REPORT FROM THE U.S.—Real estate is all about location, whether hotel concepts fit better in an urban or suburban region. But other influences, such as adaptive reuse and dual-brand considerations, factor in to developers’ decisions.
Available downtown building sites in many markets are scarce and the cost of land can be high, even when you’re able to find it. Plus the barriers to entry are still imposing when it comes to zoning, permitting and community buy-in.
But urban locations for new hotel projects are preferred by developers and owners by a wide margin, sources said.
Suburban and airport locations have their adherents, but that support is lukewarm compared to the enthusiasm expressed for high-energy city centers.
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“Downtown opportunities are still worth pursuing because there are so many demand generators there—convention centers, sports stadiums, cultural attractions among them. Corporate headquarters attract business travelers during the week and then there’s leisure traffic on weekends,” said Mitul Patel, COO for Peachtree Hotel Group.
Likewise, Steve Ehrhardt, owner of Ehrhardt Properties, prefers urban locations but notes that the definition of downtown has evolved in recent years.
“As downtowns have been revitalized, niche submarkets have sprung up, be it an arts district or entertainment district in addition to the traditional business district,” Ehrhardt said. “All can support hotel development.”
Barriers to entry certainly exist, but when an owner or developer is successful, there’s a competitive advantage.
“When we’re able to bring in a good brand and create a good product, it’s harder for others to enter the downtown market around us, given the scarcity of available sites,” said Perry Molubhoy, CEO of Atlantic Hotels Group.
Typically, the hotels these owner/developers build are select-service properties and belong to select-service franchises. Room counts average between 100 and 150 keys.
“It seems the days of the big-box, full-service property are more or less over,” Ehrhardt said. “Financially, it just makes more sense to develop a mid-price product today.”
The return on investment tends to be higher, especially if the hotel has the right number of keys for the market.
“It really allows you to drive rate,” Ehrhardt said.
Not coincidentally, the owner and developer enthusiasm for urban locations dovetails with the push by branding companies the past few years to accelerate the growth of their select-service brands into downtown markets. This has meant reconfiguring the horizontal prototype originally intended for the suburbs into a vertical version that still retains a recognizable semblance of all the brand standards.
Securing the franchise, however, has become a challenge.
“Frequently, the established premium brands are already either open or spoken for,” Molubhoy said.
Brand companies continue to launch new brands, in part so that owners and developers will have franchises available to choose from.
“True, but at our company the preference is to gravitate to new brands that are part of established brand companies,” Molubhoy said. “We want access to all the distribution channels that come with them, not to mention the frequency program.”
Even then, there’s no assurance of success, according to Bill DeForrest, president and CEO of Spire Hospitality, which is part of real estate investor and developer AWH Partners.
“The latest wave of brands is very targeted from a consumer standpoint,” DeForrest said. “You want to be clear who the new brand is targeting and how many competing brands are trying to attract that same consumer.”
Otherwise, you run the risk of betting on a brand that doesn’t have staying power, DeForrest said.
“Before the last downturn, there were numerous brand launches that projected they’d have hundreds of units open within five years. But the actual number turned out to be much more modest,” he said. “That could be the case again, if you bet on the wrong new player.”
Getting out of downtown
While still professing a preference for the urban core, Kerry Ranson, partner and chief development officer of HP Hotels, said he sees a higher level of activity coming to the suburbs due, in part, to the steep costs of downtown development.
“Opportunities in the suburbs could become more appealing to developers going forward, if the lodging cycle starts turning downward, as some analysts are predicting,” he said. (See also: “2015 Development Activity By Location” below.)
Unlike downtown, demand generators in the suburbs tend to be few and far between. The likely candidates are shopping malls, universities and research centers.
“In the best-case scenario, the location is close to a corporate office park,” Atlantic Hotels Group’s Molubhoy said.
Similarly, airport hotel development is a matter of pluses and minuses. On one hand, inclement weather can result in unexpected spikes in demand as flights are canceled or delayed. On the other hand, aside from the airport itself, there tend to be few other demand generators nearby.
“Airport hotels also are 24-hour-a-day operations, so the cost of operating them, labor costs included, can be higher,” Peachtree’s Patel said.
What’s old is new
The scarcity of available development sites downtown has inevitably led to a spike in adaptive reuse of non-hotel buildings, both historic and otherwise, that have outlived their usefulness as offices, banks, apartment houses, schools and so on.
“Each adaptive reuse represents unique development demands,” said Mary Beth Cutshall, SVP of acquisitions and business development at Hospitality Ventures Management Group. “You can’t approach these projects with preset ideas. They can take longer than expected, so in terms of timing and resources, be sure you have the necessary runway to see the project through to completion.”
The case for adaptive reuse is especially compelling when the building is historic, can’t be demolished because of landmark protection and happens to sit on a central downtown corner, DeForrest said.
