National Report – In the heady days of 2006 and 2007, developers embraced the concept of mixed-use projects that combined luxury hotel rooms with high-end condominium apartments. In city center high-rise projects, the hotel typically would be situated at the base, while the high-priced apartments were at the top—buyers paying a premium for the best views.
While the industry was still emerging from the downturn, a modest number of high-end projects were able to secure funding and begin construction in major gateway destinations. Examples, both in New York, include the Park Hyatt, which occupies the base of Extell Development Co.’s 75-story (marketed as 90-story) One57 project on West 57th St., opening this summer. And, on West 53rd St., just off Fifth Ave., Tribeca Associates is in the final stages of construction on the 46-story Baccarat Hotel & Residences, consisting of a 114-room hotel topped by 60 residences. The first property of the new Baccarat brand, named for the famous French jeweler and celebrating its 250th anniversary in 2014, the project is also due to open this year.
In both cases, financing came together in part because of the parties involved. With its track record of trophy developments in the city, Extell was able to raise significant capital and Hyatt Hotels Corp., given what it saw as a stellar opportunity in New York for its luxury Park Hyatt brand, was “willing to deploy its balance sheet,” in the words of Hyatt Hotels Corp. SVP of development David Tarr.
At the Baccarat project, Starwood Capital Group stepped forward as Tribeca Associates’ equity partner. Still, the timing—in early-2011—made “assembling all the financing a complicated process,” said Tribeca partner Mark Gordon.
For developments still on the drawing board in mid-2014, however, a new dynamic has entered the picture.
“We’re certainly seeing interest in these types of projects back to 2007 levels. But we’re not seeing as many deals get done, however. From our point of view, there’s been a shift on the part of master developers, where they’re looking to bifurcate projects today,” Tarr said.
Instead of developers wanting to own the entire project, as was the case in the mid-2000s, today they want to own the residential and are looking for another party to own the hotel. They feel they don’t know the luxury hotel business and aren’t interested in being hotel owners.
On some level, a bifurcation of sorts is inevitable, Gordon explained. “There’s a natural split because at some point the residences are sold and the hotel remains owned by the equity participants and/or developer, so it’s important to plan for that eventual reality,” he said.
Ideally, you’d like whoever is developing both components to be in 100-percent alignment, noted Greg Doman, SVP of development for the Americas and residential for FRHI Hotels & Resorts, representing the Fairmont, Raffles and Swissotel brands.
“Otherwise, it can get more than a little tricky. The residential developers may want to get out as quickly as they possibly can and—in a worst-case scenario—can be promoting a product different from what the hotel owner is planning to deliver,” Doman said.
In terms of financing these projects, lenders tend to be much more conservative today. Back in what Doman describes as the “glory days” of 2006-2007, they might look at the success of the sale of the residences pre-construction as boding well for the success of the entire development; now, they also remember the “hangover,” when many of the projects failed.
Sales contracts on the residences notwithstanding, lenders today want to be sure the market—and the location within the market—can support the high-end positioning of the project. “Location is clearly the first driver,” Doman said. He cited the Fairmont Pittsburgh and Fairmont Pacific Rim in Vancouver, British Columbia, Canada, as two recent FRHI hotel/residential success stories.
Location was critical to both the Park Hyatt and Baccarat projects. “We look at every opportunity and assess if it’s a market where we want to gain a presence for a particular brand. In regard to One57, we then asked where New York ranked as an opportunity for the Park Hyatt brand,” Tarr said. “If New York wasn’t our top priority worldwide, it was certainly within the top five.”
Given the caliber of the project Tribeca Associates envisioned, only a truly prestige location would suffice, Gordon explained. “The barriers to entry in midtown Manhattan are very high, so the chance of finding a buildable site on 53rd St., off Fifth Ave., across from the Museum of Modern Art, was extremely rare,” he said.
With two other Baccarat Hotels announced with other developers (Rabat, Morocco, in 2015 and Dubai in 2018), it’s also up to the New York property to define the new brand’s high-end luxury positioning.
Different locations require different branding and different levels of luxury service. As an example, Gordon cited an earlier Tribeca Associates hotel/residential project; this one in Manhattan’s Tribeca neighborhood. Called The Smyth Hotel & Residences, it’s luxury, but lower-key luxury in a lower-key area and independently branded.
Considering the issues of alignment between the two components, a considerable amount of thought goes into determining the right number of hotel keys in a project versus the number of residences. Coming out of the last cycle, the brands and the developers are trying to keep the lessons learned then top-of-mind now.
“Certainly, the hotel has to be viable in terms of amenities and services if it’s to appeal to potential buyers of the residences as well as hotel guests. Typically, that translates into a certain number of keys,” Doman said. “Especially in the high-end luxury space, any project with significantly more square footage for the residences than for the hotel is not really a workable model.”
The hotel has to stand on its own before the developer overlays the residential on top, Tarr agreed. “Part of the design exercise is to understand where the overlap is. If there are going to be shared amenities, it’s important that all the parties be comfortable with just how many residential units there are and how large the shared space will be,” he said.
“The scenario you want to avoid is the classic case of the developer trying to leverage the brand in order to sell the residential at the expense of the hotel. That shouldn’t be the motivating driver to the project,” Doman said.
A given in these projects—both in the last cycle and in the present one—is that owning a residence comes with access to hotel services. Yet there are always exceptions. Tarr cited a project developed by Macerich currently under construction in McLean, Va., called Tysons Corner Center that will include a Hyatt Regency-branded hotel, residential and office components.
The residential component will be in its own tower, however, owners of the units won’t have access to hotel services. “Having the residential in a separate building complicated things operationally,” he said.
With access, the services can include housekeeping, room service, use of the fitness and business centers, access to the spa and dedicated lounges and preferred reservations at the restaurants.
But when the alignment isn’t thoroughly thought through or the shared space is inadequate, tensions can arise between the owners of the residences (united in a hotel owners association) and the management of the hotel, and that can get messy. Consistent and regular communication between the parties can go a long way to clear up any confusion.
Since for many of the owners, the residence may be their second or third home and not their permanent residence, access to hotel services can take on an added dimension, closer to what is usually called concierge services.
“A buyer couple can be in L.A., traveling to New York to stay in their residence. They call the property and order an airport car pick-up, request their apartment be cleaned, the refrigerator stocked and a dinner reservation made for them, all before they leave L.A.,” Gordon said. “It’s part of their lifestyle and takes access to guest services to another level.”