INCOME RESORT INVESTMENTS

Intelligent Investments with guaranteed Income.

Mega Resorts/Fantasy Resorts 
In the past eight years, a new type of resort has entered the marketplace - mega resorts or fantasy resorts. These are best exemplified by Chris Hemmeter’s resorts in Hawaii (Hyatt Regency Waikaloa, for instance) and the Disney and Hyatt Grand Cypress hotels in Orlando, Fla. 

These resorts combine lodging, meeting facilities and an array of amenities and activities, many with fantasy themes. Capital and operating costs thus are extremely high, requiring high room rates and occupancies throughout the year. 

The Orlando resorts have tapped a strong year-round market, but those in Hawaii have not been as successful. 

Despite their attraction, the long-range viability of the more elaborate of these resorts is in question. 

Boutique Resorts 
For the market segment that does not like big resort hotels, a strongly emerging product is the small boutique resort hotel that caters to the high-end of the market and emphasizes service, quality and privacy. Boutique resorts, such as the Ventana Inn in Big Sur, California, and the Jumby Bay on Antigua, have 50 to 100 rooms and serve select markets. 

Boutique resorts target upscale individual travelers and small business meetings. They tend to focus on lodging and related amenities, with limited shopping and residential development. They do not try to provide “everything to everyone”, but rather promote a mystique and market niche. 

The Business/Meetings Market 
Probably the most significant economic trend in resorts over the past 20 years has been the strong shift to conference business as one of the major contributors, if not the major contributor, to resort occupancy. 

Although a limited number of “pure” resorts rely almost entirely on FIT (free, independent traveler) occupancy, most have had to make major efforts to attract conferences and business meetings as an economic necessity. For most large resorts, between 45 and 70 percent of occupancy is now in the form of group business. 

The business/meetings market requires first-rate facilities and services. Corporate meeting planners generally desire a self-contained resort with everything in-house, including a multitude of recreational activities. 

Resorts and Traditional Hotels 
Although the major national and international hotel chains were slow to enter the resort market, they are now the dominant players in large resorts. However, there are significant differences between operating a resort and a traditional hotel in a major urban center. 

Resorts cost more to build than traditional hotels, but they generate more revenue from longer guest stays, higher occupancy rates and other on-site services. In 1990, occupancy rates for the top 25 resorts averaged 76 percent, compared to 71 percent for the top quartile of traditional, full-service hotels, according to a study by Pannell Kerr Forster. Room rates averaged $136 per night in those resorts versus $94 in traditional hotels, while resorts’ net operating income as a percentage of total revenues was 30 percent higher. 

Other primary differences include:

Current Market Conditions 
Economic Research Associates’ surveys have found occupancy rates and room rates have fallen somewhat since 1990. Resorts worldwide began to suffer that summer as fear of war in the Persian Gulf restricted travel and the economies of many industrialized nations slowed or entered recession. 

The resort market also has been hampered by overbuilding. Widespread development in the 1980s was fueled by the protracted economic growth of the U.S. and other nations, as well as a large influx of capital from foreign investors, particularly from Japan and other Asian countries. Much of this increased activity was focused on high-end, luxury properties that were considered the most recession-proof. 

Government attitudes toward resort development exacerbated the trend. Countries like Mexico began to look at tourism and resort development as a mechanism for economic development and thus created various incentives for resort and hotel construction. 

Cost overruns in acquisition, construction and operation have also weakened the market. Japanese and other Asian investors often acquired or developed properties for fees that could not be supported predicated on traditional operating guidelines. 

For example, the amount of investment per room in many of the luxury resorts built in Hawaii in recent years has exceeded all normal parameters. Several have been built or purchased at a cost of over $500,0000 per room.  Applying the rule of thumb that a hotel needs $1 per night per room for every $1000 invested, an investment of $500,0000 per room requires $500 per night, which is not being achieved. 

Few of the premier properties built recently in Hawaii are meeting debt service. Recent development encouraged by Bali at Nusa Dua resulted in so much overbuilding that major properties such as Hyatt, Hilton and Sheraton are operating at less than 50 percent occupancy. Tourism and hotel occupancies in the Caribbean also have slipped temporarily. 

Trends in Resort Facilities and Services 

To thrive in an increasingly segmented market, resorts will have to focus on amenities and services. Some major trends in facilities and services are described below. 

Health Spas and Fitness Facilities 
With people more concerned than ever before with health and well-being, it is not surprising that fitness facilities are now considered a basic amenity for resort and hotel properties. 
Some resorts are adding on-site health spas to complement existing fitness centers. Health spas pamper guests while offering educational and medical programs designed to monitor health and guide nutritional habits. Some even offer holistic, “New Age” programs like yoga, acupuncture and meditation. Spas have higher capital and payroll costs than fitness centers and also require highly skilled personnel. 

Soft Adventure Programs 
Many new and larger resorts have begun to provide a variety of off-site excursions for guests who want more adventure and fantasy than traditional resort activities offer. These “soft” adventures—white-water rafting, three-day hikes, wild-game hunting—typically require guides and provisions and include some element of thrill. 

Gaming  
Casino gaming is spreading across the U.S. as state and local governments legalize such operations to generate tax revenue. More than a dozen states already allow some form of casino gaming on land or water. 

Gaming in a resort setting has become more common as existing casino operations have developed resort facilities to broaden their market appeal. However, the proliferation of casino gaming may reduce its appeal as a tourist draw. 