“A lot of really well-located center-city buildings have the potential of being repositioned as hotels,” he said. “It’s a win for all parties concerned, particularly when it’s a historic building at stake.”
It’s a win for the community because the building is preserved and is returned to productive use. It’s also a win for the developer, who gets to create a hotel in a highly visible location. Most importantly, the traveler wins by getting to book a one-of-a-kind, expertly restored hotel.
A stumbling block, however, can be the brand. Understandably, brands tend to want their prototype design followed as closely as possible to ensure consistency of product and guest experience. By definition, that’s less likely with an adaptive reuse.
Fortunately, the brands have started to show more flexibility, according to Patel.
“Increasingly, they’re more interested in one-of-a-kind projects,” he said. “They’ve learned that guests want a more individual look and feel, the opposite of the cookie-cutter approach, which plays to the strength of an adaptive reuse.”
Lenders, meanwhile, can pose another obstacle, often bringing more scrutiny to adaptive reuse than to a ground-up project.
“They tend to hire outside attorneys and consultants to assist just because the scenario is a bit out of the ordinary, involves approval and monitoring by local jurisdictions and so on,” said Ehrhardt, whose firm has a successful adaptive-reuse hotel in downtown Tulsa, Oklahoma.
The possible availability of tax credits in the case of historic buildings adds another layer of complexity.
Underlying much of lenders’ unease is what architect Cara Shimkus Hall calls “the element of the unknown” that can result in cost overruns and time-consuming delays.
“The project can easily require taking down a wall and—with 100-plus-year-old buildings, in particular, you never know what you’re going to find when you do,” said Hall, whose firm, GH2 Hospitality Architects, has worked on such projects.
“Consequently, it’s critical that both the owner and lender understand the need for adequate contingency plans,” she added.
The perks of dual brands
As with adaptive reuse, developers in high-barrier-to-entry downtowns look to dual-brand deals as a way of getting “two for the price of one.” Also like adaptive reuse, there’s no one formula or model to follow.
Rather, there are “variations on a theme” and choosing the right one depends on a slew of factors—chief among them demand generators in the market, the particular site, the availability of franchises and flexibility of the brands involved.
The one thing everyone agrees on? The potential synergies that come from shared facilities, including shared business and fitness centers, swimming pools, meeting rooms and possibly front entrances, lobbies and front desks, not to mention laundry and other back-of-house facilities. Lower labor costs (housekeeping, maintenance, security, possibly sales) are another benefit.
Cross-training across brands is another given, wherever it makes sense. General managers, on the other hand, tend to be brand-specific, though in some instances one GM will oversee both brands.
The concept works best when you’re targeting two distinct types of guests.
“For that reason, extended stay is a popular choice for one of the components, the other then being a transient brand, often an upper select-service one,” Patel said. (See also: “2015 Development Activity By Chain Scale” on page 7.)
By contrast, pairing a mid-price extended-stay brand with an upscale extended-stay brand wouldn’t make sense because the difference between the two wouldn’t be great enough, he added.
In almost all cases, the two brands are part of the same brand company because of the shared amenities. Developers have expressed interest in pairing brands from different brand companies but have faced an uphill struggle.
“They don’t tend to want to share the facilities that are typically shared,” said Arzu Molubhoy, CFO of Atlantic Hotels Group.
This would mean two fitness centers, two swimming pools and so on, which would undermine the rationale for the dual-brand concept in the first place—and be unworkable.
“Getting the two brands within the same brand company to work together on the best layout of facilities can be challenge enough,” Patel said.
Particularly when one brand provides complimentary breakfast and the other doesn’t, location of the breakfast room can be an issue. Similarly, when one brand has an on-site restaurant and bar open to the public and the other doesn’t, access to the restaurant from both the street and from within the building can be important.
HVMG is in pre-development for a dual-brand hotel in Charlotte, North Carolina, and is weighing the possibility of pairing brands from two different franchisors, Cutshall said.
“If the cons outweigh the pros, we may end up dividing the land and building two separate buildings adjoining each other, each with its own brand,” she said.
Most dual-brand projects have been ground-up developments, while some have been an adaptive reuse of a non-hotel building. Rarely is a dual-brand hotel carved out of an existing single-brand property, but Spire Hospitality and AWH Partners are in the process of doing exactly that in Atlanta.
The 501-room full-service hotel had been undercapitalized and poorly positioned, according to DeForrest. Under the new configuration, a 360-room full-service brand has already opened and will be paired with a 102-suite upscale extended-stay brand that is still under construction. Both brands are part of the same brand company.
“Construction on the extended-stay floors entailed reducing the key count to create suites, so the work was quite extensive. Extended-stay suites typically include kitchens, so they were added as well,” DeForrest said.
“Like all dual-brand developers, our goal is to create two strong market opportunities. The more demand generators there are that are appropriate for one brand or the other, the better,” he said.