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From the
January 2008 issue of:


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The Best of Times, the Worst of Times:
Opportunities & Challenges for the Resort Industry in the Year Ahead
 
by Alan N. Schlaifer
Principal
Law Offices of Alan N. Schlaifer, P.C.
 
The U.S. national economy and global economic trends are sending mixed signals. After we review these strong currents – and undercurrents, along with the potential undertow - we will offer thoughts on how to capitalize on current hospitality and resort challenges that you may be able convert into valuable opportunities.

You may recall John F. Kennedy’s comment, “A rising tide lifts all ships.” To be on that rising movement, in a sense, you need to be a “prince – or princess – of tides.”

Direct and well-conceived strategic action, which characterizes industry leaders, will be needed to ride out challenges and capitalize on opportunities.

As always, we would welcome your thoughts and reactions to our views below.

Cross-Currents and Turbulence
During the past year, economic activity in many nations, including the United States, hit new highs. Gross Domestic Product, or GDP, continued to rise along with employment, and the vacation ownership industry maintained its double-digit growth path.

Expansion occurred at a moderate pace in most of Europe and at a faster tempo in Eastern Europe. Russia, and the tigers of Asia, especially China and India, together with Brazil, were among developing countries that led the pack with high double-digit rates.

These leaders, together with the oil-rich Middle East states, continued both to invest more domestically on tourism and infrastructure, as their citizens did likewise in other nations. Timeshare and other resort products and projects were among the beneficiaries as more funds were used to purchase at sites at home and abroad, including the U.S.

Despite these and other favorable developments, undertow for the U.S. and other developed countries came from many factors. These included sharp spikes in energy and food prices, continuing dependence on unstable foreign oil suppliers, and further declines in the dollar against the Euro and other major currencies.

Wars in Iraq and Afghanistan, together with other national defense and homeland security initiatives, combined to drain hundreds of billions of dollars a year from the federal purse. Although reduced somewhat from prior years, federal deficits and the national debt continued to hit Mt. Everest-like new peaks. Reluctance of either major party to confront and control escalating entitlements, such as Social Security and Medicare, as well as continuing rises in health care costs, now the world leader at 16 percent of our GDP, pose additional challenges as the massive wave of baby boomers starts to hit the shores of retirement.

Add in the high level Richter earthquake that roiled through the financial markets was turmoil from the subprime mortgage crisis in the U.S., and you have the seeds of a potential tsunami. Many large banks and other money players wrote off billions of dollars each in bad loans, with UBS but the latest at $10 billion, as credit for other loans to more worthy borrowers was much tighter and difficult to obtain.

To offset these losses, foreign investors, many from Gulf oil states, injected billions of dollars in various forms of investments. That capital, in turn, raises concerns about foreign ownership and control, especially with continuing massive balance of payment deficits and a weakened dollar undermining confidence in ongoing foreign willingness to accept more of our currency.

Despite the massive losses, some captains of industry, such as several heads of Wall Street investment banking houses, sailed out the door with exit packages in the tens of millions of dollars, or even more than $100 million, as line employees were laid off with modest severance packages. This scene offer a dramatic contrast to life at sea, where the captain goes down with the ship and is not airlifted to a life of luxury as others drown.

The Federal Reserve Board lowered interest rates several times to reduce the risk of an impending recession in an election year, and the Bush Administration and Congress worked on legislative and voluntary efforts to prevent a tidal wave of foreclosures.

Homes, a store of value touted by real estate brokers as a seemingly “can’t lose” proposition for years, lost their luster. Prices fell in almost all markets, and many areas of resort-heavy states, such as Florida, Nevada and Arizona, had some of the hardest hits in response to the overbuilding and speculation in many markets, plus a mixed national and local economy.

Meanwhile, states such as timeshare leader Florida, including many counties that had sought higher returns outside traditional markets, faced their own fiscal crises as part of the fallout from the subprime mess.

