Credit Crisis Cripples Vacation Ownership
Would-be owners think twice about real estate investment, while timeshare companies are having difficulty monetizing consumer debt.
By Adam Kirby, Associate Editor -- Hotels, 1/31/2009 11:00:00 PM
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| Marriott’s Crystal Shores on Marco Island, Florida, is slated to open next month. The Marriott Vacation Club International property has 219 units. |
Just a few months ago, even as global travel was slowing dramatically and a U.S. recession loomed, leaders in the vacation ownership industry were upbeat and optimistic that the downturn would largely miss timeshare and vacation clubs. Even fractional and branded whole ownership were thought to be somewhat insulated from the recession thanks to their appeal to more affluent consumers. HOTELS even went so far as to declare in its ill-timed October cover story that vacation ownership “defies the downturn.”
And then the sky fell.
The global credit markets collapsed, stifling an industry that had relied so heavily on loan liquidity from timeshare mortgages sold as asset-backed securities. The market for such “consumer paper,” as it is colloquially known, seized up almost completely—and for those companies entrenched in the asset-backed securities model, it matters little from a cash-flow perspective that consumer interest in timeshare remains relatively strong.
“We’ve never had a situation like this before, where we’ve been unable to monetize consumer paper,” says Howard Nussbaum, president of the American Resort Development Association. “There were timeshare developers who were still having robust sales, but there was no way to monetize the consumers’ debt, so those developers had to slow their sales down. That has been very problematic for the industry.”
Cash transactions are the preferred order of the day throughout the industry, as vacation ownership operators retool their sales strategies to become less dependent on securities monetization.
Marriott Vacation Club International (MVCI) and Starwood Vacation Ownership (SVO) have stopped offering incentives, like bulk loyalty points, for prospective owners to finance timeshare purchases. That said, both Orlando-based companies remain solvent enough to provide financing when needed to complete transactions.
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| Walt Disney Parks and Resorts’ first destination resort in Hawaii will be located on Oahu. Scheduled to open in 2011, the property will include 480 Disney Vacation Club timeshare villas |
“Starwood and Marriott are going to continue to make timeshare loans; they’re just not going to push them as hard,” says David Loeb, managing director of Robert W. Baird & Co. Inc., Milwaukee, Wisconsin, which is projecting sales revenue declines of 30% to 50% for the two companies this year.
Sol Meliá Vacation Club, Orlando, is restructuring interest rates to facilitate more substantial down-payments, says Denis Ebrill, executive vice president. The company, which opened The Club at Gran Meliá Palacio de Isora in the Canary Islands and the second phase of its Gran Meliá Puerto Rico member resort in the second half of last year, found itself in a relatively fortunate position when the credit markets collapsed. It had committed financing facilities locked in with Europe banks, providing some much needed financial flexibility through 2009.
Wyndham Vacation Ownership, Orlando, was perhaps the major timeshare player hit the hardest by the credit crunch. In December, the company announced it would cut 4,000 sales and marketing jobs—a quarter of its total workforce—in a cost-saving measure tied to difficult financial forecasts. The company expects to scale back vacation ownership interest sales by 40% this year, to US$1.2 billion, making the profit sheet less dependent on external credit markets. Westgate Resorts, Orlando, is facing a similar fate, with 3,000 workers already let go and another 1,000 on notice to ready their resumés.
Prospective Buyers Cautious
The credit crisis has affected nearly all facets of the economy, souring 2009 expectations even for vacation ownership companies that were not reliant on asset-backed securities for liquidity. Warnings that this recession may be longer and deeper than any in recent memory have made consumers, regardless of affluence, jittery about big-ticket spending. “The bursting of the housing bubble has really taken the bloom off the rose in terms of the consumer’s perception of owning timeshare real estate,” Loeb says.
The timeshare segment, while not hurting quite as badly as the travel industry overall, is nevertheless expected to post a decline in sales for the first time ever. Fractional and whole-ownership sales have slowed even more dramatically.
“The higher-end guy is sitting on his hands in all aspects of his life,” says Larry Shulman, senior vice president of sales and marketing for Florida-based Hyatt Vacation Ownership Inc. “They’re looking at the product and saying, 'This is good, I’m very interested—just not now.’ They’re not saying, 'No,’ they’re saying, 'Not now.’ But I’ve never before seen that guy not buy what he wants to buy, when he wants to buy it.”
Not all buyers are willing to wait for the economy to get better, however. Many vacation ownership companies are beginning to observe a definite trading-down effect, as would-be whole-ownership buyers are considering fractional as a more palatable purchase option, while the former fractional demographic is taking another look at timeshare.
