The continued spread of the coronavirus and its many variants, combined with low interest rates, a surplus of undeployed capital earmarked for global real estate investments and growing market conviction that remote and flexible work structures will persist has led to an acceleration of, and increased appetite for investments into, “hybrid hospitality” projects.
Hybrid hospitality is the next iteration in the hospitality industry as the lines between professional and personal lives further blur and the desire for flexible spaces to accommodate both sides of life (often simultaneously) fuse together. The look of a hybrid hospitality project is unique from project to project and depends on the location, size and anticipated needs of the users. Often, however, these projects include various flavors of residential products (such as co-living, serviced apartments and whole-ownership units), transient units (traditional hotel rooms), a variety of food-and-beverage concepts, co-working spaces and various other entertainment and wellness offerings. At bottom, hybrid hospitality projects offer day-to-day flexibility to end users, with a “hospitality first” experience that creates not only a place to sleep and eat but also to meet, collaborate, socialize and work.
Right Mix of Uses
Given the ongoing uncertainties around a return to prepandemic levels of demand for transient occupancy at city-center hotels around the world, there is an opportunity for stakeholders in these hotels to “reimagine” the spaces and add complimentary components to create more operationally intensive, dynamic environments that drive higher levels of space utilization and, therefore, improved financial returns. Some of the less “invasive” adaptations include removing traditional in-person check-in procedures in the lobby and their associated footprint and transferring to digital kiosks and then using the space in a more activated manner through new food-and-beverage areas and/or co-working spaces to further enhance the interactive nature and overall experience that guests and visitors can enjoy.
At a more fundamental or structural level, single-use hotels could be adapted further to incorporate various types of residential products, co-working spaces, wellness spaces, general entertainment spaces, new F&B concepts and delivery-only kitchens. Identifying the right mix of uses and level of potential “adaptation” to undertake is project-specific, depending on myriad factors, including availability of capital, expected demand levels for the existing use (both current and future), the location and audience of the users as well as the anticipated needs for the immediate neighborhood.
In connection with finding the appropriate mix of uses, stakeholders should consider how any adaptations will impact on the staffing model for the new operation. The deployment of new technologies (online check-in, app-driven concierge services and guest communication tools, property-management software, etc.) and cross-training the employees for multiple roles can address the acute staffing challenges that COVID-19 has ushered in across the global hospitality sector.
Multicomponent, operationally intensive buildings are more complicated to operate and manage than a single-use hotel. COVID-19, however, is challenging the narrow, static operating model of single-use structures. Flexible, multicomponent buildings offer guests and visitors a more diverse range of experiences, include multiple revenue drivers and, therefore, are more resilient to external demand shocks such as COVID-19. Several factors should be evaluated when considering whether to embark on the journey to adapt a single-use operating model to a multiuse operating model within a single structure.
Any consideration about adapting a building from a single-use model to a multiuse model will, of course, require early and ongoing cooperation from existing lenders, tenants, equity investors, operators and franchisors. Achieving early alignment with these stakeholders on the vision and strategy will demand a thoughtful business plan. The plan should set out how the repurposing will be executed and the resulting “uplift” in financial performance from the enhanced operating environment following completion of the repurposing works.
An assessment of whether the planning/zoning authorities will support the repurposing of the space should be made early on because delays caused by planning objections or other public resistance could increase overall investment costs. Although hotels typically already have dining and retail components in line with planning/zoning requirements, a key consideration in the analysis is looking toward the future and what possible changes and uses could be added to the hotel.
An evaluation of the building’s existing infrastructure (mechanical, electrical, plumbing and technological systems) should be made to determine if upgrades or replacements of infrastructure will be necessary to support the added uses. Items such as access points, elevator/lift service, lobby areas and other shared areas need to be evaluated from a design and operational perspective to ensure the essence of each dedicated use can be preserved while still affording the operational and financial efficiencies introduced by the presence of multiple user groups within a single structure.
The determination of the optimal mix of uses will be informed by a variety of factors, including the location of the building, the services/amenities available within the immediate vicinity of the building, and the expected users of the adapted space. This step will include an assessment of anticipated weekday versus weekend use, daytime versus nighttime use, and the qualitative and experiential expectations of the anticipated user groups. These considerations will inform the viability of each contemplated use and the anticipated financial performance of the re-purposed building.
The stakeholders will need to consider how to create, as much as possible, a nimble and flexible ownership/use structure to allow the various spaces to be flexed and adapted in the future as use and demand patterns shift and evolve over time. This has downstream impacts on the ease of further adapting those spaces in the future given the relatively fixed nature of these structures once implemented. On the other hand, and for example, adapting event/ballroom space in a hotel to co-working, wellness or general entertainment space likely could be achieved using a more short-term, flexible licensing arrangement. This approach would allow the stakeholders to return the space to its original use or further adapt the space as demand patterns evolve.
Beyond the legal structures, a determination of how the building will be operated and managed should be assessed. For example, many third-party office managers are not equipped to also manage residential, hotel and/or food and beverage spaces nor are all hotel managers equipped to manage residential, office and/or food and beverage spaces. That said, many hotel operators, particularly larger operators in the full-service to luxury segments of the hotel industry, are well equipped to effectively manage residential projects and food-and-beverage spaces. Looking ahead, it would not be surprising for these hotel operators to extend their service offering into managing office spaces within a building that also houses a hotel. It could be that a single operator is engaged to manage and operate all components of the building. This “one-stop-shop” management arrangement would naturally introduce further operational and cost efficiencies as well as provide a consistent service delivery level across the various components.
Despite the myriad considerations involved with adapting a single-use structure into a hybrid model, if well-conceived and implemented, the hybrid operating structure can drive superior financial returns while also delivering an operating model more capable than their single-use counterparts of withstanding adverse demand shocks.
Matthew G. Pohlman is a partner at Goodwin Partners in London. Brenn J. Coyle is an associate at Goodwin Partners in Los Angeles.