New York City – When real estate developers get together, the talk invariably turns to a new deal and, soon, mention of the site’s “highest and best use.” Considering the barriers to entry that exist in most major markets today, more often than not the project under discussion ends up being mixed-use. A hotel may be one component, but office, residential and/or retail components are also likely to be part of the plan, not to mention an occasional cultural, educational or community facility.
“Mixed-use developments today range from the 100-room select-service hotel with ground floor retail in dozens of U.S. cities to the 17-million-square-feet super project with lodging, office, residential and retail elements, in addition to a museum and a park in a market like China,” said Karen Rubin, SVP for global development policy and feasibility for Starwood Hotels & Resorts Worldwide.
As developers and hotel brands have gained more experience with mixed-use deals in the past few years, they’re realizing just how complicated these projects can become. Consequently, while there’s no question mixed-use developments of all types and sizes are here to stay, owners, developers, lenders and the brands all have their eyes wide open.
The hotel component, in fact, can become the focal point. “It’s ironic, but the overall development can take on the identity of the hotel, even though it may only be a small part of the whole,” said David Gutstadt, managing director for hospitality for the Hudson Yards project by the Related Companies in New York.
Rubin and Gutstadt, along with Mortenson Development’s Tom Lander and Hilton Worldwide’s Craig Mance, participated in a mixed-use workshop during June’s 36th Annual NYU International Hospitality Industry Investment Conference in New York.
Mance, who is Hilton’s SVP of development for North America, cautioned developers against adding a hotel to a mixed-use project that’s “over-branded” for the market. He recalled an opportunity Hilton had to add a hotel to a project in suburban Cleveland, but that the developer insisted on the hotel being a Waldorf Astoria because of the prestige it would lend the entire project. Mance and his team declined to participate. “We’ll walk if we don’t think the choice of brand makes sense,” he said.
Similar concerns affect the decision whether to brand the residential portion of a mixed-use development. Some residences are simply that (residences); others are branded St. Regis, Four Seasons or Ritz-Carlton and so on, linking them to the brand hotel located elsewhere in the complex.
“The assumption is that occupants of the branded residences have access to a range of hotel services from fitness to dining to concierge. Non-branded residences may or may not offer access to such services [or offer more limited access],” said Rubin, whose company (Starwood) includes St. Regis in its portfolio.
VARIED DEMAND GENERATORS
Moderator Stephanie Ricca, Hotel Management editor-in-chief, noted a trend of hotels becoming anchors in shopping malls, in effect turning the mall into even more of a mixed-use venture than it might already have been.
Retail is such a popular component in mixed-use projects for two reasons, one financial and one more related to smart city planning. Financially, high-end retail commands commensurately high rent. In terms of city planning principles, “municipalities in urban markets may dictate that ground floor retail be included in the project. They view it as a way of enlivening the streetscape and encouraging pedestrian traffic,” Lander said.
In any situation, but certainly in the shopping mall example, the deal has to be the right mix of partners, Mance stressed. “Why would we want to become an anchor at a mall that’s failing?” he said.
In this way, the components of a mixed-use project enter into a kind of co-dependence with one another, Rubin explained. “The hotel has to be sure the office, residential and retail are going to be successful, and vice versa,” she said.
Unlike in Asia, where the top of mixed-use towers are typically reserved for the hotel, with the residential and office pieces below, in the U.S., the opposite arrangement tends to be true. “The best views are typically reserved for the residents,” Gutstadt said.
Going forward, the underlying rationale behind mixed-use developments is too persuasive not to flourish in the future. The components may continue to vary, but the economic and land-use benefits remain significant.