Economists and Industry Leaders Working Through the Bumps
Recently, The Conference Board, an economic think tank, held an online briefing for reporters on the U.S. and global economy. Dr. Lori Esposito Murray, president of the group’s Committee for Economic Development, predicted that U.S. inflation would peak in the second quarter of 2022 and that the Federal Reserve is likely to raise rates to 2 percent this year and near 3 percent next year. Overall, they’re projecting modest Gross Domestic Product growth of 2.25 percent for 2022, down from 6 percent in 2021.
The headwinds facing the economy are familiar now: war in Ukraine and the energy and fuel shortages it has caused, inflation, labor shortages, supply chain hiccups, and rising interest rates. Other signs are much more encouraging: The TSA screened just under 2.4 million passengers both Thursday and Friday of Memorial Day weekend, putting both days among the top five busiest since the start of the COVID-19 pandemic. Airports in Miami and Washington, D.C., even reported that all public parking was full. The Labor Department’s closely watched employment report showed the unemployment rate held steady in May at 3.6% for a third straight month, even as more people entered the labor force.
What do these indicators mean for the timeshare industry?
While no one has a crystal ball, Resort Trades checked in with financial, travel, and resort management experts for their hot take on a possibly cooling economy.
Tackling Inflation
At the American Resort Development Association’s Timeshare Conference in May, Michael Brown, ARDA chair and president and CEO of Travel + Leisure Co, took on the topic of inflation in his opening remarks. “The current inflationary environment gives timeshare companies the opportunity to provide value to our customers when other leisure companies are raising rates,” he said. “There is not a time in my history in this industry when consumers are seeing more value in our product.”
Industry participants who remember the 1970s and ‘80s may recall that part of timeshare’s appeal was as an insurance policy against future inflation. You were paying for future vacations in today’s dollars. With the Consumer Price Index increases tracking at 8 percent, that argument makes much more sense than it did with inflation under 2 percent.
According to the U.S. Travel Association, hotel/motel prices were up 23% year over year in April of 2022 and 11% compared to 2019. With costs for labor, construction, and supplies going up, timeshare resorts are also having to raise their rates for nightly rentals and other fees. Will this dampen demand?
“We’re not seeing a lot of price sensitivity,” said Greg Eure, head of growth at Vacatia, which serves both consumers and timeshare resorts with resort management, resort rentals, and timeshare resales. “We’re doing extensive research on comps in each market to ensure that we are priced appropriately. Our goal is to strike the right balance between occupancy and rates. Overall, the prices associations are able to charge are going up.”
Related: Timeshare Management Companies Share Labor Shortage Solutions
With many of the resorts partnering with Vacatia being located in drive-to destinations, they can still represent an affordable vacation choice.
At the same time, many consumers who missed out on vacations during 2020 and 2021 due to the pandemic are ready to splurge on vacations, a trend some call revenge travel. “Across the board, travel demand is going through the roof,” Eure said. “Some of the most in-demand locations are Breckenridge, Colorado, and Florida and Virginia beaches. We are already at near maximum occupancy for those and other locations.”
The main challenge for resorts in this enviable position is providing their customary high level of service with a smaller staff. “For our owners and rental guests, a big part of our appeal is the authentic and warm culture of service that our timeshare resorts provide,” he added. “We are very hesitant to cut back in areas that affect the guest experience. Our employees know they are valued team members, so we have been pretty successful in keeping our resorts staffed to meet guest expectations. That being said, the labor shortage is very real, and anybody who says it’s not is lying.”
In response to this challenge, Vacatia has created an online recruiting platform to make the hiring process faster and more efficient. “We look for opportunities for growth for every employee, figure out who the players are, and give them opportunities across the organization. We have also centralized more functions so that the employees who are at the properties can focus on the guest experience.”
Related: Inflation Busters: Protecting Profits as Costs Rise
Interest Is Up
To help stimulate the economy during the pandemic, the federal funds rate was lowered to nearly zero in March 2020. In 2022, the Fed has been gradually raising that rate and on May 4, reached 0.75%-1%. For consumers, that meant that the average 30-year home mortgage went from the 3.5 percent that was common in 2021 to 5.4 percent in May of this year. How will this affect timeshare developers, who usually finance their buyers?
“It will definitely have an effect,” said Bill Ryczek, principal of Colebrook Financial Company LLC, which specializes in providing financing for the timeshare industry, “and it will be a negative effect.”
He explained that developers’ income from interest arbitrage on their receivable portfolios is a significant part of their profit. “With developers charging 14 to 18 percent on their paper, they’ve had a very healthy margin for the past several years. That will shrink since there’s not much ability to increase the rates consumers pay. The good news is that there will be income. It will just be less than it has been in recent years. And they still have development income, management income, and rental income,” he said.
Supply Chain Snafus
With a front seat to global supply chain issues, Dawn Sena, president of Sena Hospitality Design, has seen it all over the past two years. “Even if we order from a domestic manufacturer, some of the parts will have to come from overseas,” she said. “I’m being hit with fuel surcharges, tariffs, and huge increases in the fees charged for shipping containers. At one point, we were paying $25,000 a container from Asia, and it used to be $4,000 to $5,000.”
Nearshore manufacturing in Mexico is not always a more affordable option as factories there don’t have the equipment and experienced workforces that Vietnam and China do. To compensate, Sena is ordering more samples so that quality can be checked before production begins.
She’s also switching up which ports containers are delivered to. If you have things come through the West Coast, there are more port backup and there is the fuel to take your container to its destination, which may be on the East Coast. “It’s better to deliver to a resort that is closer to the resort. Now, there’s an app and I can watch the progress my containers are making. I could watch them moving through the Panama Canal and ultimately to New York City. It was so cool knowing exactly where they were.”
The biggest price increases have been for products that contain foam due to a foam shortage. Other items that have caused issues are the mechanisms for sofa beds, which come from overseas.
Resorts may be tempted to order furniture unassembled, but Sena cautions that after paying staff for on-site assembly, savings may be minimal unless it’s something as simple as attaching table legs.
Due to these challenges, Sena urges resorts to move quickly once they have quotes in hand. “Many of our quotes are only good for 30 days, so the HOA can’t think about it for six months. By the time they get approval, the prices could have gone up–a lot. They need to find ways to make the decision faster.”
She also urged resorts to prioritize. “It’s better to do a few things really well than do a lot and have to replace it in a short time.” But don’t wait. “Prices are not going to come down anytime soon.”
Judy Kenninger is a frequent contributor to Resort Trades.