In these circumstances, the timeless words of Charles Dickens in A Tale of Two Cities come to mind as 2007 comes to an end and the new year, 2008, beckons:

"It was the best of times,
it was the worst of ti mes;
it was the age of wisdom,
it was the age of foolishness;
it was the epoch of belief,
it was the epoch of incredulity;
it was the season of Light,
it was the season of Darkness;
it was the spring of hope,
it was the winter of despair;
we had everything before us,
we had nothing before us;
we were all going directly to Heaven,
we were all going the other way."

(rearranged slightly to make your reading easier)

The Road Ahead: Open or Rocky, or Both
So you may ask these and other questions:
• What lies ahead for the economy?
• Will it tip, or slide, into recession?
• What areas of the U.S. are in the strongest condition and which in the worst?
• What impact will economic challenges and possible recession have on the resort and vacation ownership industry in a presidential election year?
• Where will current owners find funds to pay for current or additional purchases?
• How will other prospects be able to afford trips and vacation purchases?
• How will your company fare?
• Will it be the best year for timeshares, or the worst, or somewhere in between?
• How much can you and your company influence and shape the course ahead?

We have set forth below views on what may happen to the ships of state and vacation ownership, along with views on some of the white sand beaches of opportunities and rocky shoals that lie ahead. Welcome aboard!

A Tale of Two Perspectives?
Is the resort industry glass half-empty, half-full, or simply, if you will pardon our pun, “all full?”

Optimism reigned at the recent ARDA fall conference. Executives with projects throughout the U.S., and many with resorts abroad as well, told us that their company sales were on track to exceed what they achieved in 2006.

In that year, overall vacation industry sales topped $10 billion.

They, as well as ARDA’s President Howard Nusbaum, were confident the industry would be able to ride out economic turbulence and continue on its growth path.

ARDA is not merely passive, but rather proactively working with its members in many ways.

A major initiative is it’s newly announced multi-year year national public relations campaign, being managed by the experts at leading firm Burson-Marsteller, should help considerably in this process. Tentatively named, “Own the Fun,” its thrust will be on the many positive aspects of vacation ownership for benefit of both press and public.

Spin City?
Recent corporate developments will play out in the new year, including the two leading exchange companies. Interval International is set to re-emerge as a new company, one of 5 divisions being spun off by IAC (Interactive Corp.). Leadership appears to be remaining stable under the baton of longtime maestro Craig Nash.

Changes have taken place at RCI, formerly part of Cendant. Now known as Group RCI, and with the theme, “Vacation Exchanges, Vacation Rentals,” executives including Ken May have departed. Heated competition between the two exchange firms is likely to remain, whatever the state of the United States, or the world economy.

As vacation ownership is part of the overall lodging and travel industries, it may be helpful to consider overall trends and predictions. PKF Hospitality Research, based in Atlanta, GA, and the research arm of national hospitality consulting leader PKF Consulting, predicts a modest slowdown in 2008 from 2007.

They foresee average occupancy nationally falling slightly (-.7%), as average daily room rate (ADR) continues to grow ( 5.3%). The result they project is that average daily revenue per available room (RevPAR) will net a 4.5% increase, the smallest rise since the 2001-03 lodging recession that followed the 9/11 attacks.

Market variations are considerable. A growing force in urban timesharing is New York City. That location, dealing with a continued surge in domestic and global demand, as well as considerable new construction and renovation of existing properties, is projected to have occupancy above 80% in the new year, together with high ADRs and RevPAR.

That situation is part of why “The Big Apple” remains an appealing timeshare market.

Industry Insight
To get input on current market challenges and how each may evolve, as well as the potential opportunities, we were fortunate to be able to obtain the insight of 30-year resort and real estate industry veteran Ken Miller, CEO of Global Marketing Group (GMG), New York City (212-247-6060). A specialist in strategic planning, marketing, sales and development, he has been involved as a developer and marketing/sales consultant for resort developers in the U.S., Caribbean, Europe, the Middle East and other important markets for over 30 years, with projects totaling over 3 billion in sales worldwide.

