Let’s be honest, we are in the middle of a historic recession and we’re all hoping it doesn’t turn into a historical depression.  What does this mean for the fractional ownership industry? 

It’s not as bad as one might think.  I tend to maintain the glass is half full mentality.  First of all it should be said that we are not talking only the U.S. here, economic problems have spread globally.  So when we talk about fractional buying habits remember that the general assumption is that this is going to apply in most markets around the world, not just in America. 

Allow me to bring out the Pierce Group Crystal Ball.  We will likely see our economic future broken down into three phases:  the “Help Us All!” phase is the first, followed by the “We Survived, What Now?” phase, and then of course the “It’s Over, Let’s Spend More and Go Back into Debt” phase.  To understand what the future might bring for fractional real estate developers let’s look at how these phases will influence the savvy buyer.  The savvy buyer is the fractional industry’s target market – 45 to 65 with successful careers and kids in or moving towards college.  (Initially Duke but now Boise State)

Phase 1 - “Help Us All!” 

We are in a period of uncertainty right now and many people are simply scared, this is completely understandable.  The savvy buyer however is playing the waiting game.  They might move some money around here and there, but overall they are financially OK and will be in relatively good shape as we move into phase 2.  The important issue to remember is that during Phase 1, nobody will be buying anything short of the new Sarah Palin action figure for Christmas.  This phase should only be temporary (knock on wood) and once the election is over and we get through the holidays things should level off.

This is a game of Chess for lenders and developers.  They need to be calculating what their next move will be when the buyers come back and preparing accordingly.  These low times are when the most successful are the most active.

Phase 2 – “We Survived What Now?”

This is what the majority of the folks (Bill O’Reilly reference) will be saying, “We survived but what do we do now?”  This is the point where the savvy buyer begins to execute on their savvy buying decisions.  In 2009 everything will be a serious bargain, even compared to the relatively low prices that we saw this year.  But let’s take a look at what those savvy second home buyers will be snatching up.  This is where those developers and lenders who decided to go fractional will win. 

The savvy buyer took a pretty serious financial hit as everyone else did and in 2009 we’ll still be in a very distressed economy.  The chances that those savvy baby-boomers are going to plunk down big money for a whole ownership second home are pretty slim - we haven’t yet reached phase three.  Condo Hotels will be a distant memory at this point, they pretty much are now.  They have fallen completely out of favor with buyers due to alleged SEC violations and the resulting lawsuits on developers.  Timeshare sales numbers will continue to fall because its target market will be much harder hit by phases one and two. 

That leaves fractional ownership, a perfect compromise.  Why not buy deeded ownership in a desirable local at a phenomenal price with reasonable annual expenses?   

Phase 3 - “It’s Over, Let’s Spend More and Go Back into Debt”

I don’t need to spend any blog space on this one.  Reference 2003-2008.

So what is the answer?  Convert!  It is important that developers and lenders position themselves correctly right now, in Phase 1.  Whole ownership condo and condo hotel properties should be considered for fractional conversion.  When savvy baby boomers start buying again, fractional will be the most practical way to go and my friends we are all going to be making practical buying decisions for the foreseeable future… sorry Starbucks, the $4 Vanilla Latte is a memory for most.  Concentrate on selling boring old coffee, stage three won’t come around for quite some time.

Eric Pierce

FORESIGHT COSTS LESS THAN HINDSIGHT^SM