We predict that 2013 will see a new wave of hotel development at select major shopping centers and malls to create "hotel-retail mixed-use". Why the sudden onslaught?
The recovery of the retail sector has not been as strong as some would like, but it has been strong enough to bring owners out of survival hibernation. Many of the largest shopping center owners and developers were in various stages of adding hotels to their centers in 2008 before the Lehman Bros. bankruptcy froze all new development. In markets all across the country, many of the major shopping center players are reviving their plans to add a hotel component to transform their projects into "hotel-retail mixed-use." For both the shopping center and the hotel, the economic argument for hotel-retail development is compelling.
One of the big shopping center owners we were working with before the Great Recession conducted extensive multi-year studies. Their studies showed that adding a hotel to a retail center can increase retail sales 20% to 40%. At the same time, the hotel component in a hotel-retail mixed-use environment received a 30% to 40% premium in revenue per available room (RevPAR) over comparable hotels in the competitive set.
With numbers like that, you can expect 2013 to lead a lot of big shopping center owners to announce hotel developments for their centers as they jump on the hotel-retail mixed-use concept.
The case for hotel-retail
The eye-popping figures above were the result of a study undertaken by one of the nation's largest retail center owner-developers, which our Global Hospitality Group® lawyers worked with prior to the recession. The client had 6 major projects and master planned communities where it could study the impact of hotels on shopping centers and malls. Some of the projects included the Ritz-Carlton Tysons Corner Galleria, Westin Dallas Galleria, and Ritz-Carlton Water Tower Place. After a multi-year study, the company concluded that its 200-property portfolio was "capable of supporting 80 near term hotel developments ranging from extended stay to select and full service product." They found that a hotel adjacent to retail results in a very substantial boost in revenue for both the hotel and retail components -- 20% - 40%!
Shopping is a top leisure travel activity
Shopping continues to be one of the preferred activities for travelers. The U.S. Travel Association reports that more than 3 out of every 4 domestic trips in the U.S. are for leisure, and shopping continues to be the #1 or #2 leisure travel activity, year after year. And increasingly important to luxury retailers is the international traveler who shops for coveted brands in the U.S., eliminating tariffs and taxes that significantly escalate prices of luxury goods in their home countries.
Some luxury retailers and shopping malls have begun to engage in focused outreach and specialized services to attract foreign shoppers. The Los Angeles Times article "Asian tourists flock to South Coast Plaza," reported that the luxury shopping mall in Costa Mesa, California has a language assistance program for international shoppers and honors UnionPay, China's leading credit card - only two of its many services for foreign shoppers. South Coast Plaza is not only a shopping mall. It is becoming an increasingly important international destination.
Creating a vibrant destination appears to be an important element in drawing both traveling guests and local shoppers to the hotel-retail mixed-used development. As hoteliers know, a hotel can be the spark plug for activity that powers the revenue machine.
The deal structure is key
A hotel-retail mixed-use destination can provide powerful competitive advantages to both the retail and the hotel components. But achieving stellar revenue gains will require much more than just matching the "right" hotel with the "right" shopping center. In fact, that is just the beginning.
The unique norms, customs and practices of the hotel industry often surprise industry newcomers. Like any new business, the learning curve can be fraught with pitfalls for the novice. Shopping center developers will tend to view hotels as a new major anchor for their centers. And there are many ways in which hotels can provide the kind of draw that traditional anchors provide for shopping centers. But there are dozens of hotel-specific issues in hotel industry arrangements that will create a great need for advisors who can bridge the deceptively similar culture and language of the hotel and retail worlds -- experienced veterans who understand the needs of all parties and can translate structures and concepts to fit the new arrangements.
The hotel-retail phenomenon we are talking about applies mainly to regional shopping centers and malls with sufficient scale. With the continuing dearth of debt financing available for new hotel construction, the shopping center owner-developers should expect to provide the cash for the hotel development. Although it may go against their strongest intuition, smart shopping center owners should also expect to own and control the hotel project from development, construction through to stabilization. Once stabilized, the shopping center owner will be in a strong position to locate potential buyers or lessors of the hotel and capture the value they have created. There are a number of creative methods for the shopping center owner to finance the development of a retail-hotel and, once built, to structure their arrangement with third party hotel owners or lessors who will find the hotel attractive for their portfolios. To accomplish their goals, they will find it necessary to go outside their usual circles of professional advisors and to hire experienced hotel consultants and lawyers to structure these relationships so that they make economic sense and to negotiate agreements that are unfamiliar to them.
In the next few months we will see some of the biggest names in the shopping center and hotel industries announce joint hotel-retail projects. Some will add a hotel component to their existing retail centers. Others will be new ground up construction. Some hotels will be on air rights parcels over existing shopping center structures; others will be adjacent to the shopping center. Shopping center owners and hospitality and retail REITs are taking a serious look at the synergies provided by hotel-retail projects. Hotel owners and operators would also be wise to explore this trend. It's an exciting one for all involved, including the hotel guest and shopper.