Miller has been an innovator in residential and resort development from helping plan and create the project concept to managing the marketing and sales. He has worked with builders, developers, governments, financial institutions, and Fortune 500 companies.

Prose and Condos
Miller says, “Condos and condo hotel sales are dead in most resort areas. The hardest hit markets include Florida, Las Vegas, and Arizona.”

His view is that there are many, somewhat complicated reasons for current market failures. One of the top reasons is “promising something that was not possible, like making a profit or breaking even and then ‘flipping’ (or, buying and then selling the unit after holding it only a short time), or having a 'free, vacation place.’”

“The numbers never worked not achievable in the majority of situations,” he says, “when you considered total outlays from mortgage payments, taxes, common charges, and fees versus income from renting.”

The reason why most of the assumptions and projections did not work in many markets was “overly optimistic assumptions, plus competition: from timeshares, fractionals, hotels, condos with rental program, and too many condo hotels.”

Miller is quick to note, “The condo hotel concept has worked well in many place since it was conceived and sold as an investment product since builders could not raise the debt from banks in places like Brazil. A transparent program works when buyers are educated about the risks and had no illusions.”

But he says, “This was not the case in US. The concept was a bit twisted, and in combination with almost impossible projected returns convinced banks, investors, developers and the consumer that it would happen as represented. They are all guilty of blinking and hoping. No innocents here.”

Miller notes, “There were abuses, and that is one reason those products are suffering. Similar but different circumstances caused the real estate meltdown.”

“Déja Vu All Over Again”
That is one of Yogi Berra’s famous quotes, and Miller subscribes to it. His view is that timeshare may come to the rescue again, just as in the industry’s early days three decades ago in the midst of a real estate slowdown and national recession.

One of his clients was a developer in Pennsylvania’s Pocono Mountains, with a 40-unit project. Only 15 whole units had been sold, yet the resort was within a 3-hour drive from 30 million people.

After doing some research and discovered the new concept timeshare, “we instantly embraced the idea given it was a lot easier to sell a $2500 week than a $100,000 condo. Given we did have a good product with amenities and convenience, after a few bumps and marketing challenges, it became a success.”

To have history repeat itself now, Miller says that now, as back then, “you must have reasonable expectations of the developer and understanding that the key is always a great product and the wherewithal to make it work.”

• The industry has evolved since its early days. The evolution has included: much better exchange systems in Interval International and RCI, plus some independents and ICE
• Improved sales practices, including a growing realization that current owners are among the best sources for added purchases and referrals
• Stronger legal protections for buyers, which offer better disclosures and substantive measures
• Much better products, including higher-end purpose-built resorts
• Entry and expansion of major hospitality and independent brands
• More positive public perception.

Industry members, along with a larger and stronger American Resort Development Association - ARDA, have been responsible for these and other positive developments, including the vacation industry’s ongoing double-digit growth in the U.S.

Current Status: Affordable Luxury
“What's happening now,” says Miller, “is that we are in a mental recession, if not a real one, or headed that way.”

Yet, he says, “families still want to take vacations and have their own vacation home but are insecure about buying now.”

He sees timeshare and related vacation ownership products as a solution for these consumers. “Timeshare makes person feel good, gives family extra incentive to vacation. All other benefits, including exchanges, also work well.”

Miller adds, “Timeshare continues to fill the huge market needs of the 30 million plus families that cannot or do not want to spend more the $25-30,000 total for a timeshare.”

Fractionals and PRCs (Private Residence Clubs), in contrast, “appeal to the high end of the market willing to spend $50,000 to $500,000 or more to get usage rights in a villa worth up to several million dollars.”

These concepts offer the valuable, luxury usage rights, together with trade privileges, but without the costs and hassles of sole ownership.

All of these concepts offer the path for millions of Americans, and others around the world, to enjoy affordable luxury: quality vacation homes well above the level they could afford on their own.