Ed Kinney, vice president of corporate affairs for MVCI, expects sales for his company to be buoyed somewhat in 2009 by the company’s 25th anniversary celebration. Being able to tout the longest track record in timeshare gives MVCI an edge in consumer confidence. Sales at the company’s newest timeshare development, Marriott’s Lakeshore Reserve at Grande Lakes, Orlando, are exceeding expectations. Next to open is the first phase of the 219-unit Marriott’s Crystal Shores on Marco Island, Florida, set to debut in March, and The Ritz-Carlton Club, Kapalua Bay, a 62-unit fractional and 84-unit whole ownership project slated for an April launch in Maui.
U.S. Pipeline Stalls
A few months ago, the mantra was, “Good projects in good destinations are still getting done.” Those days are largely past, as high-profile vacation ownership projects are getting cancelled left and right. Large-scale projects in secondary and tertiary leisure markets at this point are off the table almost entirely.
Projects well into the launch process will continue, but new starts are expected to be few, though there will be some. Expect mostly mixed-use projects with limited vacation ownership components, like The St. Regis Resort and Residences Bahía Beach, Puerto Rico, which broke ground in December and will include 25 whole-ownership units.
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| Gran Meliá Palacio de Isora opened in Tenerife in August. The 200-unit resort is the fourth property in the Canary Islands for Sol Meliá Vacation Club. |
A Ritz-Carlton Club and Residences planned for Miami was scrapped in December—sales were swift enough to support the project, but Lionstone Development was unable to find a lender to cover the expected US$200 million construction costs. Within weeks of announcing the 398-unit St. Regis Residences at the Venetian Palazzo, Las Vegas Sands Corp. pulled the plug on the US$600 million project. And it remains a mystery exactly when, or even if, the 200 condo-hotel units of the long-awaited Shangri-La Hotel, Chicago, will be finished. SVO has closed three sales centers and is grinding its pipeline development to a virtual standstill, at least through the first half of this year.
Hyatt has “a fairly robust pipeline that is stalled right now,” says John Burlingame, executive vice president of Hyatt Vacation Ownership, though the company hopes to announce a number of new projects toward the end of 2009. Hyatt reports that existing inventory sales are off badly in California and Florida, and Arizona to a lesser extent, while Colorado and Texas are holding up.
A one-two punch of airlift reductions and diminished consumer confidence is putting a major crimp on vacation ownership development in the formerly strong Hawaii market, where both MVCI and SVO have halted work on major projects. Timeshare owners continue to use their units, but the overall drop in visitors to the islands means fewer tour prospects.
MVCI stopped vertical construction of its US$1.4 billion Kauai Lagoons resort project in November, though infrastructure work continues. Kauai Lagoons is to include 60 Ritz-Carlton Residences, 72 Ritz-Carlton Club fractional units, 78 Grand Residences by Marriott and 200 Marriott Vacation Club villas. Around the same time, Starwood cut construction on the 390-unit Westin Nanea Ocean Resort Villa timeshare project under development in Maui, citing market instability.
The news is not all bad for the future of Hawaii timeshare, however. Walt Disney Parks & Resorts is forging ahead with its first standalone resort, a 480-villa Disney Vacation Club at Ko Olina Resort & Marina, Oahu. Groundbreaking was in October with plans to open the property in 2011.
Beyond North America, the vacation ownership pipeline is a mixed bag.
Fairmont Hotels & Resorts in December began construction and presales for a Fairmont Residences in Cairo, and previously announced residential projects in Mecca, Kuala Lumpur, Bali, Muscat and Abu Dhabi are moving forward—some more quickly than others.
“Not a lot of projects have been cancelled, but a lot of projects have been deferred—more so in Europe and the Caribbean, Central America and Mexico—but Asia is continuing to hold up,” says Greg Doman, Fairmont’s senior vice president of residential development. Indeed, Fairmont still sees much room for growth in Asia Pacific, where the company plans to lean heavily on its Raffles brand to drive prospects to future luxury ownership product in China and the Philippines.
The story is different in Dubai, where MVCI and Fairmont are slowing development of mixed-use projects due to soaring construction costs. “It’s less about the economic conditions of the purchasers as much as the inflationary costs of construction,” Kinney says. “It’s just spiraled out of control to the point where we have to pull back until it stabilizes.”
Condo-Hotels In Peril
The condo-hotel market, which was thriving just a few years ago, is now crippled by oversupply in key destinations like South Florida and Las Vegas.
