Panel: Mixed use gets it done

NEW YORK–On the heels of the Lodging Industry Investment Council's release of its annual survey, industry executives discussed trends in mixed use and asset value during a roundtable before the start of the New York University 29th Annual Hospitality Industry Investment Conference.

According to the survey, 51 percent of respondents said it's still a good time to buy, if selective. Another 28 percent said it might be a good time to buy, "but the acquisition must present a compelling case."

Roundtable participants, who met at the Doubletree Guest Suites Times Square in June, agreed.

Jim Butler, LIIC vice-chair and partner with Jeffer Mangels Butler & Marmaro LLP, said mixed use is not the buzzword, it's the byword of attractive hotel transactions.

"Hotel developers are coming from the motivation of, they can't make economic sense out of a project unless they can get some kind of enhanced value, because the office or the retail or the residential or something is going to have more value that will justify the construction costs that otherwise won't pencil," he said.

Retail developers, particularly mall owners, also are finding hotels an attractive option, which bodes well for hotel operators.

"The opportunity for the hotel industry is, these owners by and large don't want anything to do with the hotel," Butler said. "They think they make more money out of the retail, just doing retail. They don't understand hotels, they don't want to be involved in hotels, but they have to have the hotel."

According to Bill Reynolds, managing director at Thayer Lodging Group, major regional or urban malls and hotels are looking at similar operating models.

"Our model is, during the week, you do the same conference center business that we always talk about," Reynolds said. "That customer that we deal with at a lot of our properties, on a complete meeting package basis—that customer wants the entertainment, the food choices in addition to the meeting. And then on the weekend, obviously, [it's all about] the leisure guest. It's a viable model in a lot of locations around the country, and it's a place where you can focus and say, 'I'm doing new development, but my demand generators are part of the same site.' That's a huge win, especially in the financial community where people are still skeptical about new development on a wholesale basis of full-service hotels."

Kirk Kinsell, senior v.p. and chief development officer of InterContinental Hotels Group, said successful mixed-use projects depend on the integration of guests' expectations and experiences. Particularly for the company's Hotel Indigo brand, the customer is looking for a total entertainment experience.

"It's going to become more of a way certainly for hotel developers [and] brands to get sites, access the sites, and particularly critical for places for brand building, working with the development community on a broader basis," Kinsell said.

"You're essentially in-filling," he said. "You're coming back to prove the location, something like general growth, how there's activity, there's a community, there's shopping, there's office space, there are draws already in place."

While investments were meeting expectations according to the survey, capitalization rates are decreasing, according to roundtable participants.

Hotels as a real-estate class are becoming an accepted asset class and might be losing some premium, said John Arabia, principal at Green Street Advisors.

Mike Cahill, LIIC co-chair and president & founder of HREC—Hospitality Real Estate Counselors—suggested that hotels are losing their obscurity.

"Maybe hotels are still cyclical, but the risk of hotel investments, and of knowing how they work, has actually gotten more narrow," Cahill said.

"Another reason the cap rate spread has declined is where we are in the cycle," Arabia said. "We are at that point where it's starting to widen out just a touch."

Chad Crandell, president of Capital Hotel Management LLC, said cap rates are the lowest he's seen in his career.

"It's still an operating business [but] our growth is not growing at the same pace as it has for the past two years," he said.

Some capital markets arrive late, Crandell said, citing examples of a five-cap or six-cap on assets "that may not justify it based on where the industry is going for the next several years.

"Cap rates, from what we've seen in our underwriting for our investors, have been largely influenced by insurance rates, to the extent that you can get interest-only, you can fix it for a period of time," he said. "But it's dangerous to have the hospitality industry trade with the retail or the office or the industrial that are working off five- and 10-year leases, without substantial companies standing behind that, and to think that our 24-hour lease that we have with our guest will be comparable."