How Could it Cost That Much?

The Impact of Inflation on the Timeshare Industry

What is the impact of inflation? “It makes everything cost more,” said Zealandia Holdings CEO Butch Patrick with a laugh. We could end the article right there, but the follow up question: “Where are costs increasing most and how does it affect your company?” is a little more complex.

The most simplistic explanation of inflation is that there is too much money chasing too few goods. Government manufactures money while the private sector produces goods, which goes a long way toward explaining why things tend to get out of balance.

Timeshare developers purchase a lot of labor, building materials, and money, in the form of construction and hypothecation loans. Money is definitely more expensive than it was a year ago. The Federal Reserve, an apolitical body of political appointees, is charged with undoing the monetary mischief the executive and legislative branches create by expanding the money supply. One of the Fed’s most potent weapons to slow the volatility of currency is to raise interest rates and they have been energetically doing so in 2022. The prime rate has increased from a low of 3.25% in March 2022 to 6.25% as I write this and probably 7% by the time it appears in print.

One of the major components of a timeshare developer’s income is interest generated from its consumer receivable portfolio. Typically, the consumer receivables bear interest at a fixed rate while borrowing on hypothecation and warehouse facilities carry variable interest rates. Prior to the rate increases, a developer might have a 10-12% margin. It’s probably a lot lower now. While existing securitizations generally have fixed rates, the yields on new deals will undoubtedly be higher. That will have a material impact on the income of large, publicly-traded companies.

Talk to anyone in the hospitality business and the conversation will inevitably turn to the problem of finding good employees—or any employees. Global Exchange Development CEO Rick Sargent said, “I don’t think the steep increase in labor cost is due to inflation but to the employee shortage created by putting all that money into the system during the pandemic. It’s starting to get better; we’ve stopped offering sign-on bonuses and have been able to increase our hiring standards. For a while, we just had to get bodies in chairs and on phones and couldn’t be that picky. But the labor market’s coming back.”

Global Exchange sells a club product, which means that the principal expense of its owners’ association is the maintenance fees charged by the resorts in which Global owns the inventory. Sargent has been able to keep his maintenance fee increases to a minimum by renting unused inventory, but he’s alarmed by the bills that are coming in from the underlying resorts. “One resort went up $50,” he said. “That’s huge. Another resort told us their utility costs rose 100% from last year and a third, which hadn’t increased its fees in 20 years, went up 5%. We’re getting murdered out there!”

Related: Resort Tips for Battling Rising Costs of Inflation

Butch Patrick is dealing with inflation on a number of fronts. He has a whole-unit condominium project in the planning stages and was surprised to find that construction costs, which eighteen months ago had been estimated at $150-175 per square foot, were now expected to be around $250.

“The thing that has shocked me the most,” said Patrick, “is the cost of windows and doors. During the first year of the pandemic, we couldn’t get any. Then when we could, the price had doubled. Costs are up across the board—appliances, lumber, labor in the trades.”

How much is due to an increase in the money supply and how much to shortages? “I really couldn’t say,” Patrick replied. “Some of the increases are very specific. People may not realize it, but the most important components in appliances are the chips, which come from overseas, are very slow to arrive, and are a lot more expensive than they used to be.”

“I think at least part of the reason construction costs rose was the surge in single-family and multi-family construction. Now that interest rates are climbing, new construction may fall off and prices might go down a little.”

Zealandia’s subsidiaries manage 24 resort properties throughout the United States and Canada, all of which are bearing the brunt of inflation. “I think we’re going to have to increase maintenance fees about 8% on average,” Patrick said. “With costs rising and employees hard to find, we’re looking for ways to reduce our labor force. We’re developing a keyless entry system and hope that eventually half our guests will check in without stopping at the front desk. For renters, we provide room cleaning only on request.”

Mike Vasey is CEO of Vacation Ownership Sales (VOS), which sells memberships in Vacation Internationale, a points-based club that began operations in 1974. As the manager of VI’s 47 resorts, Vasey sees cost increases all across the U.S. and Canada. “Our costs are going up faster than the rate of inflation,” he said. “There are such severe labor shortages, especially in the housekeeping and maintenance areas, that we’ve had to increase salaries rather significantly in order to be competitive. Airbnb charges a pretty hefty cleaning fee and with that fee they can afford to pay their people a lot more than we can from our maintenance fees.”

Like Patrick, Vasey has found construction projects more difficult to plan and execute. “Not only are costs increasing,” he said, “but you have to try to anticipate the availability of materials and labor. We’ve had to defer some projects because of the uncertainty.”

Related: Inflation Busters: Protecting Profits as Costs Rise

The VI club has been around for decades and its owners’ association is very strong, but the continual cost pressures have led to an increase in maintenance fees. “We probably should have raised them earlier,” said CFO John Kehoe, “but we finally went up 3.5%.”

The one place VI is not seeing inflationary pressure is Mexico, where labor is plentiful and most costs are governed by union contracts. The Mexican resorts have also had increases in food and beverage revenue as, subsequent to the onset of the pandemic, timeshare owners have been less likely to leave the resort for dining.

Entrepreneurs are optimists by nature. Sargent thinks the labor market is improving. Patrick thinks a slowdown in construction will bring costs back down. Vasey’s encouraged about Mexico.

Sargent remembers 1980, when the prime rate hit 21.5% and double-digit inflation seemed to be a permanent feature of the economy. The timeshare industry was just getting started and Rick Sargent was an eager young buck on the sales line. One of his big pitches was that the new product was a good way to guard against future increases in lodging costs and he hasn’t forgotten that. “We’ve always sold timeshare as a hedge against inflation,” he said. “We’ve never gotten away from that.” Amidst the labor shortages, increasing interest costs, and pricey doors and windows may be a sales opportunity with a generation for whom inflation is a new experience. Buckle up!

Bill Ryczek, RRP—Partner, Colebrook Financial Company.

With more than 40 years in the timeshare industry, Bill Ryczek is well-known and a frequent speaker at conventions on the topic of receivable financing and has authored numerous articles about the timeshare industry. Colebrook Financial, approaching its 20th anniversary, is highly regarded for its innovative approach to lending. based in Middletown, Connecticut, it specializes in providing financing for the timeshare industry, and can offer a variety of facilities in amounts ranging from $100,000 to $30 million or more.