Energy costs are at record highs, inflation is growing rapidly, condo supply in many top-tier markets outstrips demand and the primary housing market is on the verge of collapse.

Banyan Tree Residences Mayakoba marks the company’s Mexico debut. The Residences brand’s sales grew 450% in the first quarter.

In fact, current overall economic conditions are strikingly similar to the late 1970s, when the concept of vacation ownership really took off in earnest, says Howard Nusbaum, president of the American Resort Development Association (ARDA). “We’re still The Little Engine That Could,” he says. “We fish for customers every day, so when the phone quits ringing, it’s not so scary for us because we’ve never depended on the phone ringing.”

Fractional sales may be down, but buyer interest is up, with potential owners ready to pounce on that second home as soon as the economy stabilizes. And while fractionals at mid-market and below are struggling, according to Dick Ragatz, president of Oregon-based Ragatz Associates, a vacation ownership consulting firm, higher-priced fractional product is doing OK, and branded residences, particularly at the luxury end, have been largely immune to the downturn.

Some timeshare operators and vacation clubs are even reporting increased business, as budget-conscious families look to lock in affordable lodging rates. Additionally, because timeshare is not meant to be a capital-gains investment, the weak real estate resale market has little impact on the segment, at least in the short term. That could change a year from now, however, if the tourism industry at large continues to struggle and more projects are put on hold, causing a decline in new timeshare customers.

Sector leaders agree that while times are tougher, quality projects in first-rate destinations will continue to move forward, and buyers are still out there. “There is still a ton of demand for the product, and the ability for us to produce tours and get people into our resorts is still pretty strong,” says Franz Hanning, CEO of Wyndham Vacation Ownership, which posted 2% gross sales gains year-on-year for the second quarter of 2008.

ARDA data from 2007 saw 6% growth in U.S. timeshare sales over 2006, with a sales volume of US$10.6 billion. The U.S. timeshare industry this year probably won’t match the 13% compound annual sales growth since 2003, but analyst Steven Kent of Goldman Sachs & Co. believes 10% growth is achievable.

Project creation and development, meanwhile, is a mixed bag, Hanning says. “The credit markets for us are like they are for everybody else—they’ve pretty much dried up. That said, we’re able to access the capital markets to provide funds and run our business,” he says. “Despite all the doom and gloom, the business continues to outperform other businesses.”

The credit crunch may actually benefit vacation ownership brands in the long run, says Greg Doman, vice president of residential development for Fairmont Raffles Hotels International Inc. “Any developer getting into the market is going to be asked what kind of brand is being brought in, because it brings a level of credibility to the project,” Doman says. “The strong will survive—Darwinism will prevail, and the right projects will get done.”

The old standbys of vacation ownership—Hawaii, Las Vegas and Orlando—are weathering the downturn better than some expected.

Four Seasons Residences Denver currently in sales, is part of a movement toward urban vacation ownership.

“Timesharing is the saving grace for the Hawaii tourist market,” Hanning says. As hotels struggle to fill rooms and timeshare shows few ill effects, Nusbaum predicts additional timeshare conversions in Hawaii, spurred by community leaders eager to keep the flow of visitors coming.

Starwood Vacation Ownership Inc. (SVO) recently opened a 198-unit Westin property in Kauai, and another project is in the works on Maui. Serge Rivera, president and managing director of real estate development for SVO, says plenty of prospective Hawaii buyers still exist, though they may be a bit shy given the present economic climate. “We have not really seen a drop in arrivals, but we do know that the consumer has been much more sensitive to pricing because of the economy on the mainland—especially on the West Coast,” Rivera says.

Marriott Vacation Club International (MVCI) reports intense demand for its timeshare product in Hawaii, including being virtually sold out on Maui and Kauai. “It’s a bit of a head-scratcher,” admits Ed Kinney, MVCI vice president of corporate affairs and brand awareness. And John Burlingame, executive vice president of Hyatt Vacation Ownership Inc., says Hawaii remains as strong as any market in the world. Still, the diminished airlift gives pause about Hawaii’s long-term future.

The opposite may be true in California, a market suffering from the mortgage crisis but one that Burlingame expects will recover sooner or later. “California is more difficult now than some of the other markets, as Californians are more levered than other people in the country. It doesn’t make doing business in California any less desirable, though,” he says.

The Orlando and Las Vegas timeshare markets are showing some signs of softness, but like Hawaii, existing owners are still going. SVO’s product in Orlando is having one of its best years, which Rivera credits to heavy international traffic and a resilient East Coast source market. Orlando and Las Vegas remain attractive markets for fractional and branded residential development, with Fairmont Raffles targeting expansion in both within three years.

MVCI continues to add timeshare inventory in Florida, with new units opening in Singer Island and Marco Island, as well as a new townhouse-style offering in Orlando. Finding new buyers is proving relatively difficult, but half of MVCI’s sales are coming from existing owners and owner referrals. “That’s saving us at this point,” Kinney says.

