Real Estate Forum - January 2008

“There have been too many
condo hotels built in
Southern Florida.”

JIM BUTLER JEFFERS, MANGELS, BUTLER & MARMARO LLP

than anything with a residential component,” he says. The issues in the mortgage market are also causing some developers to even land bank their projects, he adds. “They are going to wait until the situation improves and then consider going back to the market, selling those units the way they had originally contemplated. But that may be a two- to three-year hold period. You have to have some pretty deep pockets to warehouse something that long.”

Geller also suggests that developers can no longer expect to sell their projects at their previously projected numbers. The condo sales won’t pay for the hotel component, he relates. “I think developers are going to have to find more equity for the hotel in the end, because you just can’t finance it out,” he says. “The residential projects are the issue, rather than the hotel, because the hotels don’t depend on the residential. And the lodging markets at this moment in time are still holding up pretty strong.”

As with any particular commercial real estate sector, some markets are faring better than others. Florida has been repeatedly mentioned as the most problematic region for condo hotel projects. Too much product combined with the subprime mortgage meltdown felled that state like no other in the US.

“There have been too many condo hotels built in Southern Florida. I don’t think we need any more along Ft. Lauderdale Boulevard,” states Jim Butler. “It’s a glut perhaps driven by hot capital out of South America or Europe. With the capital from Latin America looking for a stable home in real estate, it almost didn’t matter what the feasibility or economics of the product was.”

Even Las Vegas finds itself with a glut of condo hotels. “Vegas is far from immune,” Plasencia states. “There are a number of projects there that have also been put on hold. It’s similar to Orlando in that it has an inordinate number of hotel rooms. People were buying units in Vegas as investments. In many cases you found people buying three, four, even seven units purely on spec. These were going to be condotel projects, where they were going to earn a portion of the revenues from nightly rentals. A lot of

those projects are being converted to hotels. Because of the demand for hotel rooms associated with the casinos and the convention center, it’s much easier to convert those units to lodging.”

Meanwhile, Geller describes urban condo hotels, where the buyer is purchasing a unit for investment purposes and gets limited use of it, as “pretty fragile” now. “In the urban markets where they were looking for the hotel to be the savior, I don’t think it will be. I don’t think the hotel is a panacea. But it isn’t because of the subprime crisis, it’s a lack of debt liquidity.”

He contrasts those properties to similar ones in resort destinations. Strategic has closed on all but two of the 35 condo hotel units at its Hotel Del Coronado, a high-end resort in San Diego. Those sold for $2,150 a foot and permit 90-day usage to the

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