Mixed-use projects are still a viable way of getting hotel deals done, and the market continues to expand.
REPORT FROM THE U.S.—Real estate developers and investors continue to utilize hotels as valuable anchor pieces within mixed-use development projects, but according to industry experts the nature of those developments—and the hotel brands included within mixed-use projects—are both geographically expanding outward and diversifying in scope over time.
Thanks to rising demand for consolidated services across all consumer segments, as well as the stability a hotel brings to a mixed-use development, the concept is now moving beyond just its traditional major-market, high-end condo/luxury hotel pairing. Newer projects might instead utilize upscale select-service and lifestyle hotel brands, as well as sites located in secondary and tertiary markets, making the overall potential pipeline all the larger.
“We’re definitely seeing an uptick in mixed-use opportunities. I probably started noticing this about a year ago, but the past six months I’ve seen it increase,” said Mary Beth Cutshall, SVP of acquisitions and business development with Hospitality Ventures Management Group. “We’re seeing a lot of RFPs for municipal projects where they’re looking to create a mixed-use project in their township or municipality, and we’re being approached to be the hotel component. It’s something I didn’t see as much maybe three years ago.”
The benefits of mixed-use
While executing any kind of new-construction project remains challenging, especially one with all the moving parts of a mixed-use development, sources said the synergy between components such as a hotel and apartments or condos remains a strong motivator and risk mitigator in the eyes of investors and underwriters. From the hotel perspective, the mixed-use structure can greenlight a project that wouldn’t be otherwise feasible, whether due to market factors and/or project costs of erecting a standalone hotel.
“We’re seeing a lot of times there are places where a hotel can’t be built because it doesn’t economically work, but sometimes doing a mixed-use building brings tax incentives, because you may be bringing residential units, or you might be required to do some low- or mid-cost housing,” said Gary Isenberg, president of asset and property management services for LW Hospitality Advisors, which recently advised on the new 175-room Westin being built amid a $231-million mixed-use project at Staten Island, New York’s Lighthouse Point. “The Westin has residential units and retail, and all that had to be done to get tax incentives in order to make the development work. A lot of times, packaging it together can make it more economically feasible.”
When part of a mixed-use project, a hotel can bring the power of its brand to the larger development, lending credibility, consistency and in many cases a dash of urban cool to the complex. It can also have a positive impact on profits, too.
Experts said adjoining condos or apartments can often be priced with as high as a 20% premium due to the presence of a hotel. The hotel industry has seen this relationship frequently in the past, when a major luxury apartment tower has partnered with a brand such as Ritz-Carlton, Mandarin Oriental or Four Seasons for a companion hotel. Sources said it’s still a frequently employed tactic, but today hotels are increasingly expected to contribute more than just their name on the building.
“It used to be, ‘We’re not that concerned if the hotel makes money, but we’re going to need it, because that’s how our real estate buyers are going to find out about the property,’” said Andrew Cohan, managing director of Horwath HTL Miami. “What’s changed is that now it matters. Nobody wants to finance a hotel to be a loss leader, so that somebody can sell condos next to it or in the same community.
“It also still serves that same purpose of not only being a for-profit hotel, but also being your showroom, to give people a taste of the experience of being in that development, so that hopefully they’ll want to stop in the sales center next door. However, the hotel also has to make sense. That’s the big difference.”
Types of mixed-use
Sources said it’s also important to note that not all mixed-use projects need to be new construction. In many cases, existing structures may be converted to hotels within a mixed-use development, especially within former office space. It’s an effective way of refreshing a potentially aging development, or finishing a complex that was planned in stages and never completely built-out.
“There’s been increasing activity in the adaptive reuse,” said Tom Engel, principal of the Boston-based T.R. Engel Group. “In some cases the developer will say, ‘This building sits in an ideal location in a favorable market, but it’s lost its allure and the bud is off the rose as an office product.’ That’s where the adaptive reuse comes in, and it becomes a hotel product, either independent or as an affiliate. That’s been a very active market, particularly in your top MSAs.”
There’s also the possible opportunity of building an entirely new expansion on an existing mixed-use development, bringing in an attractive hotel brand and connecting it to mixed-use space in need of an overall boost. Both local patrons and visiting travelers frequently benefit from such a concept, as it invigorates the local area and provides a range of options for transient guests.
“Another interesting thing we’ve seen is where there’s an existing mixed-use active development, and a piece of land that was a larger part of the parking area is sold to a hotel developer,” Cutshall said. “This entity has generally been around for a very long time, and then a new hotel component pops up to add some vibrancy to the shopping area, or what have you. Noble did one in Buckhead, (Georgia)—they put an AC Hotel in the Phipps Plaza mall—on land controlled by Simons.”
What comes next
Sources said strategies for mixed-use development are no longer just a luxury play; the upscale select- and focused-service brands, as well as lifestyle brands, also work in today’s mixed-use environment. In the near future mixed-use projects are also expected to increasingly spread outward from the major urban markets, until most secondary and tertiary markets have their own mixed-use conglomerates.
It’s a reflection of evolving consumer demand, and developers will aim to capitalize.
“What you’re seeing in society as a whole, is this desire to work and play in the same location,” Isenberg said. “This kind of ‘urban setting, I want to walk next door to work, and walk next door to the coffee shop.’ You’re starting to see that happen even in suburban America. You see these ‘main street’-type things popping up all over the suburbs.
“It seems that with millennials, and even baby boomers, they want to be in denser-populated areas. They don’t want to lose the suburban feel, but they want that consolidation. It seems to be the trend, and developers are following suit with that.”