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Nov.14–Based on the number of e-mails I have received, there are many interested viewers waiting for my impressions of the proposed acquisition by Starwood of the Ski Area and the effects it will have on the local real estate market. As of today the delays in writing this report have been many, but the most important reason was that I wanted to get a real feel for the impact of this transition rather than get lost in the hype and hoopla.
First, I had been making many notes about the market activity prior to the announcement but was looking for something more profound to discuss. I also had a vacation planned and leaving a business for two weeks takes some preparation, especially with winter threatening. When the press release hit the front page of the LA Times (Oct.5) I was stepping onto a boat bound for southern Baja waters and wouldn't be back for ten days. I knew all hell was going to break loose but there was nothing I could do about it.
Since my return I can say that the past forty-day period has been one of, if not, the busiest period Mammoth real estate has ever experienced. So let me discuss the basics (from my point of view) of this Ski Area acquisition, where the market was prior to this announcement, and where the market is today, and then we'll get to what I see for the future here.
The sale of Mammoth Mountain Ski Area to the Starwood Capital Group has received a tremendous amount of publicity, both in the regular press and the business press. I'm sure everybody who is interested has read plenty, and if not, a simple Google search will provide plenty of information. The deal has been inked and should be finalized in the next 30 to 60 days. Mammoth CEO Rusty Gregory has paraded his "dog and pony" show around town in the past few weeks trying to inform the community about the acquisition and transition. As usual, there is lots of good information when Rusty speaks, and plenty of smoke too.
The "Capital Group" part of Starwood clearly sees the Ski Area as an undervalued asset. And that's what the "big boys" and smart investors are after these days. The Ski Area has rebounded from the dismal numbers of the mid-90's and shown great skier numbers and financials the last couple of years. The soft spots (and the upside potential) are clearly located in the (poor) mid-week business, the complete failure of Mammoth Hospitality (the hotel operations end that operates the Mammoth Mountain Inn and the "front desks" of all the condo-hotel units built by Intrawest the past few years–enter Starwood Hotel Group), and all of the ancillary services (like food and beverage) that produce large amounts of revenue and profits.
The even larger opportunity is the cross-selling and international marketing of it all, especially with names like Westin, St. Regis, W, and all the other Starwood brands leading the way. Beside the operational opportunities, there is still plenty of high-end real estate to develop. Clearly they intend to raise the bar on quality–of amenities, service, management, etc., and visitations, especially mid-week. They will push, whatever it takes, to get regular air service in place at the airport. It has been expressed that Starwood is here for a 5 to 7 year experience, and then they are likely to sell the whole thing off. If that is true, then they intend to increase, accelerate, and synergize the cash flow from their new undervalued asset.
So let's talk about the Mammoth real estate market. Prior to the announcement, we were sitting in a pretty normal position based on the typical sales cycle in Mammoth. The only thing of real significance to me in my notes was the volume of 1031 tax-deferred exchanges coming into Mammoth as opposed to leaving Mammoth. Those who watch real estate markets on a more macro or global level know that many of the "hot" markets of the past few years are beginning to cool–inventory building, reduced sales volume, etc. The interesting thing was that at that point in time people with "investment" dollars were feeling more confident about the future values in Mammoth than they were the places they were exchanging (1031) out of. The hottest segments of the market were condos in the $400,000 +/- range, Mammoth homes in the $1.2M to 1.5M range, a little resurgence in Old Mammoth, and any homes in Crowley Lake. Condominium inventory was around 190 units on the market and home inventory was around 75 units.
Since Oct. 5 there has been a flurry of activity. Condos have been hit the hardest, especially ones near the chairlifts and ski runs (but that is really to be expected this time of year.) After this past weekend the condo inventory is below 70 units on the market and agents were scrambling to show anything considered "decent". The only immediate appreciation I'm seeing is in the Eagle Base area (about 8 to 10%.) This is also not the time of year sellers typically put their condos on the market. At this point good properties are likely to be bid-up or properties with higher asking prices are going to sell. Some sellers have pulled their properties from the market anticipating some short-term appreciation. The remaining "good" deals are in the Village and in Phase VI of Snowcreek, aka The Lodges. If all of this Starwood momentum moves forward, the stronger market is definitely going to be in the higher end of the pricing spectrum.
Single-family home inventory was sitting at about 75 units prior to the announcement.
Today it is in the low 40's and as of this last weekend getting shown plenty. The best buys are in the $800K to $1M range. Don't expect them to last. Anything under $700K is greatly marginalized at this point–crummy location or dated structure. Above the $1M there are still some attractive buys.
Good residential building sites are thin with a couple decent under $500K, but it is really going to take a minimum of $600K to get something of quality, something a Starwood customer wants. As far as the new fractional units are concerned, I can't really say. We get mixed responses (Sales are great! We're going to have a price increase!), but I know that almost every day we get an inquiry in my office from somebody, who isn't our client, wanting to know if they should follow through with their purchase. It seems like there is a lot of hesitancy.