Although fractional operators generally report strong interest from potential buyers, the segment may be slower to bounce back due to high foreclosure rates in California and Florida that have decimated the primary housing markets in those states. With so many bargains to be had in the primary real estate market, fractional is less appealing at this point. “Because the wholly owned business has really hit some tough times, there are some really good deals in the wholly-owned world,” Nusbaum says. “There are some people who may have been in the second-home market that might step up and say, 'Hey, maybe I should go into the wholly-owned world instead.’”

Still, Nusbaum and Ragatz agree that the fractional segment will likely recover more quickly than the U.S. primary housing market, perhaps as soon as early next year. “There is pent-up demand being created—people are just putting off buying,” Ragatz says. “The interest in the concept is very, very strong. People are just putting off that final purchase decision until after the election and the market shapes up.”

In terms of new development, prime markets are continuing to get projects, down market or no, Doman says. Fairmont Raffles in April opened its Fairmont Heritage Place fractional product in Vail, Colorado.

“Clearly, it’s cooled in the Americas. Deals aren’t falling off, but they’re getting pushed back, as developers are lining up financing or they’re waiting for the market to come back,” Doman says. “The A-plus markets and opportunities in the Americas keep going.” Case in point: Starwood Hotels & Resorts Worldwide Inc. in September announced the 398-unit St. Regis Residences at The Venetian Palazzo, Las Vegas, which could fetch US$2 billion in total sales.

Urban projects are gaining traction with consumers in the branded residences and fractional segments. Beach, golf and ski projects remain tops, Nusbaum says, but city centers are becoming attractive as more affluent and cosmopolitan Baby Boomers retire and move into the second-home market for the first time. Look for more conversions in urban gateway destinations like New York City, and even some secondary U.S. cities.

Four Seasons Hotels & Resorts is ahead of the trend, with Private Residences in Baltimore and Denver currently in sales. “In urban destinations, it tends to be more people buying as their primary residence,” says Michael Minchin, vice president of residential marketing and planning for Four Seasons.

Wyndham is going headlong into the urban conversion space with its Avenue Collection of city center timeshare properties. The newest Avenue property is Wyndham Vacation Resorts San Francisco, and other Avenue properties are in New Orleans, San Diego, San Antonio, Honolulu and Atlantic City.

Urban timeshare still has its skeptics. David Gilbert, Interval International’s executive vice president for resort sales and marketing, doubts urban timeshare will become a major segment due to the high cost of entry relative to the demographic’s price point. For that very reason, MVCI—despite its successful urban conversions in San Francisco, Boston and Miami—does not have plans for additional projects. “We looked at Chicago and Los Angeles,” Kinney says, “but the cost per square foot and what you need to do just makes it cost-prohibitive.”

Visa issues remain a problem for inbound visitors to the United States, cutting short what could be a larger share of fractional and branded residence buyers from overseas, given the positive exchange rate for Europeans. U.S. hegemony also takes some of the blame. “Even though we’re the Wal-Mart of the world as far as dollar weakness, we’re not seeing the inbound travel that we should be seeing,” Nusbaum says.

Nearly every operator interviewed cites Mexico as the hottest vacation ownership market to watch.

The newly opened 346-unit W Fort Lauderdale Hotel & Residences is W Hotels’ first condo-hotel in Florida.

Banyan Tree Holdings Ltd. made its debut in Mexico this year with the 50-unit Banyan Tree Residences Mayakoba, and Banyan Tree Punta Diamante is in development in Acapulco. In its second year of existence, the Banyan Tree Residences brand, which operates on the condo-hotel format of owned units rented to guests, posted 450% first-quarter sales gains year-on-year, and the company is “cautiously optimistic” that the Mayakoba property will further grow that bottom line in the short term. “Our prospects remain broadly positive, despite the current global economic slowdown,” says Pancho Llamas, area general manager for Banyan Tree Mexico.

Mexico remains a dominant player in timeshare, second only to the United States in terms of new development, with 24 new projects opening in 2007, according to a Group RCI report. The country finished last year with 469 open timeshare projects, accounting for 41% of the total timeshare inventory in Latin America and the Caribbean.

In the Caribbean, Wyndham reports difficulty bringing in new customers to its timeshare properties in the U.S. Virgin Islands due to decreasing airlift. “Most of the airlift from the Northeast to the Caribbean goes through Puerto Rico, and a lot of that has been cut significantly in the last six months,” Hanning says. Perhaps not coincidentally, Wyndham is developing additional vacation ownership product in Puerto Rico at The Rio Mar Beach Resort & Spa, a Wyndham Grand Resort.

Vacation ownership shows no signs of slowing in Mexico and the Caribbean as Americans—the largest buyer source for the region—increasingly view these familiar markets as comfortable yet exotic locales for a second home purchase.

“In a post-9/11 world, Americans’ wanderlust is more limited to places they see as safe and where the dollar is still strong,” Nusbaum says. Additionally, the number of regional buyers is picking up. In 2006, regional buyers accounted for 15% of Caribbean timeshare sales, according to RCI. A year later, that percentage jumped to nearly 21%, even as the number of foreign buyers also grew.

