approvals the highest in history, and development costs escalating at an unprecedented rate, more and more resort hotel developments are tipping the scales at a cost well above $100,000 per unit. (In comparison, land for budget brand hotels typically costs between $5,000 and $7,500 per unit and midlevel sites cost up to $15,000 per unit.)

For example, costs for the five top resorts now under construction in the Miami market range from $100 million for the 640-room Ritz-Carlton to $385 million for the 500-room Four Seasons, according to the Greater Miami Convention & Visitors Bureau.

Resale values for hotels and resorts in today's market are driven by capitalization rates. According to CCIM/Landauer Investment Trends Quarterly data, cap rates have varied little in recent years, holding consistently within the 10.5 percent to 12 percent range. Unique locations such as beachfront sites or properties adjacent to major attractions sometimes can lessen the overall cap rate and therefore increase value for noneconomic reasons.

Since time shares are, by their very nature, built for immediate resale, bulk resale generally is not a factor.

However, with time-share loan rates now averaging 14.5 percent and climbing, some financial fallout is likely in that market. Such fallout may result in a somewhat lower demand and a slowing of unit sales.

Development Update Because time-share projects generally are developed in phases, hotel development often is viewed as containing more risk. It is anticipated that the growth of hotel-oriented resorts will grow at a pace somewhat slower than time-share properties in the year ahead. With nationwide hotel occupancy projected to be around 67 percent, both developers and lenders alike are cautiously approaching the addition of resort hotel units. Resort hotel inventory should increase by just under 3 percent across the United States over the next year.

International resort development varies. Hilton Hotels Corp.'s development interest is as strong for overseas property as it is for U.S. sites, according to David Desforges, vice president of development for Hilton Grand Vacations. On the other hand, European real estate has been so thoroughly developed that getting two projects per year out of the ground on the continent represents a true challenge for the Marriott Vacation Club International, according to Miguel Ruano, Marriott's vice president of European development.

Brand-Name Products Brand segmentation likely will be the resort trend of the future.

In recent years, many other hotel segments have become masters of brand development through the creation of multilevel products. For instance, with its recent acquisition of Promus Hotels, Hilton now operates its landmark brand, Hilton Garden Inn, Embassy Suites, Homewood Suites by Hilton, Hampton Inn, Doubletree, Doubletree Guest Suites, Doubletree Club Hotels, and is rumored to be developing a lower-priced extended-stay product.

Traditional operating companies such as Quality Inn have price-tiered their product into brands such as Comfort Inn, Comfort Suites, Clarion Hotels, and Quality Inns, Hotels, and Suites. This stratification has enabled the industry to reach a broader range of travelers by providing different levels of service. Because of its success, the time-share industry is following suit.

The seemingly infinite expansion of the powerful Marriott name into hotel brands ranging from its limited-service budget brand Fairfield Inn to its super-luxury Ritz-Carlton Hotels and Resorts soon will be reflected in the time-share industry. Marriott's recent forays into the time-share component of the resort industry have met with tremendous success, so it has developed a three-price-tier destination resort product line.

The lowest-priced tier, Horizons by Marriott Vacation Club, will target the "active vacationer" with a family income between $50,000 and $90,000 per year, according to Tracy Evans, senior manager of public relations for Marriott. Unit week prices will start at $9,900 in markets such as Las Vegas and Orlando. The company's midpriced product, Marriott Vacation Club, is being marketed to families with annual incomes exceeding $116,000. Average sales prices for this tier are $17,500 per unit week. The high-end Ritz-Carlton Club will be priced for those with both champagne tastes and budgets who can afford to pay from $85,000 to $335,000 per four-week block of time.

Contrary to the trend of selling points rather than real estate in the resort industry, all of the Marriott products deliver deeded fee-simple titles. This is the inception of a broad-based restructuring of the time-share industry and the expansion of services that will be available at resorts.

Brand segmentation is destined to continue. However, with marketing costs representing such a large percentage of the overall resort sales value, Hilton will not follow the Marriott model until the marketing price point can be better controlled, according to Desforges.

Looking Ahead With upper-end resort hotel properties now frequently selling in the six-figure price range per unit, there may be a convergence of both products and values in future resort developments. Marriott is developing time-share properties surrounded on all sides by the entire spectrum of its hotel brands, while Hilton's preferred future development shares recreation facilities and amenities between destination resort hotels and time-share product. No one has accomplished the shared concept better than Walt Disney World, where over 10,000 resort hotel rooms share the lodging traffic with thousands of weeks of time shares.

Common ownership of hotel and time-share resorts, rising labor costs, a tightening labor market, increased development costs, and a dramatic decrease in viable resort sites suggest an even closer alliance between the two major components of the industry. Hotels and time-share resorts will take on a more similar look and a shared operations platform, producing full-service destinations containing not only the typical amenities, but also full food-service and recreation facilities.

Robin L. Webb, CCIM, CRB

Robin L. Webb, CCIM, CRB, is vice president and managing broker of Arvida Realty Services Commercial Division in Winter Park, Fla. Contact him at (407) 628-2160 or


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