Even RV, or recreational vehicle, resorts are sharing in this success despite high gas prices, as the RV Investment Conference in McLean, Virginia this fall made clear. For those millions of consumers who want more outdoor activity and have considerable time to travel, RVs offer an excellent option. Lest you feel they are not in the same economic tier, consider that an RV may have a price tag in the hundreds of thousands, or even millions of dollars – about the same as high-end homes in vacation ownership.

Future Prospects and Projects
What does the resort industry, in its various facets, need to do to maintain growth or capitalize on the current economy?

Ken Miller cites several factors. “Marketing must be broadened to be more like hotel/hospitality rather then real estate, with this kicker: you own your place. The smart money says so. You should take ideas from successful hospitality and other marketing programs.”

This bodes well for brands, both hotel and independents. Some of them advertise in high-end publications, such as airline and luxury magazines, as well as the Wall Street Journal.

In our view, this should include further emphasis on providing much better customer service at all points in the owner-prospect experience, not just lip service (see our article in last month’s issue, “‘Your Call is Very Important to Us,’” for more on this point). Every aspect of the sales and marketing experience needs to be assessed and, where needed, refined.

Product quality must be maintained or improved, notwithstanding financial challenges. Letting maintenance slip, for example, loses far more in the long run than it saves in the short run. Find creative and affordable ways to regularly motivate your staff with “carrots” and more (see our article in the November 2007 Resort Trades, “How to Motivate Employees to Build Engagement, Retention and Performance”).

Miller also recommends adding more benefits such as a wellness product and services. His firm, GMG, believes in this concept so strongly that they are partnering with a major wellness company and will have a Wellness product for timeshare and fractional developers available in early 2008. He believes this will “enhance experience for consumers, build loyalty, and open new markets.”

Finally, he concludes that companies and projects need a systematic approach, a “type of GPS – Global Positioning Satellite - system - recalculating when they go off course, and to assess other opportunities. This should either be a backup or a roadmap to follow with built-in contingencies, and every developer needs one.”

His company gives its approach an acronym, SOS:
S: What is the current Situation – what is the current one, considering all of its major financial and other facets?
O: What are realistic Objectives, taking all of this and other relevant circumstances?
S: What is the best Strategy to achieve those objectives?

Legal Hurdles Ahead
Our nation and many in the world face tremendous challenges in 2008 and beyond. Many legal issues continue to be addressed, and ARDA has taken the lead.

On a variety of fronts, from flood insurance and extension of TRIA – the Terrorism Risk Insurance Act, to avoiding adverse income tax consequences of transactions to developers and owners, as well as preventing undue restrictions on loans to finance vacation ownership purchases, ARDA has maintained the needed vigilance on both the federal and state fronts.

Given ARDA’s track record over several decades, this can be expected to continue in the coming year.

Myriad issues that have a potential impact on travel and the economy, now before Congress, still await action. These include energy, renewable fuel usage, and CAFÉ (corporate average fuel economy) standards for new vehicles.

Whereas most developed nations have higher mileage standards than the U.S. and have set renewable energy goals, the U.S. has not yet done set renewable objectives on a federal basis. Meanwhile, states such as California and regional groups of states are adopting their own limits and requirements on greenhouse gas emissions (GHGs).

Congress is still in session as we go to press, so we will provide an update in these pages or online as relevant legislative, regulatory and case law developments occur.

Conclusion
A Tale of Two Cities ends with these words:

It is a far, far better thing that I do,
than I have ever done;
it is a far, far better rest that I go to,
than I have ever known.


If leaders of the resort industry respond successfully to current market dilemmas, as they have done in the past, beginning with timeshare’s birth in the U.S., they may well achieve “far better things than they have ever done.”

In so doing, they will be giving current owners and new ones “far, far better rest and vacations than they have ever known.”

Perhaps then, developers, marketers, service firms and owners will all have the proverbial ‘Dickens of a good time.”



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