Some developers check out of fledgling market as home buyers flock to others
by Alison Soltau
Buyers scouting downtown Chicago for in-town residences during the last couple of years couldn’t escape the growing number of builders hawking hotel condo projects. But by late 2006, several of those developers had reservations about the market and decided to check out.
The reasons why they headed for the door vary, but observers say a rebound in conventional hotel business and doubts about the depth of this niche market in Chicago were factors.
As hotel occupancy rates rise, some developers can make more money by operating traditional hotels or selling their buildings than by converting to hotel condos, says Ted Mandigo, founder of hotel consultancy T.R Mandigo.
Developers in Miami, New York and more recently, Chicago, turned to hotel condos when hotel occupancy rates fell after Sept. 11, 2001 and investors became wary of backing new hotels. Hotel owners found financing by selling some of their suites as condos, which buyers typically use for limited periods, putting the deeded units back into the pool of hotel rooms when owners are not in residence.
The hybrid housing product – a cross between a hotel suite and a condo – caught on quickly in Chicago, but some builders here might have been too exuberant. At press time, The Harp Group had canned plans for hotel condos at the Ambassador East Hotel, and The James Group had put hotel condo plans on hold at The James Chicago, which is operating as a traditional hotel. Crain’s Chicago Business reported that The Falor Companies was trying to sell Hotel 71, the hotel it was marketing as Solis Chicago Hotel Condominiums. The developer already has abandoned two hotel condo projects in Chicago, Hotel Blake and the Aldens Hotel. But at press time, the Solis’s director of sales and marketing, Darlene McElvy, said the project was still selling hotel condos and that 60 percent of the 200 units were sold, with delivery anticipated in early 2007. McElvy, a Coldwell Banker Residential Brokerage agent, said she didn’t know if Falor was trying to sell the development.
Hostmark Hospitality Group took reservations for hotel condo units at The Amalfi Condo Hotel in early 2006, but at press time a spokesman for Hostmark said the company was not presently marketing the units. No further information was available.
Peter Dumon, president of The Harp Group, says he decided to pull the plug on hotel condos at the Ambassador East when the hotel industry rebounded and the building became worth more as a traditional hotel.
Dumon also believes that the costs of owning a hotel condo in Chicago – mortgage, taxes, insurance and maintenance – can outweigh the benefits in some cases, particularly at developments where owners have to book their units ahead of time and are permitted use of their rooms for a limited number of days per year.
“If I want a second home downtown, I’ll go and buy a second home for the same kind of money, and I can use it anytime,” Dumon says. “Or, I’ll call the Peninsula tomorrow and stay there Saturday night.”
Privately, some developers say hotel condos can be tough to sell because securities laws prevent them from discussing the units’ investment potential. The lack of hard data can make even buyers who like the idea skittish.
But many prominent Chicago developments that are all hotel condos or have hotel condo components report strong sales. Developer Crescent Heights sold 75 percent of the 175 units at The Raffaello Condominium Hotel in six months.
Typical hotel condo buyers at The Raffaello are Midwestern business executives who want to wind down after a hard day’s work and suburbanites who want their children to experience city life, says Tara Soderstrom, Crescent Heights’ marketing director for the Midwest.
The most successful hotel condo developments offer new construction, with high ceilings and modern floor plans, says David Pisor, of Elysian Worldwide. Pisor says he is “really happy” to have sold 68 percent of the 51 hotel condos at The Elysian Hotel and Private Residences after two and a half years on the market.
“What’s happening in our marketplace is that older buildings, two- or three-star properties, are not doing well and are being pulled off the table,” he says. “Elysian, Trump and Mandarin [Oriental Tower] are doing well because they are brand new properties.”
Indeed, Trump International Hotel & Tower experienced rapid sales right out of the gate at a time when hotel condos were still brand new to Chicago, and the Trump name had more than a little to do with that success.
Buyers are drawn to hotels run by seasoned hotel operators, says Dorrie Freiman, of Waterview, LLC, which has sold 35 percent of the 200 hotel condo units in the Shangri-La Hotel, part of the Waterview Tower development. “If you do a world-class hotel in a world-class city, how can you lose?” Freiman says.
The bottom line is that buyers should think of hotel condos as “lifestyle investments,” says Laura Sherman, of LR Development Company, which is marketing Canyon Ranch Living, a River North high-rise development with lavish amenities and spa facilities.
“Skiers look for hotel condos in Aspen,” Sherman notes. “Buy a holiday experience that you know you’re going to want to repeat.”