Facing falling prices, slipping sales volumes and rising pre-sale contract cancellations, many South Florida condo developers and owners have thrown in the towel, opting to operate properties as rentals until the market improves — or selling units in bulk (often at big discounts) to investors looking to rent them out until the market changes.
But another alternative is just starting to emerge in South Florida’s tourist-heavy submarkets: vacation-oriented “shared-ownership” real estate models including timeshares and their burgeoning upscale brethren known as “fractionals.”
Few deals have closed transforming struggling condo projects into shared-ownership resorts. But well-placed sources, including consultants assessing the viability of these ventures, are anticipating a spate of activity in coming months, as fractional and timeshare specialists get involved with condo projects.
Just ask resort real estate veteran Dick Ragatz, whose Eugene, Ore., consultancy, Ragatz Associates, provides feasibility analysis for hospitality developments, including shared-ownership projects.
“We’re getting calls every week” from developers of failing South Florida condo projects, wondering whether they might make sense as fractional-interest resorts, Ragatz said. His firm is already consulting with “a couple dozen” struggling condo developers “up and down both coasts” and all the way to Key West.
Ragatz said he isn’t at liberty to identify projects he’s consulting on, but predicted that “dozens” of Florida condo developments will end up going the fractional route over the coming six months or so.
That’s clearly in the cards in today’s arguably disastrous condo environment, noted South Florida multi-housing guru Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach.
McCabe fears 2008 could witness “the great condo meltdown,” as the marketplace is already seeing a wave of heavily discounted “block sales” of unsold units at condo conversion and development projects. Hedge funds and other private equity players are typically able to negotiate prices at least 20 to 30 percent or more below original asking prices, McCabe said.
With developers still bringing thousands of new units to market, McCabe likewise expects to see some new properties ultimately operated as timeshares or fractionals.
Nearly 4.5 million American households own one or more weekly timeshare intervals. Florida is the biggest domestic market with just over 30 percent (or nearly 53,600) of the nation’s timeshare units. Beach-oriented resorts account for almost one out of every four timeshare resorts, with golf and island resorts each comprising between 9 and 10 percent.
According to Washington, D.C.-based American Resort Development Association, sales of weekly timeshare intervals grew by 16 percent to more than $10 billion in 2006, with Florida capturing 23 percent of the 2006 interval sales activity, according to a report by ARDA and Ernst & Young.
Given the soured market South Florida condo developers face, it’s reasonable that those with struggling projects in the region’s resort-oriented locales would look into timeshare or fractional alternatives.
This presents an opportunistic “silver lining” for timeshare specialists and related shared-ownership players in the midst of South Florida’s condo market woes, agreed long-time industry figure Franz Hanning, president and CEO of timeshare giant Wyndham Vacation Ownership in Orlando.
“We’ve heard from developers who seem willing to sell completed and partially completed projects at very attractive prices,” Hanning explained.
WVO’s Wyndham Vacation Resorts operates four timeshare properties in South Florida, plus the Wyndham Miami Airport Hotel. The company is one of several large, multi-market resort operators offering timeshare owners flexible “points-based” systems, allowing them to utilize various properties, rather than being locked into a specific week and site.
Popular resort areas and even some of the nation’s most dynamic downtowns are now seeing developments of more luxurious shared-ownership properties, offering the so-called fractional-interest alternative to a wholly owned second home. With the heavily amenitized properties often called “private residence clubs,” fractionals are targeted at wealthy buyers looking to visit several times each year.
Developers typically look to sell fractional interests ranging from one-twelfth (or one-thirteenth) to one-eighth, giving buyers the right to stay in a particular unit for three weeks or more each year. While the average weekly timeshare interval sold for $18,500 in 2006, fractional interests tend to be much more expensive.
For instance, at South Beach’s Seville Beach Hotel, which is being converted into a Ritz-Carlton Club property, one-twelfth-deeded interests are priced from the $100,000s to just over $500,000 for models ranging from 1,100 to 2,100 square feet.
Local noteworthy Flagstone Property Group and partner ING Clarion are including 100 fractional units, known as Residences at Island Gardens, atop the 150-room Shangri-La Hotel high-rise getting under way this summer on Watson Island, an island in Biscayne Bay close to downtown Miami. Asking prices range from $175,000 to $750,000 for one-eighth interests.
Ragatz noted that the Ritz-Carlton Golf Club & Spa, Jupiter, is perhaps the best illustration of prospects for successful fractional developments in South Florida. For $249,000 to $364,000, buyers are guaranteed five weeks annually at the project’s spacious 1,900-square-foot two-bedrooms and 2,900-square-foot four-bedrooms.
Of course, not every condo project is viable as a timeshare or fractional. Larger condo developments of 200 units or more aren’t likely to get converted to fractional ownership, as upscale buyers tend to prefer more exclusivity, Ragatz said, noting the average unit count for fractional projects is only about 40. The most attractive beach and golf locations tend to be good prospects, especially if residents have access to high-end hotel services.
And in beach communities seeing heavy tourism activity, timeshare specialists boasting the requisite high-volume marketing machine might make a go of a failing larger condo development, Ragatz explained. “Given that sales expenses comprise a disproportionate share of overall development costs, timeshare operators will need to negotiate an attractive purchase price to make a project pencil,” he stressed.
“I think we’ll see some entire condo developments end up instead as fractionals,” McCabe said. “After all, if you’re not able to sell a unit for $500,000, maybe you’ll do better trying to sell one-fourth fractional interests for $125,000.”
Of course, like condo developments, timeshare and fractional ventures certainly aren’t immune to market risks. The fractional ownership model, which makes most sense when second-home prices in high-demand areas become prohibitive, has been ready for take-off a few times over the past decade or so, Ragatz recalled. But each time, circumstances shortened the flight plan.
For instance, second-home prices were hitting peaks as the economy was booming early in the decade, but the Sept. 11 terrorist attacks dramatically cut into travel activity.
Values kept moving upward after tourism stabilized, but recent declines in much of the country make Ragatz cautious about what lies ahead, even as so many South Florida conversion plans seem set to materialize.
Falling sale prices and rising interest in fractionals aren’t a natural marriage, he explained. If whole ownership continues to become more affordable during the regional condo glut, Ragatz wonders just how strong interest in fractional ownership will be later in the year.