Hotels now anchoring retail ventures

The Hilton Short Hills in N.J. is across the street from a 150-shop mall.

The Hilton Short Hills in N.J. is across the street from a 150-shop mall.

 

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Phoenix – Mixed-use developments that include a hotel among other components have taken a new turn. In recent months the industry has seen a spike in the number of projects either under construction or on the drawing board where the other major asset class is not residential or office, but a retail shopping mall.

In this model, a hotel in effect becomes the anchor tenant of the shopping center or mall, replacing what might have been a Macy’s, Bloomingdale’s or J.C. Penney. 

The trend isn’t totally new. Precedents include The Ritz-Carlton, Tysons Corner in McLean, Va. (adjoins the 100-shop Tyson’s Galleria) and Hilton Short Hills in New Jersey (across from the 150-shop Mall at Short Hills). 

“The trend slowed to a crawl during the downturn, but with the lodging industry rebound it’s now regaining momentum,” said Jim Butler, chairman of the Global Hospitality Group at Jeffer Mangels Butler & Mitchell, who moderated a panel on the topic at last month’s Lodging Conference.

 

The Ritz-Carlton, Tysons Corner is near Virginia’s Tysons Galleria.

The Ritz-Carlton, Tysons Corner is near Virginia’s Tysons Galleria.

 

Participants on the panel, which was entitled “The New Explosion of Hotel-Retail and Mixed-Use,” were mostly developers along with a designer and a consultant.

The timing of the re-emergence of hotels as a viable component in shopping malls is auspicious, noted panelist Tom Lander, VP and GM of Mortenson Development. “It coincides with a retrenching in the retail sector. With large department store chains cutting back, many malls have been losing long-time anchor tenants, making land available for redevelopment.”

Mortenson was the developer of the Radisson Blu in Bloomington, Minn., which connects to the Mall of America, which holds the distinction as the largest mall in the U.S.

WHY IT FITS

One of the challenges in this kind of project is matching the right hotel brand to the right mall and vice versa. “Often an upper-end select-service brand makes the most sense,” said T. Dupree Scovell, managing director of Woodbine Investment Corp. “Unlike full-service luxury brands, select-service brands don’t come with three-meal-a-day restaurants, bars, spas and other amenities that are expensive to operate.”

But hotel guests don’t particularly miss them because these services are likely to be available at the mall right outside the hotel’s front door.

In fact, guests may even prefer the variety of choices available at an upscale mall. “Market studies tell us consumers want much more than a hotel alone can provide,” Scott Travis, SVP for development at the Buckingham Companies, told the audience.

Bruce Baltin, SVP of PKF Consulting USA, pointed out that in many parts of the country, people might drive hundreds of miles to visit a regional mall and plan to stay two or more days.

For their part, the brands are becoming more open-minded when it comes to these types of projects. “They’re eager to build distribution, especially with a demand generator or generators right across the parking lot, so if it means relaxing brand standards a bit to fit the shopping mall location, they’re willing to be flexible,” Travis said.

The availability of land is another plus. “In many markets, there’s a scarcity of developable land, which can make a shopping mall opportunity all the more appealing,” said Lalaine Tanaka, design principal of JCJ Architecture.

CHALLENGES

For as optimistic as shopping mall mixed-use development might sound on first blush, there are potential impediments.

 

Developers say hotel companies should look at retail projects to grow their brands.

Developers say hotel companies should look at retail projects to grow their brands.

 

“The developers of the hotel need to be sure they’re not fixing their star to a failing retail enterprise,” Travis said. In other words, with many big box department store chains cutting back on their mall presence, you don’t want your newly opened hotel looking out on of a sea of empty storefronts.

“Similarly, there are no assurances that the mix of retail outlets, restaurants and other venues won’t change over time for the worse,” said Lander.

In cases where the mall owner is selling the land for the hotel to the developer, it’s also critical that the mall owner have pockets deep enough to be able to maintain the premises at an appropriately high level and make CapEx improvements as they become necessary.

Butler added one more common-sense-type caution. “As in any mixed-use situation, the hotel component here still has to make sense financially on its own terms,” he said. “After all, not every mall warrants a hotel.”

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