The boom of shopping malls in the United States gave hotel owners and developers ample room to build, but malls’ fall in popularity means the hotel industry needs to think about the future of retail space.
It might not seem obvious, but the fortunes of the hotel business—especially in the United States—are linked to the bricks-and-mortar retail industry. And as you’ve probably read, retail in general and shopping malls in particular are in economic trouble—a trend that presents both challenges and opportunities to hotel owners and developers.
While it’s hard to quantify how many hotels in the U.S. depend on nearby retail for large chunks of their business, a lot of data exists showing the rapid erosion of the country’s retail business. So far this year, according to Fung Global Retail & Tech, the number of retail store closure announcements increased 218% over last year, with 5,321 closures to date and more certain to follow.
Many large regional shopping malls and outlet centers are surrounded by hotels, with those properties depending to varying degrees on business generated by that retail. Unfortunately, fewer shoppers are visiting malls and instead relying on the internet for the bulk of their shopping needs.
Exacerbating the problem is the fact that, compared to the rest of the world, the U.S. has a glut of retail space. According to data from Cowen and Company, there is 48 square feet of retail space per person in the U.S., compared to 22 square feet per person in the U.K. and 12 square feet in Canada.
While retail stories are closing at a record pace, some new development is underway. Unfortunately, it’s generally not the kind of retail that generates business for hotels. Fung Global Retail & Tech says there have been 3,262 store openings so far this year, up 53% over 2016. However, more than 2,000 of them are Dollar General, Dollar Tree or Aldi stories, none of which are likely to support the hotel industry or spur any new development. Similarly, of the 2,139 retail openings in 2016, 69% were one of the dollar store concepts.
There has been a long history of mutual dependence between the retail and hotel industries. As example, Randall Park Mall opened in suburban Cleveland in 1976 as one of the largest enclosed shopping malls in the world. A large Holiday Inn was developed adjacent to the mall and soon became one of the most-successful properties in the region and in the Holiday Inn system. But shortly after the mall closed in 2008, the Holiday Inn also floundered and closed as a hotel.
Like other industries that have been disrupted by new concepts and technologies, some segments of the retail business have begun to move in new directions. And in much the same way the hotel industry has embraced enhancing guest experiences as a way to combat Airbnb and other disruptors, some shopping mall owners are emphasizing experience over shopping as the focus of new and renovated malls and centers.
These new-look shopping areas have become experience-oriented destinations with theaters, restaurants and other attractions, all activities that can create demand for hotels.
Some ambitious owners are recasting existing and aging malls into new multi-purpose developments that de-emphasize retail in favor of other uses, including entertainment, residential, wellness and office.
In Dallas, for example, Beck Ventures recently broke ground on a $500-million first phase of a project to transform the existing Valley View Center shopping mall into a corporate destination. While the company envisions a much larger $4-billion development, the first phase will include 500,000 square feet of office space, 1,000 apartment units, 200,000 square feet of retail and restaurants, a fitness and wellness center, a 10-screen movie theater and a 440-room luxury hotel. SB&G Hotel Group, the largest owner of IHG hotels in Australia, is involved in the development of the hotel, which has yet to be branded.
Not all shopping malls or outlet centers will be suited for redevelopment at this scale, and many will shutter and rob surrounding hotels of major pieces of business. Yet, as retail real estate continues to simultaneously contract and recycle, opportunities will open up for smart and visionary hotel developers who can see the possibilities beyond what exists today.
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