March 19, 2007

Condotels finding fans in Seattle

Photos courtesy Yabu Pushelberg

Prices for the condo/hotel units range from $550,000 to more than $1.5 million. Furniture and appliances are included.

Los Angeles lawyer Michael Adler and his wife, Brenda Fabe, intend to build a home on Lopez Island in a couple of years.

But, just so they don't get island fever, the couple also may buy a condo in downtown Seattle at 1 Hotel & Residences.

The project is planned for Second Avenue and Pine Street by Avalon Holdings and Starwood Capital Group. It is one of a number of Seattle hotel/condo projects, but this one will have a twist: All the rooms in the hotel portion will be condos owned by third parties, such as Adler and his wife.

This will be the first condominiumized hotel, or condotel, in Seattle, according to Chris Burdett, a senior vice president for Colliers International Hotels.

“I think it gives people an opportunity to buy into something they can't normally own,” said Burdett.

Condotels are found mostly in resort areas, although they're also in urban centers such as New York and Chicago. Now they're popping up in West Coast cities.

They appear to be popular in Seattle. Refundable deposits have been placed on all the 1 Hotel's 110 City Suites condos, which can be let to hotel guests, and more reservations are being accepted.

“The demand has been very strong because it's a unique product,” said Avalon President Paul Brenneke.

The 23-story, $200 million “ultra luxury” project will also have 98 conventional condos, including seven two-level penthouses. Refundable deposits have been placed on 50 percent of those.

The full-block project will break ground by May and be done by the winter of 2008, Brenneke said. The project was designed by Sienna Architecture and PCL Construction Services is the contractor. Public spaces, restaurant and hotel room interiors were designed by Yabu Pushelberg.

Who's buying them?

Condotels are found mostly in resort areas, although they are popping up in urban centers such as New York and Chicago, and now in West Coast cities.

Many people attracted to City Suites want an in-city home to build equity, get room revenue and use for short stays, said Dean Jones, principal with Realogics, which is marketing the project.

Corporations wanting to house guests are among other potential buyers, as are people who want to house a nanny or other domestic help while they live in one of the project's conventional units, said Jones, noting “that's one well-kept nanny.”

City Suites owners can contract to let out the units for a specific period and split the room revenue with an affiliate of Starwood Capital, the hotel operator.

City Suites buyers are not required to participate in the rental program, but Burdett said developers encourage owners to do it because “if you have people buying and living there, you wouldn't have a hotel.”

Jones said prices range from $550,000 to more than $1.5 million and sizes range from 700 to 1,200 square feet. Furniture and appliances are included with all the units. Owners will have a separate homeowners' association and a separate elevator.

The 1 Hotel is the first of what is being sold as a new luxury, eco-friendly global hotel brand. Jones said prospective purchasers like the Starwood Capital brand and the nearness of Pike Place Market. Starwood Capital Group's CEO Barry Sternlicht headed Starwood Hotels and Resorts, where he created the W Hotels brand and led the revitalization of Westin Hotels & Resorts, according to a project spokeswoman.

Many potential buyers are investors, a group conventional condo developers generally try to discourage with “no-flipping” rules, which don't apply to the City Suites.

“I think the nature of the product is attractive to investors and they're targeting us,” said Jones.

Traditional condos in the 1 Hotel & Residences will range from 840 to 6,000 square feet and cost from $600,000 to more than $10 million. A sales center will open in May at 217 Pine St.

The project will have a grocery specializing in high-end prepared foods, a day spa, restaurant, bar, health club and 24-hour room service for hotel guests and condo owners.

Avalon is also renovating and reconfiguring retail space in the adjacent nine-story parking garage and fashioning the outside to complement the hotel/condo complex. A flagship retailer will occupy space at Third Avenue and Pine Street, Jones said, and City Suites owners and guests will park in the garage.

Sharing the risk

Development returns on the City Suites aren't “dramatically different” than with conventional condos, but the niche product has no competition in Seattle, Brenneke said. He said he would build a condotel again because he can share risk with buyers, which allows him to develop a higher quality project and access financing more easily.

Among the condotels being developed on the West Coast is the 420-unit Hard Rock Hotel San Diego. Those units sold swiftly, Burdett said.

But Burdett doesn't expect to see a lot of urban condotels. For one thing, the Securities and Exchange Commission forbids projections about potential condotel “room” rates or occupancies and the expected investment return, he said. “It's something most developers don't understand, don't want to deal with, because you can get yourself in a lot of trouble,” he said.

Owners of condotel units are buying into an ongoing business, not just real estate, Burdett said, so the success of their investment can ride on the fate of the hotel. Condotels also are a fairly new concept without much of a track record on resales. “The million dollar question for everybody doing this is: How deep is the secondary market?”

Other developers will be keeping an eye on the project, said Matthew Gardner, principal with the Seattle land-use economics company Gardner Johnson. “It's certainly is a new concept for Seattle and one that obviously we're tracking.”

Adler, the Los Angeles lawyer, said he and his wife need more information before deciding whether to buy. If they do, they intend to keep the unit for a while if performs well financially.

Adler said he likes the central location, Pike Place Market's proximity, Starwood Capital's reputation and the hotel amenities. He also figures there's a shortage of hotel rooms in the country, although he needs to do more research on where Seattle stands.

Adler said he's never invested in a condotel. “I'll either be right or I'll be wrong.”