With the growing presence of such big-name hospitality players as Marriott, Disney and Hilton in the past decade, the concept of vacation ownership has gained credibility and continued to grow at an annual pace of nearly 15% — and developers say the market of potential owners has barely been tapped.
While the idea of timeshare actually was introduced in the French Alps, the United States incubated the concept and is the undisputed world leader of timeshare properties with 2 million U.S. household owners, about 40% of the world market, according to the American Resort Development Association (ARDA), a nonprofit organization based in Washington, D.C.
More than 1,600 of the 5,000 worldwide resorts are in the United States, where vacation ownership has become a growing part of the traditional hospitality industry. In 1999 alone, U.S. timeshare sales topped $3.7 billion, according to ARDA.
“Timeshares allow developers to take their investments and unhinge the value in an effective way,” said Kenneth May, CEO and president of Parsippany, N.J.-based Resort Condominiums International (RCI), which was founded in 1974 as the first network to facilitate the exchange of timeshare intervals that allow owners to divide blocks of time among different destinations. “It parcels out the real estate into 52 weeks of use, which can be sold 52 times, so more people can participate in utilizing that real estate asset,” he said.
Vacation ownership takes a variety of forms: one of the most popular in this country is a fixed-week deeded ownership where the week can be used, rented, traded, sold or bequeathed. In addition to the purchase price — which now averages about $12,500 for a week — owners also pay an annual maintenance fee and belong to a homeowners or similar association which oversees the property.
No one disputes that the industry got off to a shaky start, thanks to high-pressure sales pitches and not-always-ethical owners. A regulatory organization — which evolved into ARDA — was formed to oversee the industry, and states began regulating the sale of timeshare properties in the 1980s.
“There was a lot of bad publicity,” said Gerald Koi, a principal with Orlando-based Morris Architects, who began to notice the fractional ownership projects of condos in the 1970s and began designing timeshare resorts for Orlando-based Fairfield Communities in 1993. “There wasn't any organization behind it. Standards, ethics and marketing practices can get out of hand when there are no guidelines. With the growth of ARDA, it's gotten significantly better.”
The entrance of the major hotel companies helped bring credibility to the industry, said Nusbaum, whose 20 years in the hospitality industry includes directing corporate and industry relations for the American Hotel & Motel Association. “This is still a young industry. There's been a lot of maturation,” he said.
The annual growth rate has attracted not only branded companies to the industry but interest from investors as well, according to Nusbaum. He and others point to the fact that two sessions at the recent UCLA Annual Hotel Industry Investment Conference addressed timeshare as a sign of the industry segment's growing acceptance.
“It was very evident at UCLA that timeshares are the hottest segment in the hospitality industry right now,” Koi said.
Hotel companies buy in
Washington, D.C.-based Marriott International Inc., through its Marriott Vacation Club International (MVCI), was the first major hospitality player to test the waters in 1984, and now has 50 timeshare resorts in seven countries. And apparently the pace will continue: In January, Marriott opened its first Horizons brand of moderately priced timeshares and announced its entrance into the Asian market. Horizons also is developing projects in Branson, Mo., and Gatlinburg, Tenn.
“We've been growing in the mid- to high-20s (percent) as a brand,” said Ed Kinney, senior director of brand advertising and communications for MVCI. Marriott's vacation ownership business grew 25% last year, from $540 million to more than $700 million in sales. “For us to get to that level just working within a segment of the industry, and now tapping into the moderate industry, shows there's a tremendous amount of opportunity,” Kinney added.
Timeshare has become a more important part of hotel companies, with mixed-use resorts comprising a hotel, timeshare and high-end condos becoming more common, according to RCI's May. “Marriott was the first major flag to get involved,” he said. “Then there was Disney, Hyatt, Westin, Sheraton. But the big volume player is Marriott in terms of actual numbers.”
And as the major hotel companies entered, the projects began to offer more amenities and services, which drove up the prices, according to Dick Ragatz, president of Eugene, Ore.-based Ragatz Associates, an RCI affiliate company which handles market research and feasibility studies. “So then the market jumped over the middle-income market for whom it was intended.”
The hotel companies found many advantages in the co-existence of a timeshare and hotel property. “It gives the timeshare company a brand the consumer can identify with and that's a gigantic marketing opportunity that an independent timeshare company would not have,” Koi said. “From the hotel side, it brings more activity to their project.”
The affiliated properties not only can share amenities such as health spas, clubs and restaurants, but the hotel provides a steady stream of potential timeshare buyers to the site. Koi's firm designed Fairfield Community's Ocean Walk in Daytona Beach with 124 of the total 299 units being designated for timeshare. “The pool decks, health spas, retail, restaurant are all accessed within one building,” he said.
