Resort development in the next few years will struggle to define the new norm, but will survive and be stronger for riding through this economic turmoil.
Trends are neither destiny nor gospel. They are guideposts identified from the collective experience of many professionals within an industry. In the resort, recreation, and tourism industry, numerous trends identified through experience and expectations are emerging to influence how and where people will buy and use resort real estate. Society is changing fast, and the economic conditions of the past two years have created much uncertainly. But what is discernible is that current trends are focused on valuedriven buyers, downsized purchases for personal use, and scalability.
U.S. vacation home sales increased 7.9 percent to 553,000 in 2009 from 513,000 in 2008, the National Association of Realtors (NAR) Investment and Vacation Home Buyers Survey reported in March. During the same period, investment home sales declined 15.9 percent to 940,000 from 1.12 million. The survey results seem to reinforce the idea by the NAR that the purchase of a vacation home is largely a lifestyle choice, often made with the expectation that the home will become the buyer’s primary residence in the future. In 2009, the share of vacation home purchasers remained nearly steady with that of a year earlier, with one in ten homebuyers purchasing a vacation home. The survey results came as a big surprise to many resort developers, who saw sales of second-home properties drop 50 to 80 percent in 2009.
A substantial inventory exists in the United States of mountain, desert, and coastal resorts. These properties will first see repositioning of existing distressed projects, followed by add-on and infill development, and then gradually new stand-alone products in the best locations in existing resorts. There is no reason to start a new project until the inventory is cleared out. In the past two years, resort properties across the country have had and will continue to have to go back to the lender for more money, to change ownership (often for cents on the dollar), and/or to restructure their financing (both equity and debt). Additional concerns center on shadow inventory, a term used to describe unlisted property with owners that desire to sell but who are holding back until the market strengthens.
Class A locations, defined as destination resorts with good access, such as Aspen and Vail, will come back quicker than second-tier locations with difficult access, such as Telluride. In addition, buyers can now get secondtier prices at class A locations. In a survey this spring by resort developers Chris Kelsey and David Norden of more than 200 real estate development industry professionals, 16 percent predicted a recovery in the resort sector later this year, 40 percent look to 2011 for that recovery, and 30 percent believe recovery is further in the future.
Jerrod Johnson, director of development with Chicago-based Amble Resorts, predicts new resort development will occur first in emerging markets with little existing tourism infrastructure, exceptional natural or cultural assets, affordable land and building costs, and international appeal and access. “Panama, Colombia, Vietnam, and Croatia will have more new resort development than the United States,” he predicts.
Jason Eckhoff, principal of Maryville Hotel Associates in Oregon, concurs. “New development will happen first in the Caribbean, Mexico, and international gateway markets that had financing in place and were already under development pre-2007.”
Many resort developers believe that the demographics of the buyer have not changed. These buyers are feeling more comfortable with their current and future situation even though their net worth is a little less than it used to be.
Investor sales are all but gone and will remain that way for a while. Instead, buyers are end-users with extended families looking for a place that multiple generations can appreciate. Even though the second-home property is purchased primarily for personal use, many buyers still want to feel confident that they are making a good financial investment. For instance, Lynn Carrozza of Albuquerque, New Mexico, who is considering buying a second home in Panama, first plans to rent a home for his family members for the summer, and if they like the experience, they will start shopping for a second home to buy. “There is no urgency. We will definitely try before we buy,” he says.
With a lot of distress in the resort marketplace, potential buyers have friends in projects that are having serious problems— halted development, bankruptcy, a decline in club memberships, big property owners association deficits—so they are analyzing the numbers carefully before they buy.
At Hampton Lake in Bluffton, South Carolina, the resort developer chose to take land zoned and entitled for a golf course and use it for a 165-acre (67-ha) lake and waterway instead. Though construction costs were similar, the amenity value of the water is high and the annual maintenance and operation costs for the lake are only 10 percent of those for a golf course.
“The major change is that the buyer’s interpretation of value seems to be more intrinsic,” states Gary Derck, chief executive of Durango Mountain Resort in Colorado. “The purchase is less about how to impress others and more about the buyer’s own internal value equation.”
What do resort buyers and users want? First, they want to pay less than 2008 prices— a lot less. “More buyers can afford a better product in better locations than any time in the last decade,” Derck says. “They are taking advantage of great deals in the resort marketplace.” The Kelsey/Norden survey participants believe that the new price floor will hold until inventories are cleared and then rise at a slow but steady pace.
In the short term, areas such as Aspen may see a wave of buyers purchasing distressed properties. “Small failed projects in the Aspen area will flip out through foreclosures and then resume development, each at an adjusted basis more reflective of marketing and proper capitalization,” says David Corbin, vice president of planning for the Aspen Skiing Company.
The next wave of buyers—the user/buyers— are looking for great value and an array of amenities that allow them to use the property year-round and that suit all ages in order to meet their desire for multigenerational use. “They are not willing to give up the services and amenities to which they have become accustomed,” Johnson says. A survey of potential customers by Amble Resorts showed that the primary reason they vacation is to explore new places, but they do not want to rough it.