To a lesser extent than Mexico and the Caribbean, Americans—and, increasingly, Europeans, Mexicans and even Russians—are seeing Central and South America as an inviting vacation ownership market, although much of the source market remains regional. Product in South America tends to be priced at about a third of comparable property in North America, but analysts expect real estate values to mature to equal weight within about five years.

Costa Rica has the largest concentration of timeshare in Central and South America, with 31 resorts at the start of the year, according to RCI. Belize is a distant second, with 12 resorts, followed by Guatemala at 10.

Colombia and Venezuela are seeing growth in the fractional segment, with continued growth by as much as 15% to 20% over the next two years, says Max Eidelman, the Bogotá-based Americas advisory services director for NorthCourse Leisure Real Estate Solutions. The U.S. downturn, he says, “has not really impacted the fractional or the shared ownership industry in Latin America. People are still seeing alternatives to second homes, in terms of fractionals, as very attractive because of price point.”

Belize and Panama are poised for major fractional expansion in the short term, Eidelman says. Same goes for the ski resort areas of Argentina and Chile. Brazil is another under-built market ready to expand, with room for luxury branded residences and fractional product attached to eco-resorts and golf, he says. “With the right marketing and the right positioning of both timeshare and fractional projects, this is literally the top of the wave—and it’s going to be a long-lasting wave,” Eidelman says of South America.

Dubai is the talk of the hospitality industry these days, and that holds true in the vacation ownership segment as well. Spurred on by industry leaders, Dubai recently implemented consumer protection and developer rules to help boost timeshare there. Interval International CEO Craig Nash believes that government oversight, combined with the emirate’s booming tourism effort, will soon usher timeshare into Dubai in a big way.

Starwood Vacation Ownership’s newest Hawaii property, The Westin Princeville Ocean Resort Villas, Kauai, opened this year.

The Fairmont brand is entering Dubai in a major way with its mixed-use Kingdom of Sheba project on The Palm Jumeirah crescent, in conjunction with IFA Hotels & Resorts. The project has 300 branded residences, 50 fractional units and 100 vacation club apartments, making it one of the largest vacation ownership developments in the Middle East. Due to open in late 2010 or early 2011, it is about 30% pre-sold, with a source market heavily European and Russian.

Fairmont also has residential and fractional projects in development in Abu Dhabi, Marrakech, Muscat and Mecca. Financing is not an issue in the Middle East and Northern Africa, Doman says, and airlift continues to expand with demand. “We haven’t seen (demand) cool… it will keep growing,” Doman says. “I don’t see it slowing down anytime soon.”

Banyan Tree sees growth potential for “unusual” locations, as Llamas puts it, including in Marrakech, where a residential resort is under development, as well as in the Greek town of Pylos. Other target spots for Banyan Tree Residences include Chiang Mai, Thailand; Barbados; Abu Dhabi; and Bali. “Seasoned travelers are now seeking more exotic destinations—places that are less explored, the road less traveled,” Llamas says.

The 40-unit Four Seasons Private Residences Marrakech is sold out in advance of its 2010 opening. “Our business remains relatively strong across the globe, and certainly, we’ve seen strength in the Middle East,” Minchin says.

As for Europe, with a handful of exceptions, the fractional and branded residences sector is basically dormant, primarily due to a difficult regulatory environment there. Besides a few mixed-use projects—a Residences at W London-Leicester Square in late 2010, for instance, and Raffles eying a residential component for its Paris project—there are not many major vacation ownership projects to report. Europe as a source market, however, remains solid, with European buyers eagerly snapping up opportunities in the Middle East and Asia.

The fractional concept has been slow to take root in Asia Pacific, although branded residences are proliferating.

In Thailand, the trend is for private buyers to resell branded residences as fractionals or to place the properties into vacation club inventory, says Charlotte Filleul, a Phuket-based consultant with CB Richard Ellis Thailand. The Thailand source market primarily comes from Hong Kong, Europe and the United States, but Eastern Europeans and Indians are increasingly buying there, she says.

Interval International’s affiliated Royal Club at Downtown Dubai occupies the top 20 floors of Hydra Tower.

Phuket is suddenly a magnet for branded residences projects. Banyan Tree Residences is launching its new Grand Residences brand there, and a number of major projects are in various stages of development, including from Taj Group of Hotels, Raffles Residences, Shangri-La Hotels & Resorts, Jumeirah Hotel Group, Four Seasons, Oberoi Hotels and Resorts, Hyatt and Starwood.

Fairmont Raffles has Raffles-branded resorts opening in Bali, Jakarta and Manila, each with residential components. The company is watching Kuala Lumpur for a project, and residences are in long-term plans for India, Doman says. China is on the Raffles radar as well, but the company will wait until government oversight there becomes clearer.

Likewise, China has enormous untapped potential for timeshare, but government has been slow to implement regulations and consumer protections, despite lobbying by Interval and other firms. “That’s a big challenge,” says Interval’s Nash, “but over the long haul, we think China is going to be a market to be reckoned with.”

Direct comments to: adam.kirby@reedbusiness.com