Condo/hotels: More shortsightedness from the real estate industry?
About two years or so ago, a flock of developers descended upon downtown Chicago with plans to build condo/hotels. The developers practically had cartoon dollar signs flashing on their eyeballs when they talked about the potential of their high-rise projects.
More than two years later? Those dollar signs have disappeared. The condo/hotel market in Chicago has, with a few exceptions, mostly fizzled.
For those who don’t know — and that, I’d guess, is most people reading this — condo/hotels were all the rage a few years ago. Buyers purchase a condominium unit in a high-rise building. When the buyers aren’t using it, the owners of the condo building rent the unit out as a hotel. The theory is that buyers get their own condo — usually as a second home — and can then make some money off it when they’re not around. Best of all, the owners of the individual condo units don’t have to worry about finding guests to occupy the units when they’re out of town. The owner or manager of the building does that.
Problem was, developers quickly oversaturated downtown Chicago with plans condo/hotel projects. I wondered at the time, and asked several real estate professionals, how all these projects were going to survive? Some gave me rosy predictions that there was room enough for all these projects. Others were more realistic, telling me that most of the proposed condo/hotel projects would never come to fruition.
Well, to no one’s surprise, the less optimistic of these two camps was right. There are a few condo/hotels now operating in Chicago — Donald Trump’s Trump International Hotel & Tower being one notable example — but the vast majority of the planned developments whithered away during the real estate slump.
Three writers at the Wall Street Journal recently wrote an interesting story on those condo/hotels that were built, reporting that many of the buyers who’ve purchased individual condominium units aren’t happy with their investment. They’ve made far less money off rentals than they expected, and their units aren’t appreciating as quickly as they had hoped. You can read the story here.
The reasons condo owners aren’t making huge bucks off their purchases should be obvious: Most condo/hotels are situated in metropolitan areas that already have a large number of hotels available. There’s a lot of competition for that empty unit. Save for the busiest weekends, most empty condo/hotel units remain that way, empty.
To me, the condo/hotel boom-to-bust cycle is typical of the way the residential real estate industry often operates. Everyone rushes in on the latest fad, not giving much thought, if any, to problems of oversaturation or too much competition for a product.
And, sadly, it’s a lesson that I think the real estate industry is doomed to learn over and over again. The industry certainly hasn’t shown any indications that it’s able to learn from its past mistakes.