Smaller homes, great outdoor spaces, lower price, affordable fees, and turnkey homes were important buyer preferences mentioned by speakers at the ULI Recreation Development Roundtable at the 2010 ULI Real Estate Summit at the Spring Council Forum, held in April in Boston. The scale of developments will be smaller for many reasons, they said, including the fact that a smaller development will lower the total cost and that the project will be easier to finance—when financing becomes available. Perhaps even more important, smaller projects have lower maintenance costs, operating expenses, and homeowners association (HOA) fees. Derck sees smaller phases, smaller residences, more reasonable amenity packages, and lower HOA dues as a given in the new market.
At the Whistler resort town in British Columbia, new neighborhood developments are allowing a mix of smaller, single-family homes built with a smaller footprint that provide buyers with less expense, more environmentally friendly features, and cost savings for energy efficiency. Laurie Vance, a real estate agent with Sea to Sky Realty in Whistler, is seeing new interest in smaller projects there from the international market, spurred by the attention the resort received during the 2010 Winter Olympic Games.
Complexity and size are now the enemy of resort development. Projects must be capable of being built in phases in order to obtain financing and meet market needs. The Sun Valley Resort in central Idaho, which is pursuing annexation and zoning for 140 acres (55 ha) at the base of the Bald Mountain ski area, is seeking a development agreement with the city of Ketchum that allows any portion of the property to be built first, without a prescribed phasing plan or requirement for the size of any phase. Most important, the goal for approvals is to not tie the start of construction of a planned hotel to a specific date. Tension did arise because the city wants economic development activity and looks to the hotel as a cornerstone to meet that goal, while the resort developer does not want to be required to build something that may not be supported by the market or cannot obtain financing for the next decade.
In the boom times, many projects pursued a luxury segment far larger than the market could support and, in many cases, greater than the attributes of the property merited. “During the run-up, many projects went after the luxury market to make the numbers work,” says resort developer Richard Albrecht of Park City, Utah. “After all, the incremental cost of delivering a product and package of amenities targeted at the luxury buyer is not that much greater than what is necessary for a midmarket or upscale market.” In reality, many of these properties do not have the natural attributes—such as views or land features— or location that are important to a luxury buyer. As a result, resort projects coast-to-coast are repositioning themselves as midmarket developments in order to achieve absorption and be a viable project. This transition is particularly difficult for projects that have previously sold significant amounts of property. Existing owners paid more for their homes than new buyers did, bought into the project when it was positioned as high end, luxury, or exclusive, and are not pleased to see the project repositioned for the mid-market for the current economic climate.
Resort developments may have confused the buyer’s desire for high quality with their desire for exclusivity. A large segment of buyers wants top-quality products and services and will pay for them, but do not necessarily want to live in a exclusive or reclusive environment. “Hualalai [on the island of Hawaii] is an example where many suggested that the resort would suffer due to the existence of the hotel, and that demand would deteriorate as new entrants offered a club experience that is more exclusive,” says Albrecht. “The reality was that many people enjoyed the energy and variety of services and activities made possible due to the critical mass of customers from the hotel.”
The Kelsey/Norden survey further supports this view. Respondents said that buyers are less interested in exclusivity and in a second home as a status symbol, and must be convinced that a purchase is a good value.
With capital markets frozen, private equity is purchasing distressed assets with high unleveraged returns instead of investing in new development, and debt financing is very difficult or impossible to obtain—even for construction financing for presold homes. There is “almost no financing for developers, and many developers are losing their loans when renewal time comes,” says Jeff Temple, developer of Marabou in Colorado. “There is almost no financing for buyers. And fractional financing is nonexistent—period.”
As the industry works through the existing inventory, new resort developments will be eco-friendly, small in scale, and culturally aware; offer high-end service and affordable pricing; and have a great location. Projects like Isla Palenque in Panama—with a light development footprint, high level of service, high-quality yet smaller units, ecologically responsible amenities, and no golf course— will be emerging soon. Other new resort projects will be developed in more manageable phases, as was done at the Purgatory Lodge at Durango Mountain Resort in Colorado, which has three small phases of projects with moderate HOA dues and a club that is family friendly.
As for the future of resort development, the baby-boomer demographics have not changed, nor has the lack of understanding of how the generation X demographic fills the hole as the boomer wave passes. Resort developers have taken a renewed interest in echo-boomer behavior. Successful resorts will meet the needs of the changing demographic groups and emphasize environmental values, authenticity as a place and experience, special cultural experiences, fun for the entire family, health and wellness, and value.
Resort development in the next few years will struggle to define the new norm, but it will survive and be stronger for riding through this economic turmoil. The crazy days of the buying frenzy of 2005 and 2006 are gone, one would hope, for a long while. But the United States fundamentally has a culture that loves to visit and live in beautiful places, enjoy the outdoors through a variety of organized and informal activities, share these special experiences with friends and family, and continually seek experiences that raise the quality of life. Resorts will thrive again.