If you want other stories on this topic, search the Archives at latimes.com/archives.

Hotels will earn investors the highest returns among the five major property types, according to a new report to be released in a few weeks by a trio of real-estate research firms -- Principal Real Estate Investors, Real Estate Research Corp. and Torto Wheaton Research.

The total unleveraged, average annual return on investment in full-service hotels is expected to exceed 13% over a 10-year holding period, surpassing returns expected for apartment, industrial, office and retail properties. For a five-year holding period, the average annual return is expected to exceed 15%. Hotels in "only a few markets are not expected to deliver double-digit returns," the report says.

Raymond Torto, managing director of Boston-based Torto Wheaton, says that "all property types are doing better, but hotels are the only property type that is showing significant rent increases at this stage of the cycle." In fact, Mr. Torto says that for a conference in Boston his firm held at the end of last month, "laggards that didn't plan ahead suffered in getting a room" because hotel occupancies and rates are up.

Another incentive for investors: Pricing for hotel properties "is a little cheaper than other property types because hotels are coming off" a sharp downturn in business since 2001, Mr. Torto says.

The hotel sector is "at an inflection point where we'll see earnings and pricing pick up more than with the other property types, which have held up strong," says Kenneth P. Riggs Jr., chief executive officer of Real Estate Research in Chicago.

Torto Wheaton is forecasting that 2005 will be the peak year for growth in revenue per available room, or revpar, a profit measure for hotels that combines room and occupancy rates. Torto Wheaton expects revpar for full-service and limited-service hotels to increase 10% and 8%, respectively, this year. Revpar at full-service hotels is expected to rise 7% in 2005, 4% in 2006 and 3% to 3.5% after that. Revpar at limited-service hotels, which typically are hotels that don't offer food and beverage service, is expected to grow 7% in 2005, nearly 5% in 2006 and 3% to 3.5% after that. Overall, revpar is expected to hit $43,924 in 2005, near the previous high of $44,138 set in 2000.

Hotels in Atlanta, Los Angeles, Philadelphia, San Francisco and Seattle are expected to experience the strongest revpar increases, of 15% to 20%, during the next two years, says Petros Sivitanides, a Torto Wheaton senior economist who follows the lodging sector. And he expects a nearly month-old labor dispute at 14 hotels in San Francisco will have "limited" impact on the market.

Hotels in New Orleans, Pittsburgh and on Long Island, N.Y., are "the only major markets that will see revpar declines" of 6%, 3% and 3%, respectively, during the next two years, says Mr. Sivitanides, because supply in those areas is exceeding demand. Revpar at hotels in West Palm Beach, Fla., are expected to remain flat.

Also working to the advantage of hotel investors is the fact that the sector has experienced limited new construction, unlike other property types. "We're looking at a good 18- to 24-month period when new hotel openings will fall far short of the increasing level of demand," says R. Mark Woodworth, executive managing director of PKF Hospitality Research, an affiliate of PKF Consulting Inc. He says that 90 cents of every $1 increase in the room rate at a hotel flows to the bottom line in profit.

In addition to rising occupancy and room rates within the hotel sector, there's a lot of room for investors to increase productivity in hotel operations and reduce the volatility of revenue.

For instance, hotel operators are beginning to integrate new technology, such as adding kiosks to hotel lobbies, where guests can check in or check out on their own. "Instead of four desk clerks to check people in, now maybe they can get by with just three," says Mr. Woodworth. That's crucial, particularly as the economy continues to recover, he says. "Now, with unemployment declining and hotel customers returning, it's harder to get better-quality people" for jobs in the hotel sector.

Outsourcing is another avenue hotel operators are taking to reduce costs and improve revenue. Hotel operators increasingly are outsourcing hotel services and functions that historically have been the least profitable -- or even money-losing -- operations, such as food and beverage service, hotel restaurants and spas.

Write to Sheila Muto at sheila.muto@wsj.com

TAMPA - The extended home sales boom and historically low interest rates have tilted a lot of erstwhile renters in favor of home ownership.

It's not just the people who rent but the properties as well.