Koi & Springer, an affiliate company of Morris Architects, designed the $80 million Fairfield Grand Desert resort in Las Vegas, which will open in July. The 420-unit project will include a 184-unit timeshare tower. The second phase will either be a hotel casino or more timeshare units if the first phase sells out, according to Koi.
Marriott's new Horizons brand will target a lower income level (from $40,000 to $99,000) but one estimated to be 55% of the total market share of vacation ownership, according to Kinney.
The first Horizons opened in mid-January in Orlando with 102 two-bedroom villas, with the potential to expand to 900 units. Amenities include a themed pool with an interactive pirate ship, fully equipped kitchens, washer/dryer, poolside restaurant and gym. Prices range from $9,900 to $14,100 per week.
The average price of owning a week at Horizons is $11,500 to $11,900, compared with an average of $17,500 to $18,000 at MVCI properties, according to Kinney. On the very high end is Marriott's Ritz-Carlton properties where a peak week — such as New Year's at an Aspen ski resort — can cost $50,000. On MVCI's low end would be $9,900 for an off-season week at a Florida property.
Ragatz said this “broadening of the market on both ends and more product differentiation” has become a trend in the industry. “Some developers are bringing on more modest products in an attempt to lower the price to reach the middle-income consumer for whom the market was intended for in the first place,” he said.
The average income of a timeshare buyer has increased to $75,000 in recent years, according to Ragatz, who said one quarter of all owners have incomes higher than $100,000.
Growing pains
Like other businesses, the timeshare industry hit some snags late last year when the bottom dropped out of the stock market. For timeshares, the reality check was the filing of reorganization bankruptcy in November by industry leader Sunterra Corp., Orlando, which has 89 vacation ownership resorts and nearly 7,000 units, more than any other company in the world. Sunterra underwent rapid growth after going public in 1996. Its resorts remain open.
Another roadblock was the virtual withdrawal from timeshare financing by Scottsdale, Ariz.-based Finova Capital Corp., a major lender in the industry. Finova specializes in financing mid-sized companies, including many technology businesses. Finova's exposure to Sunterra was estimated at $100 million by Merrill Lynch & Co. The Finova Group, which was founded in 1992, saw its stock drop from $30 per share to $1 last year.
“These are important events and we have to work our way through them,” May said. Sunterra is part of RCI's exchange network, which includes 3,700 resort affiliates in nearly 100 countries. “The impact has already been felt in the overall lending markets and in investor interest in public companies involved in timeshare. The market is looking for new confidence from the lending perspective, but we think this is absolutely temporary.”
Financing in 2001 will continue to be tight for timeshare projects, said Bob Dennis, managing director of the Vacation Ownership Finance Group for Chicago-based Heller Financial Inc. “In a broader context, there also has been an overall retrenchment in the credit market for players that have below investment-grade credit ratings,” he said.
However, because timeshare projects are built in phases, economic exposure due to overbuilding is limited, developers say. Each phase is developed as the previous one nears the end of sales.
The industry also will be boosted both on the development and buyer side by the recent drop in interest rates, according to Dennis. “A 100 basis point drop in interest rates is a big boost for the whole industry, especially the independents,” said Dennis, who expects the independent companies to continue to play a key role, even in light of the branded companies' growth. “The drop also will help preserve affordability to consumers.”
Overexpansion the past two years and the high marketing costs incurred by the timeshare industry also serve as red flags to investors and lenders. “They're demanding they control marketing costs, which can sometimes be as high as 55% of sales volume,” Dennis said.
The players
With the evolution from individual entrepreneurs to sophisticated operators such as Marriott and Beverly Hills, Calif.-based Hilton Hotels Corp., a lot of the smaller people have been bought out, according to Tony DeGeorge. He is president of Clearwater, Fla.-based Greene Canfield DeGeorge LTD, a hotel brokerage and consulting business, and president of the Hotel Motel Brokers of America.
ARDA's Nusbaum estimates there are 50 major developers in the industry. “There are another 100 hybrids involved in one or two projects, and a plethora of sold-out products which are run by homeowners and aren't an active part of the industry,” he said.
“There is definitely growing concentration among the larger developers,” Dennis said. He estimates that about 80% of industry revenues are generated by the 20 largest developers.
One pending acquisition will wed the largest independent timeshare operator, Fairfield Communities, with the largest franchiser of hotels, New York-based Cendant Corp. Fairfield, which has about 240,000 owners, agreed in November to be acquired by Cendant. The deal is expected to close April 1, pending stockholder approval.
