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 59 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, citing the Fairmont Pittsburgh and Fairmont Pacific Rim in Vancouver, British Columbia, Canada, as two recent FRHI hotel/residential success stories.