Apartment complex owners across the Tampa Bay area are converting rental units into condominiums for sale, capitalizing on the red-hot housing market at a time when interest in rental properties - particularly high-end rentals - is waning. The trend means more options for prospective home buyers. It's also creating opportunities for local developers and bringing investors who specialize in such condominium conversions to the Tampa Bay area for the first time.

"I just think that the condo market is so hot right now that people are trying to jump on it, '' said Cindy Taylor, head of Tampa-based CKT Development Co.

CKT is building ParkCrest Harbour Island, a 336-unit building along the Garrison Channel in downtown. The ParkCrest was originally planned as an apartment complex, but Taylor said she and her investors decided during construction to convert the project into condominiums to take advantage of buyer interest.

Sales began six weeks ago. Only two units - four-bedroom condominiums, both priced about $800,000 - were available as of Wednesday.

"We had high expectations, '' Taylor said. "We beat them all.''

The ParkCrest will be complete by the end of the year. Most condominium conversions involve properties that are established apartment complexes: 345 Bayshore on Tampa's tony Bayshore Boulevard was an apartment complex for three years before its conversion began in 2001. In Clearwater, 880 Mandalay Beach stood as an apartment complex for more than 40 years before it was bought in 2003 to be converted.

The top five condominium conversion projects in the Bay area account for a quarter-billion dollars of investment here, according to research by commercial real estate services firm Cushman & Wakefield. More than 2,500 apartment units in the Bay area were converted into condos last year. This year, 2,201 units have been converted, Cushman & Wakefield says. Vesna Vrcel, a breast pathologist at the H. Lee Moffitt Cancer Center & Research Institute and an assistant professor at the University of South Florida, is among the buyers fueling the trend. She said her family bought a three-bedroom, two- bathroom condominium at 345 Bayshore because it reminded them of their last home, in Manhattan, N.Y.

"For us, it was really important to have this sense of urban living, '' she said. "We looked for something in downtown and in Hyde Park, but we really liked this high-rise building.''

Vrcel moved into 345 Bayshore in October 2002 with husband Ranko Precip and their daughter, Hana. The family recently added a new member: a King Charles Spaniel puppy named Bentley.

"For us, having a view and a balcony and being able to see the city lights is something very important, '' she said. "It is magnificent. It is priceless.''

Economics 101

The sudden rush of condo conversions in the Bay area isn't too difficult to explain: It could have been lifted directly out of a textbook as an example of the laws of supply and demand. Right now, many people are looking for residential properties to buy because interest rates are low and because they see real estate as a better investment than anything offered on Wall Street, experts say.

The surge in demand is driving a national housing boom. The National Association of Realtors reported a record 6.1 million single-family homes were sold last year, and the association predicts 2004 will set another record with nearly 6.2 million sales. Meanwhile, the National Association of Home Builders said nearly 1.1 million new homes were sold last year, also a record. With so many buyers clamoring for homes, investors are buying apartment complexes and reselling the units as condominiums.

Byron L. Moger, a senior director at Cushman & Wakefield specializing in apartment sales, said investors do a lot of homework to find a property suitable for a condo conversion. They must study the local housing market and look at what buyers are paying for comparable properties in the area.

The investor must also consider how long it will take to sell all the units. A handful of state laws are designed to protect renters, allowing them to renew their leases for a limited time. Other laws require that renters be given the first opportunity to buy a unit.

About 10 percent to 15 percent of renters typically buy a unit when their property is converted to condominiums, Moger said. Expenses for investors include renovations and improvements throughout the property. The amount varies for every project. Marketing costs usually come to about $5,000 for each unit, Moger said. Different investors have different expectations for returns. Large national firms with a lot of overhead might hope for a $5 million to $10 million profit for each property.

The trend has attracted many kinds of investors. Some are national firms that have recently set their sights on the Bay area. Some are apartment developers looking to sell properties in the most profitable manner, and some are local entrepreneurs trying to capitalize on the housing boom. The conversion boom is also being fueled by investors and home buyers in search of bargains, said Toni Everett, a Tampa-based real estate broker specializing in luxury home and condo sales.