In Vegas, where the primary whole-ownership market has been devastated by oversupply and rampant foreclosures, the future of condo-hotels is uncertain. Even highly touted developments are struggling mightily to move condo inventory.
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| The Residence at the Ritz-Carlton, Dove Mountain, is scheduled to open later this year in Marana, Arizona, With 300 whole-ownership units. |
Just last month, MGM Mirage scrapped the 200-unit condo component of The Harmon Hotel & Spa within CityCenter. A major test for the condo-hotel market comes later this year when MGM Mirage opens its 1,543-unit Vdara Condo Hotel within CityCenter. The success of Vdara could determine when, or if, Fontainebleau Resorts follows through on plans to sell more than 1,000 condo-hotel units in its Las Vegas Strip project.
Brent Howie, president of Provident Hotels & Resorts, a Florida-based condo-hotel management and consulting firm, remains bullish on the long-term future for the condo-hotel concept, even as he admits the segment is probably looking at several years of hibernation.
“A lot of developers saw the condo-hotel concept as a great way of building and financing a hotel—offsetting cost of ownership by having a lot of buyers—and a lot of people jumped into it too quick without thinking it through,” Howie says. “It might be awhile before the market heats up again.”
If there is any silver lining to be found, it is that overall consumer interest in vacation ownership shows no sign of wavering, even if prospective buyers are apprehensive in the near term.
“It is important to note that, while buyer commitments are fluctuating amid the economic uncertainty, travel demand for our timeshare resorts remains strong overall and is meeting expectations into early 2009,” says Lauren Harris, vice president of marketing and communications for Hilton Grand Vacations Club. The company opened a 331-unit Honolulu timeshare in December, to be followed this summer with properties in Orlando and New York.
Direct comments to: adam.kirby@reedbusiness.com
Kemmons Wilson’s Legacies Unite
IHG makes its long-awaited debut in vacation ownership with Orange Lake venture.
As most of the vacation ownership industry seems to be going into hibernation mode in 2009, a major player on the hotel side is finally making its entry in the timeshare space.
IHG has tied up with Orlando-based Orange Lake Resorts to launch Holiday Inn Club Vacations. Orange Lake, which boasts 120,000 owners and 35,000 club members, has rebranded its four existing resorts—in Orlando; Acutney, Vermont; Lake Geneva, Wisconsin; and Panama City, Florida—under the Holiday Inn Club name.
The partnership almost seems preordained, as the Holiday Inn and Orange Lake brands share a common founder: Kemmons Wilson. The industry legend launched Orange Lake in 1982 as the world’s largest single-site timeshare property, with 2,400 villas. Given their shared heritage, perhaps it is unsurprising that the demographic base for Holiday Inn is nearly identical to that of Orange Lake.
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“The Wilson family ownership is really, really important,” says Christian Hempell, vice president of Holiday Inn Club Vacations. “We realized we had a partner here who shared our values of customer service and integrity.”
Holiday Inn Club timeshare owners, including holdovers from the Orange Lake days, receive automatic Gold Elite status with IHG Priority Club Rewards, and will be able to exchange timeshare weeks for hotel nights at IHG’s portfolio of more than 4,000 hotels. Additionally, owners have access to the Group RCI network of properties.
Until now, IHG had avoided the vacation ownership segment because of its capital-intensive nature, company executives say. The partnership is not a merger, as Orange Lake will continue operating the resorts as a separate entity, and as such will bear much of the weight of development and operational costs. The opportunity to get into timeshare without a huge commitment of capital was too good to pass up, Hempell says.
Believe it or not, both sides say this is the perfect time to launch the new brand.
Orange Lake can take shelter from the economic storm behind IHG’s massive marketing and central reservations infrastructure and by leveraging its enormous customer base for prospective owner leads. The timing of the brand launch was “impeccable,” says Don Harrill, president and CEO of Orange Lake Resorts—the pace of sales has not deteriorated, thanks to the influx of new leads. “This is when we need a shot in the arm in our business—it came just at the right time for us to grow.”
IHG sees opportunities for affordable land and resort acquisitions in the down economy, paving the way for rapid growth. In the short-term, the partnership is eyeing new projects in traditional timeshare destinations like Hawaii, Las Vegas and Myrtle Beach, South Carolina. Also, the flagship Orlando property is slated to nearly double in size.
The Holiday Inn Club flag will likely fly at a series of regional satellite resorts, Hempell says. Expansion will come in via both conversions and new-builds.
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