Expect Condotel Boom Across Central Florida Housing Market

More than 15,000 condo-hotel rooms could flood the Central Florida housing market during the next several years in one of the biggest, and possibly riskiest, building booms ever to sweep the region’s lodging industry.

Condo hotels are outwardly indistinguishable from their conventional counterparts. They have lobbies, room service and even affiliations with the world’s best-known hotel brands. It’s their business model that’s radical.

In place of a single owner, condo hotels can have many hundreds of them, each with title to a room or a suite. The buyers are often second-home owners who become members of a condominium association that runs a lodging business. When the owners aren’t staying at the hotel, their rooms become part of the rental pool.

“If all these rooms are built, the [Orlando housing market] would have the greatest concentration of condo hotels in the country,” said Jack McCabe, a Deerfield Beach real estate consultant. “The investment potential of these things is really in question. What kind of appreciation, or depreciation, will we see on these units? No one knows.”

Many hotel-industry experts are skeptical about the prospects for condo hotels. There are many issues that cloud the outlook for these businesses. What will the resale market be like? Will room rentals offset owners’ costs? What happens if the hotel market goes soft?

“The stars really have to align for these hotels to work,” said Mark Lunt, senior manager with Ernst & Young’s Hospitality Advisory Services in Miami. “There may be some real estate appreciation for the owners, but I suspect there are a lot of complex issues that will ultimately be tested in the courts.”

Those concerns didn’t dissuade Rob Risman, an attorney from Cleveland who specializes in real estate development. He bought a unit at Mona Lisa at Celebration, a condo hotel being built near Walt Disney World.

“Condo hotels are a lifestyle purchase,” Risman said. “I really don’t look at it as an investment. It is a second home that we don’t need to decorate, and they take care of everything.”

Risman said he does business in Central Florida, and his family expects to use the hotel during visits to the theme parks. But he said Florida mortgage borrowers need to understand that condo hotels will only work if the hotel is viable.

“At the end of the day, I don’t think anything will work as an investment if it doesn’t work as a good hotel,” Risman said.

Not an investment
Condo-hotel developers walk a fine line when they market their projects, often to the high end. Because the units are condominiums, security laws prohibit sellers from marketing them as business investments - for good reason. Hotel-room rates and occupancy levels can fluctuate, making a rate of return hard to forecast.

So developers sell condo-hotel rooms as residential properties - albeit ones that might lack full kitchens, washing machines and other household basics. Like time shares, they can be used for vacations and rented when not used. But in a time-share arrangement, a unit has many owners. Condo-hotel rooms have just one owner.

Bill Haberman, a partner in the company developing Mona Lisa at Celebration, said the number of people willing to pay several hundred thousand dollars for a hotel room is limited, but he said the model works for some. He had a word of caution for anyone hoping to defray ownership costs with room-rental income.

“If this is done properly, it works out as a better version of a vacation rental for some people,” Haberman said. “But other people want to go beyond that. They hope that these things will make a lot of money.”

Haberman said Florida home mortgage loan applicants and buyers shouldn’t count on that.

Hotel-occupancy rates are highly variable. A downturn in the economy can cut vacation travel, and room-rental revenue can evaporate. Competition is another issue. As the number of hotel rooms expands, occupancy rates could dwindle if the volume of tourists doesn’t increase at least as quickly as the supply.

“The kicker will be whether occupancy is high enough and room rates are high enough to generate positive cash flow,” said Michael Sullivan, co-chair of the hospitality-practice group with the Greenberg Traurig law firm in Orlando.

Going mainstream
Condo hotels have been around for several decades, but they only recently gained mainstream status. According to Smith Travel Research, a company that compiles lodging-industry statistics, one in 10 hotel rooms being planned or built in the United States is a condominium.

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