The Real Deal New York

Condo-hotels: gone for good?

With both markets faltering, hybrids no longer a sure thing
By Gabby Warshawer | April 30, 2009 06:54PM

Like timeshares on steroids, condo-hotels appeared to offer the perfect real estate trifecta when the market was strong.

The units — which look like high-end hotel rooms but are sold as condos that buyers can stay in for about a third of the year — were long a win for developers, buyers and lenders.

Developers won because they were poised to reap profits both from condo sales and from the money generated on the nights the rooms were occupied by hotel guests. Buyers won because they were securing what appeared to be an appreciating real estate investment and had access to full-service hotel amenities. And financiers won because they were lending money on what seemed like two sure bets: the condo market and hotel market in Manhattan.

But with both the condo and hotel markets now faltering in the city, these hybrid units, which were emerging during the boom, are starting to look like less of a sure thing.

“The two markets that they touch, the condo market and the hotel market, have weakened,” said Jonathan Miller, president of appraisal firm Miller Samuel. “The long-term view on both those property types is OK, just not today.”

Others note that condo-hotel developments are not likely to be seen again in Manhattan anytime soon.

“Condo-hotels were really a financing gimmick in the boom era because it was a way that developers could finance a hotel that would otherwise not get built,” said Jeff Davis, a senior vice president at Jones Lang LaSalle Hotels. “I don’t think we’re going to see any more condo-hotels.”

While only two properties with true condo-hotel units have been developed in recent years — as opposed to developments such as the Time Warner Center, which has both the Mandarin Oriental Hotel and separate, standard condo units — experts say that if the market had stayed strong, others likely would have followed. And the two that were developed have been billed as the pinnacle of Manhattan luxury.

At the Trump Soho Hotel Condominium New York, a 391-unit project at 246 Spring Street, and the Plaza, which in addition to standard condo units and hotel rooms has 152 condo-hotel units, buyers can stay in their condos 120 days a year.

Donald Trump Jr., executive vice president of development and acquisitions at the Trump Organization, said he thinks Trump Soho, which is scheduled to open this fall, is still attractive to buyers, despite the current market.

“In the long term, real estate has always been a great investment, especially in Manhattan, [which] is the greatest tourist and business destination in the world,” he said. “The Trump Soho purchaser is looking for the finest amenities and services, most luxurious rooms and the most trend-setting neighborhood outside their front door, and they will have that here.”

Trump Soho promises to feature an array of high-end amenities, including an 11,000-square-foot spa, a library and a 190-seat Quattro restaurant.

The project is not the Trump Organization’s first foray into condo-hotels: The Trump International Hotel & Tower, at 1 Central Park West, opened in 1997 and includes units sold as condo-hotel residences with owner-occupancy restrictions.

Trump Jr. said Trump Soho was more than 55 percent sold as of the middle of last month, and prices, which have hovered at around $3,000 per square foot, have not been reduced. Closings have not yet begun on the units, nor have nightly hotel rates been established.

Some in the hotel industry say condo-hotel units are not attractive in the short term, partly because rates for hotel rooms in Manhattan have taken a nosedive in recent months. Hotel rate drops also affect condo-hotel buyers because they receive a portion of the income from the days their units are rented out as typical hotel rooms. Experts say reduced income could act as a deterrent for buyers.

“Buyers would hope the [income from nightly hotel stays] would allow them to break even, but New York City is one of the worst lodging markets in the country right now,” said Jones Lang LaSalle’s Davis.

The Plaza, where condo-hotel units start at $1.5 million, has sold roughly the same percentage of its condo-hotel units as Trump Soho — about half — said one of the development’s sales directors, Sassy Johnson, a senior vice president at Stribling. Sales of the Plaza’s standard condos began in late 2005, and Johnson said the condo-hotel units came on the market about six months later. Johnson said the sales strategy with the condo-hotels has been to release just 20 to 25 units to the market at a time.

Joel Greene, president of Condo Hotel Center, a Florida-based online brokerage firm for condo-hotel properties since 2002, said that because of the recession, tourists are less likely to stay at high-end properties like the Plaza and Trump Soho. He said many will “trade down” for cheaper lodging.

“For example, people who may have stayed at a Trump might choose a Westin instead,” said Greene, who worked on three sales at Trump Soho that ranged from $1.1 million to $1.9 million.

Condo-hotel developments were much more common in areas such as South Florida and Dubai than New York between the early 2000s and around 2006, when sales began declining, he said.

“It was a hot, hot market, with properties being resold for 50 percent more literally a few months later,” said Greene, who said sales of condo-hotels are virtually nonexistent these days, particularly as banks have become hesitant to give buyers loans for the property type.

“Unfortunately, it was a market with a lot of speculative investments, where many people weren’t looking at these as vacation homes but as investments,” he said. “Now there is a glut of unsold units.”

Meanwhile, sales of “fractionals,” which are similar to condo-hotels, have been weak in recent months, as well, market observers say.

Fractionals, which involve the purchase of a portion of a condo deed, allow owners to stay in their units for a certain number of weeks a year. They are typically run by large hotel chains such as Starwood, Marriott and Fairmont.

In Manhattan, fractional ownership is offered at the Phillips Club at Lincoln Square and the St. Regis on 55th Street and Fifth Avenue.

The St. Regis Residence Club, run by Starwood, was launched in 2006 and included 22 units over two floors of the hotel. But fractional ownership recently was extended to units on two additional floors, said Leonel Piraino, a broker with Prudential Douglas Elliman who has five St. Regis fractional listings ranging in price from $332,500 to $500,000.

Owners at the St. Regis can stay in their units four weeks a year. Piraino said it has been “much more difficult” to sell the St. Regis units in recent months because of the economic downturn.

“In a regular economy, where people have a bit of money to play with, these are low numbers, so these types of properties will sell well,” he said. “In this economy, people don’t have the money for them because it’s not a necessity. Like any other second or third home, these are less important than the primary home.”