Hotel developers are finding that being part of a mixed-use project, though more complex than a stand-alone new build, helps their hotel’s feasibility when new construction overall is a challenge for the industry.
It's certainly not a new concept, but there’s increasing interest in building hotels in development projects that include residential, retail and/or office units. The concept: each component adds value to the others.
For hotels in particular, that means built-in demand generators, a major plus at this point in the industry’s recovery from the pandemic when investors and lenders need something more before they allocate capital to a new hotel.
In many cases, it’s not just hoteliers who see opportunities in mixed-use but other real estate developers who see the benefit of having a hotel in their projects. Tim Marvin, executive vice president, hotels & hospitality group, JLL, said the mixed-use projects reaching his desk are coming from developers who want to build asset classes that are hot, such as residential apartment or condo units, and understand they need to create a lifestyle experience in the development.
They can achieve higher rents by adding in restaurants and coffee shops, but building a hotel means being able to add more square footage to the project by going vertical.
The challenge with residential, retail and restaurant projects is that they don’t work well going above a few levels, he said. They can increase the projects' floor area ratio by building hotels, which do well as taller buildings.
“Not only are you getting the activation opportunity, but you're also then in a mixed-use environment finding a use for space that's above the second floor,” Marvin said.
The amenities in a hotel can also serve the other tenants in the mixed-use development, he said. A hotel’s rooftop bar and restaurant, for example, will make for a better office campus environment.
“In several cases, they have a major anchor tenant who not only wants a hotel because they’ve got visitors and employees that come, but we’re working on projects where the hotel becomes somewhat of an extension of the experience of that major tenant,” Marvin said.
Current Projects
RD Olson Development is involved the redevelopment of the Dana Point Harbor in Dana Point, California, CEO Bob Olson said. The project involves more than 200 acres of land and water-based sites, more than 2,400 boat slips, 130,000 square feet of retail, restaurants and entertainment venues. RD Olson Development is also developing two hotels as part of the project, a boutique property and a lodge-type hotel, and they’re under final approval.
The harbor itself is a demand generator, offering leisure and business travelers the opportunities to go on a fishing trip, go whale watching, take a day trip over to Catalina Island and go surfing or stand-up paddleboarding. The retail and restaurant offerings are also a draw.
“There’s so many different activities to do,” Olson said. “I wish we had those hotels opened during COVID, because it was people wanting to get away and enjoy themselves in a safe environment but still enjoy the leisure experience.”
The Waldo’s Old Fourth Ward development in Atlanta will encompass more than 200,000 square feet with townhomes, office space, restaurants, an underground parking garage, an outdoor courtyard and a 147-room Motto by Hilton, said Arun Nijhawan, managing principal at real estate private equity firm Lucror Resources.
The mixed-use development would be ideal for companies looking to attract and retain young talent in the 20- to 40-year-old demographic, he said.
“This is a neighborhood they want to live in with the restaurants and bars and activities that people enjoy in an urban setting,” he said.
There is a lot of synergy between an urban Motto hotel with its smaller, well-appointed rooms, and nice public spaces for people to work, eat, drink, relax and be part of the community, Nijhawan said. Part of the success of the hotel will be because of its public spaces, such as its restaurants and coffee shops, which will have a customer base that includes the neighborhood and the new hybrid working culture.
Hospitality Venture Management Group will manage the Motto when it opens. Richard Jones, executive vice president and chief operating officer at HVMG, said having a hotel adjacent to an office building is a significant amenity for the office tenants. At the same time, the office space is a built-in demand generator for the hotel.
“This is creating a destination with an identity and a purpose well beyond just being an office and a hotel,” he said. “It’s going to be that magnet for dining and drinking — a hub of neighborhood activity.”
Indigo Road Hospitality Group will manage hotels that will benefit from a couple of upcoming mixed-use developments, said Larry Spelts, president of lodging and lifestyle adventures at Indigo Road. One of the hotels it will operate is the JdV by Hyatt adjacent to the Southern Post mixed-use development in Roswell, Georgia.
The JdV property isn’t officially part of the Southern Post project as they have separate developers, but even so, both the hotel and Southern Post’s retail, office, apartments and townhomes will benefit from each other’s presence, he said.
The built-in population base and business activity is encouraging as a source of business for both rooms and food and beverage, Spelts said. In fact, the hotel was originally going to be a Hyatt Place, but the hotel’s developer decided to move the property up to Hyatt Hotels Corp.’s lifestyle brand after learning more about what the mixed-use development would include.
“It changed the market positioning of the hotel based on the demographic that the Southern Post mixed-use development was going to be attracting,” Spelts said.
Improved Feasibility
Financing has been a challenge for new hotel projects because of fears of a recession and slower business transient demand, Spelts said. What’s worked in the two mixed-use projects his company is involved in is they both have significant food-and-beverage programming in boutique hotels that have a strong lifestyle experience-driven element in them.
The hotels are also located in central business districts with strong leisure transient demand or near a mixed-use development that will attract a reliable source of demand, he said. They are benefiting from the larger developments with office, commercial and both leased- and owned-residential spaces.
“That definitely seems to be making it easier to get the deals done,” he said.
Olson said he’s confident he will be able to get financing for his project’s hotel, and that is in large part because they’re part of a mixed-use project. It’s also because the hotels are the right products.
“We would be developing those hotels on their own,” he said.
Being part of a mixed-use development, however, does make those properties more palatable to lenders, Olson said. The partners he’s working with on the project are experts in their field, and the cross collateralization makes lenders more comfortable with the overall development.
“There's three separate sources of operating income to support debt, and so that definitely adds to our ability to get hotels done,” he said.
There are some lenders who just want to lend to hotels while others are more nervous about hotels until they recover further and will focus on other real estate classes, Nijhawan said. There’s a segment of lenders who see the need to work with hotels as well as real estate that has longer-term leases.
“For us, it's really been lenders understanding you need both,” he said.
The key performance indicators in Atlanta’s business districts have grown 40% to 50% year to date, he said. The market is strong for hotels, and lenders and investors like that. Along with the demand generators included in the mixed-use development itself, the Atlanta market has a lot of commercial and office construction for major corporations. It also has a number of respected academic institutions nearby, creating a diverse employee base with new graduates.
Construction Challenges
Olson said his company is fortunate in that it started on the construction side, so he and his team have the experience to know where and when to source materials during challenging times.
“Planning ahead is way more important now than it ever was,” he said.
The supply chain has been working out some of its problems, but waiting too long before a project starts will create problems without a solution, he said.
“When we’re building new, we do have enough time to where we can get everything ordered,” he said. “The key is getting everything specified in the order and have decisions made when that happens. It’s really just a matter of planning, more planning.”
Whatever the development project, construction and material costs are through the roof, Nijhawan said. For the current project, the architect has viewed the entire development as one complex, allowing the different components to work with each other.
The office and the hotel will share the underground parking garage, he said. There are certain pieces of mechanical equipment that can be shared as well. The entire development will be under the same security operations.
“There are absolutely a lot of things that can be shared for the development and operations,” he said.