In the resort real estate market over the past 20 years, many innovations in product design and business model structure have resulted in an assortment of solutions that better fit the needs of each market segment of buyers.
Luxury hospitality-branded residences represent the pinnacle of resort real estate options today, as they combine product excellence in the design and construction of luxury condominium towers and resort villas with the service excellence and property management skill of luxury-branded hotel operators. Further, for those whose use of the property will be seasonal or for short stays during the year, branded residences typically offer a turn-key rental option that can generate more cash flow than most other property management alternatives.
New applications, business models and internet platforms have made the ownership, use and rental of vacation real estate customizable, given the purchasers’ motivations and needs. The recent surge in demand for luxury hospitality-branded residences has been strengthened by a new purchase motivation or “app” for the product. Market data supports the prediction that this new motivation will sustain a stronger “new normal” of demand for luxury branded residences than in pre-COVID years.
Three prime motivations have traditionally driven demand for resort real estate:
- Use of the property: Whether as a weekend home in a drive-to destination, or as an escape to a better climate or terrain for enjoyment of skiing or “fun in the sun” activities, use of a vacation property was the original motivation for purchasing a vacation home, or what we now call resort real estate.
- Investment: By the beginning of this century, a growing number of families purchased vacation property for its potential rental income (return on investment) and/or for capital appreciation (return of investment).
- Speculation: In the years prior to the Great Recession, residential real estate prices appeared to move in only one direction: up. Reservations and contracts of yet-to-be-built condominium towers were bought and sold at a profit, adding fuel to the fire of condominium pricing. After the recession, many changes were made to protect the parties involved in residential real estate transactions, countering the practice of speculative purchasing.
- Safe harbor: This was not one of the three primary drivers of residential real estate purchasing until early in the COVID-19 pandemic, when a new use for resort real estate was recognized. As a reaction to the restrictions placed on “normal” urban lifestyles, families that had nearby vacation homes decided to “ride out” the pandemic at these properties where they had more outdoor space and a bit more freedom to circulate. This pattern was repeated throughout the Americas whether the example was a Manhattan family moving to their weekend home in the Hudson Valley or the wealthier families of Panama City moving to their weekend homes in Coranado or Farallon, or residents of Buenos Aires moving to their “quintas” in Tigre.
The desire for more space, especially outdoor space, combined with a broader acceptance of remote working, and the increasingly concentrated resources of the wealthy, were three trends that converged to create a new need for people above a certain economic threshold. That need is for resiliency at the level of the household. Vacation property, second homes and branded residences in particular, could be used as a “back-up” home, or a “Plan B.”
Given the increasing uncertainty regarding the global economy, world politics, climate change, public health and the connectedness of the world in general, it is now a perceived need for these families to be able to relocate to a second home with indoor and outdoor space and access to all of the services and products that might be needed for a short or extended stay. And what better place to “ride out the storm” than in a luxury condominium or villa on the grounds of a luxury hotel, where most anything that one needs can be made available.
This new motivation to purchase should sustain a continuous new stream of demand for luxury hospitality-branded residences. The data on the growth and “coming of age” ranks of high-net-worth and ultra-high-net-worth individuals — HNWIs are those with $1 million or more in liquid assets, and UHNWIs are those with investable assets in excess of $30 million — supports the assumption that the target market for branded residences will continue to grow.
According to Knight-Frank’s 2023 Global Branded Residence Report, in 2022, there were approximately 70 million HNWIs globally, and this market segment is forecast to grow by 57% by 2027 to 109 million families and individuals. The UHNWI segment had approximately 392,000 members in 2022 and is forecast to grow by 28.5% by 2027, to 490,000 individuals, half of whom will be U.S. residents. Of the UHNWI group, 17% purchased homes in 2022 and 15% are considering buying homes in 2023.
According to a May 14 New York Times article: “In 1989, total family wealth in the United States was about $38 trillion, adjusted for inflation. By 2022, that wealth had more than tripled, reaching $140 trillion. Of the $84 trillion projected to be passed down from older Americans to millennial and Gen X heirs through 2045, $16 trillion will be transferred within the next decade.”
Given these dynamics, it is reasonable that as the number and wealth of these families increases via inheritance, their perceived needs will grow. With housing and family safety being at the top of most family’s priorities, it makes perfect sense that a responsible family with a certain level of means would have a “Plan B” or a redundancy plan for their primary residence, just as they would carry a homeowners’ insurance policy in case of fire or natural disaster.
Luxury hotels are beginning to incorporate 5-plus bedroom villa units in their inventory, with nightly rates of $15,000 to $30,000, and resort developers are responding to increased demand with more branded residence developments, some with club features, others without hotels, as the evolution continues.
Andrew Cohan is managing director for Miami at Majestic Hospitality.
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