Are Shangri-La’s hotel condominiums going to appreciate in value sufficiently to justify the higher price tag?

     Despite the fact that all of the rooms are located on the 12th through 27th floors of the 90-story Waterview Tower, Shangri-La’s condominium hotels sell at a premium. A one-bedroom residence on floors 30 through 66, containing 1,087 sq. ft. of space, is priced from $726,000 to $816,000. Compare that to a condominium hotel on the lower 27 floors: one bedroom, 941 sq. ft, for $1,035,000 to $1,745,000.¹ When broken down into price per square foot, here is how this disparity compares to the Trump Tower, a mixed-use building with residences and condominium hotels and similar views with a location on the Chicago River:

    This marked difference in price could largely be made up if the interest in condominium
hotel ownership continues, prices rise and owners can find a buyer on the resale market. Yet will the option of renting a condominium raise the value of the unit enough, compared to a standard residence? What is it about Shangri-La that justifies higher prices per square foot than Trump Tower for a hotel condominium ?

    A good way to answer these questions is to examine the strength of Chicago’s current market for residential condominiums. According to Jennifer Ames of Coldwell Banker in Chicago, when it comes to downtown condos, “it’s a tale of two markets.”³ There is a resale market that is “pretty saturated right now,”⁴and there is a burgeoning market of new construction residences.    

    The current attractiveness of condominium hotels is adding to the stronger “new build” half of the market, which has flourished despite what Ames describes as saturation in the resale market. By touting amenities and images of style and luxury that older homes lack, condominium hotels are attracting more attention from buyers. Yet the strong pace of sales is also due in part to speculators, who typically comprise an estimated 25 percent of condominium hotel buyers.⁵

    Their support may not last, however; Arthur L. Buser Jr., managing director at Jones Lang LaSalle Hotels, said “when [speculators] feel the party is over and stop buying, 25 percent of the buyers disappear, and it’s a much thinner market.”⁶ Will this pullout be severe enough to crash the hotel condominium market? Two case studies provide clues: Chicago in the early 1980’s, which is the last time the condominium market saw supply similar to today; and Vancouver in the 1990’s, one of the few cities that has significant experience with condominium hotels.

    Chicago in the 1970’s went through an unprecedented boom in condominium sales. At the peak of this cycle (1979), buildings sold out in a single day—even bought units without seeing floor plans.⁷Yet rising interest rates quickly took the high priced residences into a freefall. Speculators who intended on “flipping” units got stuck, and many ended up selling at a loss. Developers were forced to hire auctioneers to sell off excess units in the glutted market. The nation’s top converter of condominiums, Chicago-based American Invsco Corp., saw the value of its immense portfolio of real estate shrink to a fraction of its size as the market tanked.⁸Recalling those events, the company’s Chairman, Nicholas S. Gouletas, recently said “In ‘80 and ‘81, it was a disaster.” The question now is whether today’s market is any different, and if so, how?

    One obvious difference is that many of the new rooms are condominium hotels, like the rooms being offered at Shangri-la. Here it is worth looking at the experience in Vancouver, B.C.

    Vancouver saw a rash of overbuilding in the 1990’s, where people bought condominium hotels on projections that properties would continue to gain value. Înstead, prices fell, leaving many unit owners in limbo.⁹This bitter experience seems to have soured some analysts on the current condominium hotel market. Steve Rushmore, founder and President of HVS International, said this in the latest Canadian Lodging Outlook:¹⁰

“The main problem with this type of “condo-hotel” is that the prices these units are sold for often exceed their economic value. For example, if a hotel is going to operate at an average rate of US$150, then the rule of thumb is that this hotel is worth about US$150,000 per room. If the condo developer actually sold this hotel room at US$150,000 then the buyer would be getting a fair deal. Unfortunately, many unscrupulous developers are marking up the individual condo selling prices 50% to 100% so the buyers have no chance to make an adequate return. I recommend the brands carefully evaluate the economics behind these types of condo-hotels before issuing either a franchise or taking on a management contract. I predict these are litigations waiting to happen”.¹¹

    Will Chicago experience the same results as Vancouver? Are condominium hotels different enough that they will maintain value while residences do not? Or will there be unlucky owners left holding the bag if this condominium hotel market cools off?

Notes