Ecotourism 
The resurgence of environmentalism is creating a new submarket of “ecotourism”—sojourns to Amazonian rain forests or trips to study Galapagos tortoises. Because of the nature of these tours and the fragile environments in which they operate, this market is best addressed by smaller boutique resorts and service providers that can guarantee a quality recreational experience with minimal environmental impact

Market Opportunities 

Southeast U.S. 
Blessed by warm weather and proximity to much of the U.S. population, the Southeast should continue to provide opportunities for resort investment and development, particularly in coastal regions and in central Florida near Orlando. 

Florida has been successful in generating relatively high occupancy patterns. Orlando, in particular, has become the region’s dominant tourist destination and may have the most successful resort environment in the entire country. 

West Coast and Southwest U.S. 
The recession and significant overbuilding have contributed to lowered occupancies in major resort operations in the Western U.S. The Southwest, particularly Phoenix, Arizona, has suffered the most from a proliferation of high-end hotel rooms, poor real estate markets and slow economic growth. 

Environmental restrictions will continue to severely restrict resort development on the California coast and other prime Northern California sites like the Napa Valley. These constraints should help support the high rates already in effect as well as increase occupancies. California desert locations do not have the same growth constraints, but face strong seasonal patterns that affect pricing and occupancies. 

The Caribbean 
One of the Caribbean’s strengths has always been the diversity of cultures and recreational experiences among its various islands. The region historically has been a popular destination for FIT travelers and cruise operators. 

However, access to the islands has been difficult, with few air hubs or convenient connections. This has added to travel time and costs, and has made it difficult for large, five-star properties to successfully penetrate the market. 

The situation is likely to change over the next decade. Air access has improved, with a major commitment by American Airlines to Puerto Rico and the establishment of direct air service from Europe to Antigua, St. Martin and other islands. In addition, Europeans are becoming a much stronger guest market, further bolstering occupancies. 

Mexico 
Mexico has been one of the most aggressive countries promoting tourism in the last 20 years, with the government building airports and other infrastructure, and offering training schools to encourage foreign investment. 

Recently, the government has taken additional steps to spur investment, liberalizing restrictions on foreign land ownership in coastal areas and promoting private-sector financing of infrastructure and tourism development. 

With an improved investment and economic climate, several U.S. companies are developing massive projects in such areas as Cabo San Lucas and Cancún. Although Americans traditionally have provided 85 percent of the guest market for Mexican resorts, the domestic tourism market is growing rapidly in importance. 

Asia 
The continued strength of the Asian economies makes the Pacific Rim perhaps the strongest opportunity for future resort investment and development. 

The rapidly emerging Asian middle class has sufficient discretionary income to patronize resorts, while continued relaxation of travel restrictions between Pacific Rim countries gives them almost unlimited access to the region’s wealth of recreational opportunities. 

Moreover, resort development in Asia will be easier than in other parts of the world due to government promotion of recreation and public support for infrastructure funding. Examples include Malaysia’s development of Langawi Island, the massive development plans for Bintan Island off Singapore, and Indonesian developments in East Java. 

Hawaii 
Hawaiian resorts have experienced serious problems over the past two years because of cutbacks in travel, particularly by the Japanese, and the massive building boom in luxury hotel rooms during the late 1980s and early 1990s that has left a significant surplus in the marketplace. 

As mentioned previously, occupancies and room rates at many of the new resorts are currently well below what is required by their high development and operating costs. 

Hawaii’s long-range outlook is much more hopeful, with most future tourism growth expected to come from Asia.  Japanese tourists will continue to be very important, but Taiwan, Singapore, Korea and other countries should provide continually increasing traffic. A recent survey of airlines serving Asian markets concluded that Honolulu will be the leading destination for Asian tourists over the next 20 years. 

Outlook 

Today’s soft markets have created opportunities for investors to acquire and reposition existing resorts that are underperforming. Such strategies should focus on markets that are currently soft, but that have strong long-term growth potential, such as Arizona, California, Florida and Hawaii. Moreover, stringent environmental regulations in these areas constrain or add to the cost of new resort development, lending further credence to strategies that emphasize the acquisition of existing properties. 

New development is more likely in more rapidly growing markets such as the Caribbean, Mexico and Asia that seek investment and are not as apt to strictly regulate development. Despite some market difficulties, resorts represent a good, long-term investment and development opportunity. Among the factors pointing to their continued approval: the prevailing public perception of vacations and recreation as entitlements; the rise of dual-income households that have higher disposable incomes and plan short, frequent vacations; and the increased use of resorts for business meetings. 

Other positive trends include: the large, young and relatively affluent middle class in Asian and other nations with greater travel access; and the increased speed and ease of travel as political and cultural restraints have fallen. However, because today’s travelers expect much from their recreation dollar and face more opportunities on to spend that dollar, resorts will have to anticipate changing consumer preferences and cater to specific market niches. 

To prosper in coming years, resorts also will have to learn the lessons of the 1980s and keep costs in line with reasonable expectations of future revenue. They need to pay as much attention to the bottom line as they do to their guests. 

Gregory L. Cory is Senior Vice President of Economics Research Associates in San Francisco. He has worked for more than 15 years on resort and tourism planning and development projects worldwide, and has extensive experience in the Southeast U.S., the Caribbean and Latin America, as well as with destination ski resorts. 

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