"It's true almost everywhere, but especially in the south end of Tampa, that land is becoming more valuable and houses are becoming more expensive, '' she said. "People who want to spend less, or who want less to worry about, are now going condo.''

The condo conversion boom doesn't mean the end of apartments in the Bay area. The number of apartments built each year outnumbers the number of units converted into condominiums, and many apartment owners won't sell their properties for conversion because they depend upon the regular income from renters, Cushman & Wakefield's Moger said.

`The American Dream'

The condo conversion boom in the Bay area began in 2000 when New York-based Crescent Heights of America bought Island Walk and Island Place on Tampa's Harbour Island for $59.2 million.

Crescent Heights is one of the largest condo conversion companies in the United States, with a portfolio that covers the country from New York to Los Angeles. The company saw the Bay area as a market where apartment complexes suitable for conversion were available and affordable and where demand for housing was high.

'' I believe that Tampa is relatively low priced compared to the country, '' said Shay Mayron, the company's regional manager.

Crescent Heights sold all 516 units at Island Walk and Island Place in less than a year and a half. The company's subsequent projects in the area sold out even quicker. Crescent Heights bought 880 Mandalay, a 350- unit apartment complex on Clearwater Beach, in July for $46.3 million. Four-fifths of the units were bought within a few days, Mayron said. The complex will soon sport a new name: Regatta Beach Club.

Crescent Heights' third project is the conversion of part of ParkCrest Innisbrook, an apartment complex built several years ago by CKT Development.The company's business strategy: buy and convert high- end luxury apartment complexes where the cost of a mortgage payment would be about the same as rent, Mayron said.

"We want to give buyers the American dream and pride of ownership, '' he said. "If they're renting today, and they can add a few bucks and own, that's good.'' Crescent Heights might have been the first to test the conversion market in the Tampa area, but it wasn't the only one for long.

The Bradford Group bought 345 Bayshore, a 220-unit building that opened in 1998, for $41.2 million. DelAmerican, another national company, bought the Grand Bellagio at Baywatch, a new 311-unit property in Clearwater Beach, in February 2003 for $55.4 million.

Zom Inc., an Orlando-based developer that owns several apartment complexes in the Bay area, is converting its Madison at St. Pete property in downtown St. Petersburg into condominiums.Kristi King, Zom's regional sales director, said many buyers aren't just looking for a good price - they're looking to live in the heart of a downtown area that has been revitalized.

"Everything that's happening here is a draw, '' King said. "People park their cars and don't drive all weekend. They walk to the parks, the museums, the shops. The location is definitely pushing sales.''

Zom converted the Madison at St. Pete into condominiums in two phases. The first phase, with 140 units, was handled by an outside firm and sold out in seven months. The second phase, which is being sold by a separate company set up by Zom, went on the market about two months ago. Of 137 units, 118 have been sold.

Taylor, of CKT Development, said she's seeing a lot of buyers with an interest in living downtown.

"I do think there's a move to more urban living, whether it's single-family homes or condos, '' she said. "I think people are tired of commuting from the outlying areas.''

Reporter Dave Simanoff can be reached at (813) 259-7762.

David Neff, H&MM Columnist

You can hardly turn the pages of the trade press without reading about another project in the works by some of the leading hotel developers like The Falor Cos., which is converting more than half a dozen hotels and office buildings into condo hotels. Favorable publicity for condo hotels has been fostered by "The Donald" getting into the act with his proposed Trump International Hotel Tower in Chicago.

Yet, despite the buzz around condo hotels, many people still do not know exactly what they are. From both an owner and consumer standpoint, condo hotels fall somewhere between a hotel and a timeshare. A condo hotel is operated as a hotel, often with the usual amenities you would expect to see in a first-class hotel. However, some, if not all of the units, are owned by individuals. Individual owners have the option of staying in their units or renting them out to guests.

The benefits to condo hotel owners are numerous. They get to stay in a hotel instead of just a residential condo, with all the amenities a hotel has to offer. There is the possibility that their unit will appreciate in value, they might be able to deduct mortgage interest and real-estate taxes paid on the unit (and perhaps other costs such as utilities and depreciation) and can collect rental income to help defray expenses.