In addition to hotel brands such as AmeriHost, Ramada, Days Inn and Travelodge, Cendant has owned RCI, the largest exchange network for timeshare properties, since 1996. Fairfield's net earning increased more than 20% in the third quarter of 2000, to $64 million. To keep an arm's-length distance from actually owning timeshare property, Cendant likely will spin off Fairfield's hard assets, according to RCI's May. “We'll retain the fee-based services — marketing, sales and property management.”
Marketing methods
The success of a timeshare project is largely dependent on its marketing prowess. “Timeshare bets on the ability of a team to sell units,” Koi said. “They have to be very organized and have well-directed marketing. A developer's history in sales and marketing is important.”
Another advantage brand-name companies have is lower marketing costs. The cost as a percentage of revenue for sales and marketing for typical independent developers is 50% to 55%, according to Dennis. “For a branded hotel company, it's 30% to 35%.”
Marketing takes many approaches, including free mini-vacations. To support its new Grand Desert resort in Las Vegas, Fairfield reached an agreement with Harrahs Entertainment in November that will allow Fairfield sales centers with model units to be opened at four Harrahs resorts in Nevada.
While penetration of eligible U.S. households is about 5%, Ragatz thinks the market eventually could reach 20% of eligible households. “But in order to reach that, we'll need to see more continued variety in product,” he said.
Hot spots
Florida, where the timeshare industry got its start in this country, continues to be the perennial favorite destination for vacation ownership buyers. The location is followed by California, the Carolinas, Tennessee, Colorado, Texas and Hawaii, according to ARDA. What started as a beach resort concept has spread to ski resorts and even urban areas.
“The purchaser can have a variety of experiences — go to the beach, go skiing, or to the city,” Koi said. “Before, it was totally resort oriented. Now it's in an urban context as well.”
Rather than having a similar look to all Fairfield resorts, each fits into its own environment, Koi said. “In any hospitality product, consumers are looking for a unique experience. The design is dictated by locale and code requirements.”
MVCI's first urban property was in a 150-year-old building in the heart of Boston. At that location, a week can be broken down into individual stays, an option that corporations have found attractive to use as an employee incentive or client benefit, according to Kinney.
Tony DeGeorge, president of Clearwater, Fla.-based Greene Canfield DeGeorge LTD, thinks the next wave of interest will be Europe. “Timeshare companies are looking at that market and already started purchasing property.” Unlike this country, projects there likely will be renovations rather than new builds, he said.
For the most part, the major hotel companies elsewhere around the world have not yet entered the industry, according to Ragatz. But many are looking into entering the timeshare sector. And for good reason, since timeshare ownership is only expected to grow in popularity.
“If people can't afford a vacation home or don't want to maintain one, at least they can own part of one,” Nusbaum said.
The idea of sharing ownership got its start in the 1970s when Florida condo projects were not selling as well as expected, prompting owners to come up with the idea of selling in week increments, according to Nusbaum.
DeGeorge estimates that about 10% of the hospitality properties along the beach areas of west Florida are now timeshares; in the Orlando area, however, he says the levels go up to 25%. “It's going to continue to increase,” he says. “More and more properties are breaking ground.”
In 1980, there were 155,000 owners at just over 500 resorts worldwide. Now there are 5,000 resorts with annual worldwide sales approaching $7 billion.
The number of new purchasers of timeshares in the first quarter of 2000 grew by 12% over the same quarter in 1999, according to an ARDA survey conducted by Hendersonville, Tenn.-based Smith Travel Research. The survey showed net timeshare sales in first quarter of 2000 were 18% higher and that current timeshare owners accounted for one in six new purchases in 1999.
The average price of an interval week has grown steadily since 1991 when it was $9,350; it's now at about $12,500, according to ARDA. The average age of an Interval International member is 49, although more young professionals with children and retirees are buying timeshares, according to the exchange company.
The variety of product has grown significantly, not only in terms of locales, but in options such as floating weeks and a point system, Koi says. Buyers also can buy split weeks or biennial years. “As much flexibility as you can offer the potential purchaser, the more apt they are to buy it,” he says. “At the UCLA conference, we learned that people now are looking for shorter vacations because time is the new currency in the new economy.”
Kinney estimates that about 25% of MVCI owners use the trading option; owners can exchange through the Marriott network or through the Interval International exchange program.
On the high end, fractional ownership has become more prevalent in recent years. This allows a buyer to own a larger share of a vacation ownership unit, from five to 26 weeks.
So, if the economy stalls, timeshares may fill a niche for those who would have bought an expensive vacation home. “Where we are on the chain is a pretty healthy place to be,” Nusbaum says. “If they were looking at buying a vacation home, but their portfolio isn't as grand, they may not mind spending $20,000 for a week in a fabulous vacation home.”
Cynthia Mines is a Wichita, Kan.-based writer.