With a tumbling stock market and hints of a possible recession, are tough times ahead for red-hot ski-resort real estate? Maybe, maybe not.
Conventional wisdom says that when times are tough, people do not head for the hills with their extra cash. If your net worth is now half of what it was a year ago because your stock portfolio looks like shredded wheat, you aren't likely to rush out and buy an expensive vacation home. Or are you? Given the gyrations of Wall Street, real estate could emerge as a safe haven for investors to ride out economic storms. But does that include mountain property? The short answer is: No one knows.
Before the prosperous Nineties, resort real estate was always something of a gamble. Maybe you remember when builders were auctioning condos at Lake Tahoe, Calif., for $40,000 a pop, when every other development in Beaver Creek, Colo., seemed to be going bankrupt, and when slopeside condos in Vermont lost half their value in a year's time. No one likes to be the last one to leave in an exodus.
Ski resort real estate has been on a wild, uphill ride for the past five years. A seemingly insatiable public has snapped up everything from home sites to interval ownerships, causing prices to escalate almost monthly as demand far outstripped supply. What typified the Nineties was the sheer volume of buyers, led by baby boomers in search of retirement havens and by thirty-somethings flush with technology options and day-trading profits.
Resort developers are bracing for a downturn this year, but there has been little evidence of it thus far. Pre-sale events-in which buyers waving checks compete for new offerings well in advance of construction-continued strong into January. Luxury second-home communities and slopeside condominiums were selling briskly-and selling out. Time-shares and fractional ownerships were, in most cases, on target with sales projections. Even the dot-com crash of 2000 failed to put a damper on the red-hot resort market.
"I don't see any cold feet yet," says Bob Wells, vice president of real estate for Deer Valley resort in Utah. During the first nine months of 2000, sales in the valley were at $136 million, with the average transaction at $1.06 million. By the time the fourth quarter is tallied, he says, the year should end "within 5 percent, one way or another" of 1999's total of $192.5 million. Still, Wells says, there is concern about what lies ahead. "The stock market is the big phantom in the sky. Everyone realizes that the money made from it during the last few years lit a fire under resort real estate. I wouldn't be surprised to see a bit of a slowdown."
The economic downturn may first effect projects that are waiting in the wings. "There is so much in the planning stage around the Park City/Deer Valley area that it's a little frightening," Wells says. "Those projects represent thousands of units and 20 years worth of absorption, and my guess is that some of the largest developments may not get out of the ground this year. There may not be enough equity capital and borrowed money to finance so many units at one time." Indeed, lenders are already demanding tougher terms from resort developers. At South Lake Tahoe in California, where the American Skiing Company has twice delayed construction of a Grand Summit condo hotel near Heavenly resort, ASC is telling intended buyers to ante up higher deposits-or get out now. Although the quarter-share project is finally scheduled to begin construction this spring, it will not be ready for occupancy until late 2002. By then, the first buyers, who put down a 5 percent deposit, will have waited for four years. But with tightening credit markets and stricter covenants for construction financing, Heavenly's lenders are demanding that the company require a 15 percent down payment from all buyers. The company believes this will limit fallout at closing, particularly from short-term speculators who were willing to walk away from the 5 peent deposit.
Intrawest Corp. of Canada, arguably the most successful resort real estate developer, is restructuring the sales timetable and buy-in requirements for at least one of its developments in the United States. At Tahoe's Squaw Valley, where work is underway on Phase I of a new village, the presales event for Phase II has been postponed from its original date of December 2000 to sometime this April or May. Also, interested buyers for this next phase, a 147-unit condominium enclave called 22 Station, will have to meet higher deposit requirements, consisting of $3,000 for a refundable reservation and 20 percent for a downpayment. Of the 139 purchasers who bought in the first phase, eight have backed out, but their places were quickly filled from a long waiting list. "We still feel very confident that demand here will be significant," says Intrawest vice-president Tom Jacobson.
Speculation has been rampant in the resort market, but developers have fueled it themselves by launching pre-sale campaigns far in advance of completion dates. While resorts have been delighted to have OPM (other people's money) to pre-finance their projects, speculators have been just as delighted to exploit the system, holding reservations with small down payments and then reselling their units-in some cases for huge profits-at the time of closing. And if property values didn't appreciate enough during the interval, they were able to bail out with small losses. At Heavenly's hotel project, early buyers, some of whom reserved more than one of the 796 quarter shares, hope to make a killing since prices for many units have nearly doubled in the past two years.
But if appreciation slows and prices take a dip, both speculators and marginally qualified buyers may get pruned. "Lenders will become tighter, the risks will be higher and the spec market will get harder," says Byron Cost, director of the Real Estate Center at the University of Colorado in Boulder. "There has to be a sobering of what until now has been a not-so-sober environment." Cost believes that time-shares and fractional ownerships are the most vulnerable in a weaker economy, because they tend to be entry-level second homes without a strong resale record. Also, they have tended to be riskier for developers-and thus for lenders-because of much higher marketing and carrying costs, he adds.
Telluride, Colo., could end up being the graveyard of fractional ownerships. While raw land and whole-ownership property continued to sell quite well in 2000, sales of fractionals were soft, according to realtor Lars Carlson of Peaks Real Estate. "Some of these projects near the Mountain Village that tried to sell at $165,000 are dropping to $95,000," he says. "The problem is that for $125,000 to $250,000, you can buy an older condominium near downtown Telluride and have all 52 weeks a year," Carlson says.
But some fractional ownerships are doing exceptionally well. Among the most sought-after units in ski country are those with the banners of flagship hoteliers such as Ritz Carlton, Hyatt, Westin and Marriott. In Breckenridge, East West Partners, which is building Hyatt Main Street Station-a 37-unit, Victorian-style condominium project-has had no trouble selling its one-twentieth shares (one fixed winter week and 10 floating days).
While the middle-income tier of the second-home market is usually the first to feel the pain of a pullback in spending, there has been no sign of weakness there, either. In Killington, arguably the mid-priced bastion of the East, single-family homes and larger condominiums sold well through year's end, according to Lenore Bianchi, principal of Ski Country Real Estate. Her company, which handles half of all transactions in the Killington area, has seen scarce inventory and rising prices. "We've had bidding wars," she adds. "Out-of-state buyers still want to own in Vermont."
While it would be tempting to believe that multi-millionaires who have taken a bath in the stock market might be looking to retrench, there's no sign of a pullback in the pricey Vail Valley. "You would think that there would be some impact, but we haven't seen one," says Jim Flaum, president of Slifer Smith & Frampton Real Estate. Flaum believes that even if the steam goes out of the economy in 2001, resort real estate will never again take the nosedive that it did in the Eighties. "The new projects are better in quality and construction than those built 20 years ago, and they are being staged in manageable phases of 50 units or less," he says. "But the major thing is that there are many more buyers in the market now. They are highly motivated and they are chasing a dwindling supply of prime locations."in the stock market might be looking to retrench, there's no sign of a pullback in the pricey Vail Valley. "You would think that there would be some impact, but we haven't seen one," says Jim Flaum, president of Slifer Smith & Frampton Real Estate. Flaum believes that even if the steam goes out of the economy in 2001, resort real estate will never again take the nosedive that it did in the Eighties. "The new projects are better in quality and construction than those built 20 years ago, and they are being staged in manageable phases of 50 units or less," he says. "But the major thing is that there are many more buyers in the market now. They are highly motivated and they are chasing a dwindling supply of prime locations."