Owning a Slice of Heaven

For resorts and luxury hotels, it’s home sweet home these days. Home, that is, when it comes to the wealth of time shares, condos and other offerings that allow the individual leisure traveler to buy into a piece of the property. Some versions of this lucrative concept shut out travel agents from the action. Others, however, enhance agents’ opportunities.

Either way, the travel industry is buzzing over its latest revenue-enhancer, commonly called “vacation ownership.” Sure, the moniker isn’t quite as catchy as Bennifer or TomKat, but there’s lots of Hollywood-style sizzle to go along with the steak. Big names like Trump and Hard Rock are getting into the mix not to mention top resorts in places such as Vegas, Hawaii and Miami. There are now more than 157,500 vacation ownership units in the U.S., according to the American Resort Development Association (ARDA), and time-share units alone account for properties in 5,425 resorts in 95 countries.

Agents are astonished at how big this market is getting.

“I’ve been in this business for 33 years and when I started there were very few [vacation-ownership properties],” recalled agent Bob Kern, president of PNR Travel in Marina del Rey, Calif. “But it’s grown considerably. The reason. There’s a tremendous amount of marketing going on. That, coupled with the general perception that it is a cost-savings measure, has only increased their profile.”

It can resemble a new gold rush out there. Especially since as in the original gold rush people are constantly scouting for new territory that hasn’t been thoroughly mined. In fact, even little Homer, Alaska, has become the focus of a company’s interest in the vacation ownership picture. It’s true. A developer, Land’s End, is making townhouses in the area with pristine views available for those looking to buy a leisure condo.

“We’re one of the first companies to do something like this in Alaska,” said Jon Faulkner, president of Land’s End Development Corp. and Land’s End Acquisition Corp., “and our project has boomed. We have a permit for 28 units, and we’ve just sold six in the last 60 days. The resort condo market has turned red hot in the last six months. Five years ago, it was nonexistent in Homer, but aging boomers are now looking for not only a place to have fun, but an investment.”

Behind the Boom

How did the vacation-ownership niche get so big? It’s a matter of economics, pure and simple, industry experts say. Resort and luxury property developers want to expand beyond the hotel-only strategy. Why wait for that business model to produce when time shares, residence clubs, destination clubs, condos and what are called fractionals not to mention a hybrid called condotels could guarantee an immediate return on investment? (See sidebar for a glossary on vacation-ownership terms.)

“The quick reason for the growth of condo sales at resorts is simply that it serves as the financing vehicle with the lowest cost of capital for the developer,” said James Chung, president of Reach Advisors, a Boston-based marketing strategy and research firm serving the resort industry. “A standard hotel has to earn back its investment night by night over many years. Condo pre-sales can bring large chunks of money in early to get the deal financed.”

Chung says this is because every high-end resort hotel launched today has some mixed-use element, including condo sales or fractional ownership. Banks have become cautious about the hotel deals they finance, while consumers are more willing to front the money for these developments.

“There aren’t too many hotel or resort developers that aren’t thinking about some form of real-estate sales beyond the core business,” Chung said.

Interestingly enough, many agents and tour operators are finding that this isn’t necessarily a bad thing. Granted, those time shares certainly take away rooms that would otherwise be available for agents’ bookings. But the high-end resort condos are often vacated by owners for much of the year, which creates opportunity. Not to mention the fact that the vacation-ownership trend is building greater interest in travel in general.

Major vacation-ownership companies such as Rosewood Hotels have significantly broadened the market, with thriving, luxury vacation-ownership properties all over the world.

“There’s a lot of appeal to the consumer for these mixed-use properties,” said agent John Clifford, president of San Diego-based International Travel Management. Clifford was named one of the world’s top eight travel consultants last year by Travel + Leisure magazine. “You get the nice hotel accommodations and the beach, and if you want it, you have the nice kitchen for a family to cook their own meals. It’s generating interest in travel in general and that’s a good thing.”

Indeed, many agents and wholesalers have been forced to adopt a big-picture stance on the fast-growing trend.

“Travel is the world’s biggest industry and growing,” said Ron Letterman, chairman of San Jose, Calif.,-based Classic Custom Vacations, the high-profile wholesaler of luxury, four- and five-star property vacations. “It is not seen as a luxury anymore but an entitlement. There are many more distribution channels out there that compete with us but also help grow the market for us ... While it’s true the time-share business is growing very fast and for every time share sold, one less customer may be buying their vacation from us it is also true that they are fueling new hotel growth and investment.

Letterman says the growth of this business trend is a fact of life that’s here to stay.

“Fighting this trend is like swimming upstream,” he said. “Your arms will get tired, and you will not make a lot of progress. It is better to understand how to take advantage of the trend and use it to your best advantage.”

The Players

All the biggest names in the luxury hotel industry are fully involved in vacation ownership.

The Four Seasons Houston, open since 1982, was one of the first to try a mixed-use arrangement, and more than 100 of its hotel rooms are designated for condos. The condos are high living, literally, being on the top five floors of the 30-story hotel, while in the heart of South Florida’s financial district, the Four Seasons Hotel Miami has designated 84 of its units as fully owned condos. And, as often is the case with other luxury condos in vacation settings, travel agents are getting a piece of the action. Owners will leave the residence and turn it over to the hotel to rent the properties for vacationers. Travel agents booking the Four Seasons property in Houston can earn 3 percent commissions. Agents booking the Miami property can earn 10 percent commission.

“Most of our owners choose to have their property included in our rental program,” said Diane Yost, director of sales and marketing for the Miami property. “We roll it into inventory when they are not using it. Owners are usually Four Seasons guests who know our level of service and enjoy the no-hassle approach of having a vacation with the infrastructure of a hotel.”