By JANET MORRISSEY
Staff Reporter of The Wall Street Journal
From The Wall Street Journal Online

NEW YORK -- Vacation-hungry Americans, disillusioned by the time-share experience but desperate to escape to a second home, have begun turning toward luxury condominium-hotels for refuge.

And a growing number of big-name hotel companies, such as Hilton Hotels Corp., Marriott International's Ritz Carlton, FelCor Lodging Trust and Four Seasons Hotels Inc., are eager to accommodate them.

"This is the most affluent generation to approach retirement, and these people are well-educated, well-traveled and demand comfort," said Aubrey Ferrao, president of Gulf Bay Group of Cos., which is developing a luxury hotel-condo at Marco Island near Naples, Fla.

Condo-hotel units are sold as condominiums, but managed by the hotel. Different from time-shares, owners can turn the units over to the hotel operator to rent out when they're not there and receive rent. Generally they would share the rent revenue on a 50-50 basis with the hotel - a feature that can help them pay off a mortgage sooner.

The rental option also allows owners to take in extra bucks rather than boarding up their apartments for six or more months a year and gives them access to many hotel perks - ranging from room service to saunas - while they're living in their units.

But condo-hotel owners also face certain restrictions: Forget any personal touches or outrageous furnishings as owners must comply with hotel guidelines when installing furniture or other decor. And owners cannot fly off to their vacation home on a whim because most must sign contracts with the hotel operator stating precisely when the apartment will be available for rent each year.

Then there's the risk that a Motley Crue-like rock band or partying teenagers on Spring Break could wind up renting and subsequently trashing that cherished room.

Appealing To The Homeowner In Us All

Still, for many buyers, the idea of owning rather than renting or buying an ownership share was the clincher.

"I like to own and you can't control it if you don't own," said Jim Creech, who owns two condo-hotel units at Myrtle Beach and has no interest in timeshare, leasing or rentals. (The Myrtle Beach development is a joint venture project between FelCor and Hilton Hotels Corp. (HLT)).

Creech, who lives in Benson, N.C., and recently retired at the age of 50, said tax breaks associated with mortgages and depreciation, as well as the cash flow from renting out the unit have made condo-hotel units a profitable venture. Also, he said, the units have appreciated, offering him even bigger returns when he sells. A hotel-condo unit he purchased for $192,000 in 1994 is now selling for $300,000, said Creech.

And demand appears to be growing.

Creech said he wound up having to buy special lottery tickets at $5000 a pop just to get the chance to make a pre-construction bid for a condo-hotel unit being built in the newest development at Myrtle Beach. "There were 370 lottery tickets for 200 units," with the units being sold about two years before construction would wrap up, he said. "I paid $262,000 for a 3-bedroom unit, and at closing, similar units were selling for $400,000, he said.

Steven Perricone, a restaurant owner in Miami, purchased a junior one bedroom at the Ritz Carlton, Key Biscayne in 1998 - more than two years before the development is slated to open. The idea of owning a vacation property that has all the chi-chi services of a high-quality hotel was too good to pass up, he said.

Condo-Hotels Go Global

Smaller, less lush, condo-hotels cropped up in South Florida in the 1980s, but demand waned when the Tax Reform Act, which snatched away many of the lucrative tax breaks that had attracted buyers, was passed in 1986.

Louise Sunshine, president and chief executive of the Sunshine Group Inc., a marketing group, brags she was the first to begin peddling a five-star luxury condo-hotel with the rollout of Trump International Hotel & Tower at 1 Central Park West in Manhattan in January 1997.

Since then, Sunshine has been selling units in a Ritz Carlton condo-hotel in Key Biscayne, Fla., and "we have three or four others on the drawing boards all on a five-star luxury level." Details on the latest developments, to be located in Palm Beach, Fla., Las Vegas, Los Angeles, London and New York, will be unveiled in the next six months, she said.

