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The evolving mixed-use development model
March 4 2013

Mixed-use development has evolved in recent years to feature retail, restaurants, vacation ownership and other property types, as well as hotels.

Highlights
  • The Edition in Miami Beach will have 295 hotel rooms and 26 branded residences.
  • Wyndham relies on creative ways to link its vacation ownership business to its hotel brands.
  • Mixed-use properties can create operational challenges.

GLOBAL REPORT—The mixed-use model is alive and well as a hotel development tool. It has evolved in recent years, however, with less primary focus on residential development, several sources said. Instead, new projects from a variety of developers and brand companies include retail, vacation ownership and limited amounts of residential real estate as key components. Lenders, while cautious, feel more comfortable with this new approach.

“We never really left the business,” said Timothy J. Grisius, senior VP of lodging and mixed-use development for Marriott International and Ritz-Carlton. “The market is coming back, and we’re seeing mixed-use development in a slightly different flavor. The projects include residential, but in a much more rational way in that they are really hotel projects that have residential components rather than the reverse of that.”

As an example, he pointed to company’s Edition project underway in Miami Beach, Florida. The development on the site of the former Seville Hotel on Collins Avenue will have 295 hotel keys and 26 residences. It opens early next year. “We did it as a hotel but opportunistically added some residences. If you go back to 2007, you would have said how many residences can I put here, and by the way let me include a 50-room hotel,” Grisius said.

Grisius pointed to other mixed-use projects with a similar development philosophy. Ritz-Carlton in December opened the first Ritz-Carlton Reserve property in the Americas at Dorado Beach, Puerto Rico. The ultra-luxury resort includes 115 hotel units and 13 beachfront condos, all of which sold before the property opened. Grisius said an additional 20 condo units are under development.

Marriott is also involved in a project in downtown Miami that’s hotel-focused with other elements—retail, foodservice and movie theaters— playing a lesser role. The 33-story Met Square project, developed by MDM Development, is a single tower with pedestrian-friendly facilities on the lower floors topped by 26 floors of hotel space under three Marriott brands: a 150-unit Residence Inn, a 150-room Fairfield Inn and a 156-room SpringHill Suites. The complex will be connected to an existing 313-room JW Marriott Marquis.

“The blend of three brands in one building will help the owner capture different market segments at different price points,” said Eric Jacobs, chief development officer for Marriott’s select-service and extended-stay hotels. Jacobs said the three hotels will share a common lobby and breakfast space as well as other back-of-the-house facilities.

Wyndham’ timeshare connection
Wyndham Worldwide has taken a different approach to the mixed-use model by leveraging its vacation-ownership assets and network to complement its hotel system. The company has several projects in the works to add timeshare to properties that are now strictly transient hotels.

Wyndham’s first foray into mixed use that combined transient hotels with vacation ownership was its Bonnet Creek Resort project in Orlando, Florida. Since launching in 2002, Wyndham Vacation Ownership has developed 1,150 timeshare units at the resort, and two years ago Wyndham Hotels opened its first company-owned hotel, the 400-room Wyndham Grand Orlando Bonnet Creek, within the complex.

Now, Wyndham is expanding the idea by adding timeshare elements to properties it has in Puerto Rico, New York and Chicago. At each site, Wyndham is taking a different approach to the mixed-use philosophy.

“It’s important to have a level of creativity and flexibility that allows each of these projects to work,” said Stephen P. Holmes, chairman and CEO of Wyndham Worldwide. “They can’t be cookie cutter.”

Last year, Wyndham took ownership of the 600-room Wyndham Grand Rio Mar Beach Resort and Spa in Puerto Rico, a property it’s managed since 2007. Now, according to Holmes, the company plans to convert approximately one-third of the property’s hotel rooms into timeshare units.

Wyndham is taking yet another approach in Chicago at the Hotel 71, a 437-room property Hospitality Properties Trust bought in November 2012. The owners are renovating the property and will rebrand it as a Wyndham Grand. Wyndham will manage the hotel and also lease several floors for use by owners in its vacation-ownership network.

Holmes said the company has its sights on other projects that would enable it to plug timeshare into its hotel properties. While reluctant to tip his hand on specific target markets, Holmes identified some common elements that Wyndham would find attractive for the concept.

“The property needs to have some scale,” he said. “A 75-room hotel, for example, is too small to turn half of it into a timeshare product. Also, we would look at high-demand markets so that probably doesn’t mean any highway projects. Urban and resort properties are best, and also that’s where the largest hotels tend to be.”

The global approach
While historically not as common as in North America, mixed-use development is gaining traction in global markets, including Europe and Asia. One high-profile example in the United Kingdom is a retail and dual-branded hotel combination in the heart of London. The hotel part of the project includes a 188-room Holiday Inn and a 162-unit Staybridge Suites that sit atop the Westfield Stratford Shopping Centre, Europe’s largest single-site retail complex with 320 stores.

“The retail and hotel components provide benefits back and forth to each other,” said John C. Wagner, director of Cycas Hospitality, which with joint-venture partner Patron Capital Limited developed the project, which opened in April 2012 ahead of the London Olympics. Cycas in December sold its stake in the development but retained management of the hotels.

“The hotels are in easy proximity to Canary Wharf and the city of London, and while these areas have plenty of hotels they lack the vibrancy our development offers. The shopping center is as much a part of our product as our beds, our bar and our meeting rooms,” he said.

The dual nature of the complex presented some initial operational challenges, said Wagner, who described it as a “teething problem. We’re over it now.” Examples he gave were as basic as the shopping center’s management wanting to install holiday lights in the middle of the night when it could possibly disrupt sleeping guests to as complicated as the effort and expense to shield shoppers from the noise and mess caused by the construction of the hotels, which were added after the mall opened.

Finding financing
Elsewhere in Europe, mixed use is a popular avenue for many real estate developers.

“It’s fair to say virtually any new development, especially resort-based or non-urban, is mixed use,” said Philip Bacon, managing director of the Madrid office of HVS Global Hospitality Services. “Mixed use has always been a piece of financial engineering used to get projects off the ground, but it has been exaggerated in recent years due to the absence of bank debt.”

The difference today, he said, is that developers are creating projects in which the hotel piece stands on its own without relying on residential real estate sales to make the whole project viable. Incorporating some residential development still makes sense to generate cash up front, but there are limitations, said Bacon.

“People have learned their lesson because they’ve made big mistakes in the past,” he said. “I see a level of understanding among developers who realize they need to build the smallest hotel they possibly can. In the past, many people got into trouble by building very big, over-positioned, over-constructed hotels. And once the residential was sold, the hotel didn’t work on its own. Today, the clever money goes into building the right hotel that makes exactly the return it should.”

Bacon conceded that because lenders aren’t “throwing money around and are as cautious as you would expect them to be,” it’s forcing developers to find even more creative ways to get their projects financed. One path is to find early buyers of the residential real estate, given them special deals and treat the money as mezzanine financing.

“Just like any (mezzanine) financing, the cost of the money is high but it’s worth it because the developer can then go to the bank for more conventional financing,” said Bacon. He believes there is a “new normal” in financing of mixed-use developments.

“If you don’t have a project that doesn’t tick off all the boxes in regard to the basics of location, marketability and solid master plan, then don’t even get started. No one will talk to you,” he warned. “And even if you have the perfect project, it’s still painful.”

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