Yost sees travel agents as an important part of this process.

In 1984, Marriott became the first branded hospitality company to enter the time-share industry with the purchase of American Resorts and its Monarch Resort on Hilton Head Island, S.C. Since then, the company’s vacation-ownership portrait has exploded. Marriott’s Vacation Club International generated $1.2 billion in contract sales in 2004, and has grown an average of 20 percent every year since 1996. More than 265,000 families in the U.S. and 143 countries own properties through this program, which operates 44 resorts with more than 7,000 villas.

At Marriott’s Maui Ocean Club, the property recently converted this year from mixed-use to a full vacation ownership resort property. Renovations to transform rooms from hotel rooms to one- and two-bedroom villas are scheduled for completion in late 2005. There are plans for 545 one- and two-bedroom villas.

Development companies can’t build properties quickly enough. Golden, Colo.,-based Intrawest has seen revenues double in the past five years as it has established firm footing in the vacation-ownership market. Since 2003, it has added 675 units at the Village at Squaw Valley USA and the Village at Mammoth, both in California, and MonteLago Village Resort at Lake Las Vegas. Within 15 months, it will add another 170 units at MonteLago and 230 hotel-condo units at the Westin Monache in Mammoth.

“That doesn’t include a number of additional developments either under way or on the drawing board at these existing resorts and new ones in the region,” said Peter Cowley, vice president of lodging product development for Intrawest. “We look for one-of-a-kind locales that may or may not be widely known. Here, we create the resort infrastructure with luxury lodging, shopping, dining and activities that complement an array of outdoor activity options.”

And Intrawest maintains a sales team that’s dedicated to partnership with travel agents and tour operators, especially those who maintain a high degree of local knowledge about a region and the customers who want to flock there.

Cowley points out that in an era when the stock market seems more volatile and low interest rates have kept other investment options only remotely attractive, consumers are concluding, “Why sink money into something I can’t access much less enjoy?”

“It’s a real-estate investment, and it’s fun,” Cowley said. “We’re a society that likes to own things, and a vacation property has some esteem to it. This type of real estate is relatively maintenance- and hassle-free without the headaches of traditional vacation property. It’s easy ownership. On top of that you can participate in a lodging program so there’s a potential revenue opportunity to help offset ownership costs.”

With 20,000 vacation homes in 52 resort destinations, ResortQuest also has much at stake in the vacation-ownership industry. Owned by Gaylord Entertainment, which manages Gaylord Hotels in Dallas on Lake Grapevine, Kissimmee, Fla., Nashville and greater Washington, D.C. (opening in 2008), the company is eyeing even more expansion in what it describes as an underserved market.

“Currently, the market is small and is only partially understood,” said Ray Lewis, senior vice president of marketing and distribution at ResortQuest. “It is well known to a relatively small number of households who have previously utilized a vacation home rental.”

And, as with other vacation-ownership companies, ResortQuest doesn’t want agents on the outside looking in when it comes to getting a piece of the action. In early 2006, it expects to roll out an online platform that will allow agents to access inventory availability.

“We will also develop a comprehensive training effort to assist travel agents to fully understand the uniqueness associated with somewhat more complex lodging products,” Lewis said.

In fact, to the delight of travel agents, many resort development companies are opting to ditch the time-share concept entirely and opt for condos instead. Denver-based RockResorts (with the Snake River Lodge and Spa in Jackson, Wyo., among others) has seen about half of its hotels introduce privately owned condo inventory, and its latest hotel, the Arrabelle at Vail Square, is being financed largely by condo sales. There were more than 570 eager would-be buyers for 63 units, and each anted up a $100,000 deposit to stay in the hunt.

“The new wave of condo ownership is not replacing traditional vacations it’s supplementing them,” said James O’Donnell, regional vice president of operations for RockResorts. “Most condo owners at our resorts view their purchase as an investment, and keep it in active pool of rooms for the hotel. In many cases there are restrictions on how many weeks per year the owner can occupy their unit we rely on the privately owned condos to continue to be part of our core hotel product. Tour operators and travel agents continue to be a vital channel for us to book these units.”

The Bad News

Clearly, some time shares are impacting agents in a negative way, at least in an immediate sense.

“We are seeing a shift,” said Bill Maloney, executive vice president and chief operating officer of the American Society of Travel Agents (ASTA). “If you buy a time share in Orlando, you don’t need an agent to book that hotel room you booked every year previously. For people dedicated to a particular resort or destination, they will be seeing this shift. But room rates aren’t increasing because this trend isn’t reducing the number of rooms in a market. They are, in fact, increasing because of the overall increase of interest in travel. Also, remember that many time-share owners will rent out those properties at a cost that’s lower than what the hotel charges for other traveling customers, so that tends to keep room rates, overall, down as well.”

In addition, not all the developments are good for agents. Residence clubs, yet another incarnation of the vacation-home picture, are not considered an outlet for travel agents and tour operators. Denver-based Exclusive Resorts is one of a number of residence-club companies seeing a surge of interest in its offerings. It now has more than 200 multi-million-dollar vacation homes in 33 destinations worldwide.

“We believe this industry is in its infancy,” said Brent Handler, president and co-founder. “People want to experience flawless vacations that they can’t find in luxury hotels, time share or even a second home. They find some aren’t family-friendly, others restrict stays based upon time of year or destination; or perhaps they don’t want to put up the cost of maintaining a year-round home that only gets used a handful of days each year.”
Of course, when it comes to agents and revenue streams, the residence-club home may not be where the heart is, but overall, when it comes to vacation ownership, there may be no place like home in the next decade to find new markets for customers.