"We think this is a very good product type and one that has an unlimited future and broad market appeal," said Sunshine. "There is a huge demand," she said.

For hotel owners and operators, the benefits are three-fold:

• It's often easier to get financing for condo-hotels than pure-play hotels;
• Marketing costs are significantly lower than for time-share units;
• Condo-hotel units offer additional hotel room inventory.

Ritz-Carlton Hotel Co., a unit of Marriott International Inc. (MAR), is taking part in a condo-hotel development in Key Biscayne, Fla., which is slated to open in March 2001. Although Ritz-Carlton already runs several hotels that include a residential condominium component, the Key Biscayne resort will be the first that gives residents an option to turn over their units to Ritz Carlton to rent when they're not there.

The resort will include 188 condominium units and 302 regular hotel rooms, with condo prices ranging from the low-$100,000s to more than $800,000. All units were sold by March 2000 - a year before the project's official open.

The project's developer, GB Hotel Partners, found financing easier for a condo-hotel than a traditional hotel because many lenders were worried about overbuilding hotels.

Also, said Doug Weiser, GB Hotel's president, by including a residential component within the hotel, the company was able to sell the units and use the proceeds to lower the debt on the overall.

Weiser preferred a condo-hotel over a timeshare project. "The Key Biscayne market is so strong that we thought it would be easier just to sell the units once and be done with it than to sell them 40 or 50 times through time-share," he said. '

Weiser estimates advertising and marketing costs eat away anywhere from 35% to 50% of the sale price of a time-share unit compared with only 10% to 13% of the price of a hotel-condo unit.

Foreign Owners Know the Concept

The condo-hotel concept has been a popular fixture in Europe and Latin America for many years, said Weiser. About 60% of the buyers in the Key Biscayne project are from outside the U.S., he noted.

Among the big hotel operators, Phil Kab, vice president of development at Ritz Carlton, doesn't rule out further condo-hotels developments, although none are currently on the books. He said the company will likely monitor the Key Biscayne project to determine if the concept should be expanded.

Hilton Hotels (HLT) inherited its partnership with FelCor on the project in Myrtle Beach when it acquired Promus Hotels Corp. in 1999, and the company is not seeking other condo-hotels.

"We're not in the real estate game," said David A. Sherf, senior vice president of real estate and investment analysis at Hilton, "We'd rather own the project ourselves than sell it."

By contrast, FelCor Chief Executive Thomas Corcoran is bullish on the condo-hotel concept and has little interest in time-share.

"We like dealing with one owner," he said.

Bill Stuckeman, who heads up development for FelCor, said demographics are working in FelCor's favor as aging babyboomers begin inheriting their parents' wealth and more start seeking out a "high-end" second home.

At Myrtle Beach, all 200 units in the latest tower that opened in July were sold out by the Spring of 1999, noted Corcoran. Plans are in the works to begin selling units in a new 267-unit tower, which will open in the Fall of 2002.

Aside from the Myrtle Beach project, which includes an Embassy Suites hotel and more than 1,100 condo-hotel units located in high-rise towers, low-rise buildings and villas scattered across a 145-acre site, Corcoran is already scouting his next condo-hotel site.

Gulf Bay's Ferrao, who has built 14 condominiums in the Naples, Fla., area, had originally planned to only construct a small 250-seat restaurant and beach club at Marco Island that residents from his nearby Fiddlers Creek development could access. But a nasty community fight that delayed the groundbreaking invoked Ferrao's wrath, and when he won the legal battle, he decided to build not only restaurants, but a full-blown hotel-condominium and 350-car parking structure.

About 75% of the 103 units at the Marco Beach Ocean resort complex have been sold since marketing began in the fall of 1998, with prices ranging from $260,000 to $575,000. The project is expected to be complete next August.

Donald Trump describes his lone condo-hotel venture at Trump International "a great success" and said he'd consider similar developments if the "right opportunity in the right location" came along.

That's OK, Walsea says; he intends to use the room four or five times a year. "A person has to buy one of these places because they like the property, and if the finances work out, great," he says. "But this is just another way to finance a vacation home."