Residential income properties are an interesting segment of the market. All of a sudden there are a bunch of four-plex type buildings for sale in Mammoth. Most of the prices are outrageous. The only thing that would have increased their value so much is the increased costs of permits (Nov. 1). I'm watching that end of the market carefully. There is so much government sponsored housing (that's my new term for all of the subsidized low and middle income housing, deed restricted housing, employee housing, etc.) under construction in Mammoth. Once those units are completed and occupied it just has to have an impact on rents. Those units are going to be occupied by Mammoth's best and most stable tenants ("certified"). And with interest rates going up, how can they be worth more? The only way they make sense is if the buyer has "stupid" 1031 money. Many of our local immigrant-types are buying low-end condos. Good for them. I subscribe to the theory that "home ownership makes mayors of your citizens". Meanwhile the rise in interest rates doesn't seem to have too many buyers worried, yet. Where rates are going is anybody's guess.
So where are we going? Starwood has said they want to "jump right in". Upon closure of the sale, expect their marketing machine to crank up–accommodations, packaging, and future real estate projects. In the past it has been when Intrawest's marketing machine went into motion that we have seen the surges of appreciation in the real estate market. One can only guess this time around. Money does follow money.
It now appears that the Ritz-Carlton flag will fly next to the Westin in the Village. That property is already being graded and prepped for the start of construction next spring. The Mountain is already holding public meetings for "scoping" the redevelopment of the Main Lodge and Mammoth Mountain Inn area. Perhaps the St. Regis will go there. Could a heli-ski permit for San Joaquin and White Wing be that far behind?
Construction in town has no appearance of slowing down, in fact it looks like it is only increasing. At this point, what I'm looking at most carefully is who the potential winners will be and who the potential losers will be out of this sale of the Mountain. My mind looks to vulnerability first. Don't expect Starwood to share their newly captured higher-end clientele with the rest of town. I would expect Starwood to accelerate the Intrawest model of trying to capture all of the visitor's dollars. They already have the monopoly on lift tickets, expect them to cross sell and retain a greater share of lodging, the food and beverage business, retail, and as many ancillary services as possible. I see cannibals wearing Wal-Mart shirts. Intrawest's Gary Raymond explained this concept to me in the early 1990's as we drove around Blackcomb. It has already happened here. Just ask yourself why are a significant number of Mammoth's restaurants for sale despite the prosperity we've had in the past few years?
I see Starwood's Barry Sternicht throttling up hard. It is the business model. I feel for the local businessman who is going to have to compete against him. Some marginal restaurants and retailers have already been pushed out. Others will follow. Competing against the Resort Corridor could become a vicious proposition. I'm watching for how they intend to compete against me. I'm also concerned for the landlords who are going to lose longstanding tenants. I certainly don't see how Main St. and Old Mammoth Road rents are going to go up in this kind of environment.
The local reservation companies (mostly mom-and-pop type businesses) have always competed against each other and have continually rejected a central reservation type program. Now they are going to be competing against the finest hotel and reservation company in the world. And the competition will be bundling lift tickets, drink and dinner discounts, and everything else (flights) under the sun AND are going to have the nicest units in town. Oh sure, there will always be the folks that want to stay in their favorite little condo project, but…
So who will be the winners? The skiing public for one, at least the ones that can still afford to go skiing. Everything on the Mountain should get even better (even the powder will be just a little lighter–Barry promises!) Hopefully the last lingering bits of nepotism (you've got to admire a loyal guy like Dave McCoy) will disappear from the Mountain. I can't imagine there's much room for nepotism in a Starwood enterprise, but of course maybe it is part of the deal.
More winners: the owners of units currently (or potentially) under Mammoth Hospitality management. Maybe now they will get the level of service and professionalism they were sold (told) to expect. (Now I know MH may get in a huff about my comments, but I was chairman of Mammoth's Planning Commission when we down-zoned the property at Eagle base from Hotel to Condominium and I heard all of the promises of five-star services. Years later my broker's license represented a significant amount of the sales at Eagle Base–Juniper Springs Lodge, Sunstone, Eagle Run–and I know what the sales pitch was. I have also lived the past two winters right there and have had a front row seat. The owners there deserve something better. It is what was envisioned AND promised.) Let's hope Starwood sees the hotel management contracts (Eagle Base, the Village, etc.) as one of the key undervalued assets.
More winners: the owners and operators of businesses not in direct competition with the Ski Area. As long as you're not in direct competition in providing services or products, this should be a good thing. On the other hand, if they see you doing business and making a profit, they're likely to try to compete.
At the end of the day, this sale should be good for the majority of property owners, especially the ones in and around the new amenities. But I'll stick to my guns and the things I have said in the past. Some will benefit more than others, some a lot more than others. All of the boats are not going to rise equally with the tide, especially not now.
This winter should be full of press releases, publicity and marketing. People from out of the area are already excited and the news is barely broken. Just wait.
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