Now Trending: Hotel and Multi-Family Residential on the (High) Rise
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At a time when the growing influence of millennials and the ongoing development, redevelopment and revitalization of urban communities continue to shape the commercial development landscape, the changes taking place in the hotel and multi-family sectors reflect many of those same demographic and development trends.
There are two noteworthy changes taking place concurrently that have a major impact on retailers. First, hotel and multi-family are crossing categories, rewriting some of the traditional rules and increasingly being developed immediately adjacent to each other. Second, the growing popularity of extended-stay hotels — and the corresponding changes underway within that category — have reinvigorated extended-stay and made a formerly drab format more appealing to travelers, especially millennials.
Coexistence and synergy
More and more clients are coming to me with questions about multi-family high-rise and hotel. Based on the feasibility studies that those clients have requested in cities like Boston, Chicago, Los Angeles and Atlanta, the concurrent development of new multi-family and (mostly) limited service hotel concepts is clearly on the rise.
On Lake Street in The Loop in Chicago, Bighorn Capital is working on a new high-rise project tower that will include 600 hotel rooms and 300 apartments. Nearby, architect and developer Thomas Roszak is planning a 33-story high-rise project with 265 apartments. The project is likely to invigorate a dark Loop corridor surrounded by transportation. In Atlanta, Simon Property Group is expanding the hotel and residential components around Phipps Plaza, a luxury retail regional mall in the city’s Buckhead neighborhood. An AC Hotel by Marriott is one of two major redevelopment initiatives in the works. Along with a luxury apartment complex being built nearby, the goal is to add density to enhance the existing retail environment and ultimately boost the overall value of the real estate. Buckhead is a natural fit for such a strategy, as the area already boasts abundant opportunities for extensive cross shopping with apparel, beauty, health, electronic and convenience retail, as well as a number of appealing restaurant options.
Photo: In the Buckhead area of Atlanta, a Hyatt Grand stands alongside the new Berkshire Terminus luxury apartments.
Simon is pursuing a similar strategy in a number of markets, and is looking at redeveloping as many as two-dozen properties in their portfolio to add or enhance a multi-family/hospitality component. Because greater density in the consumer demand component is such a critical factor for hotels, it is significant that the majority of these and similar efforts from other developers are taking place in cities where large populations of millennials continue to lead an urban resurgence.
Whether the explosive popularity of grassroots hospitality concept Airbnb is the cause or the symptom, the inescapable conclusion is that consumer’s hospitality expectations have evolved. Today, growing numbers of guests are looking for more convenient, chic and amenity-rich hotel experiences — and a number of extended-stay hotel concepts are adapting or being introduced — to accommodate those emerging priorities.
Marriott Residence Inn and Element by Starwood Hotels & Resorts (which plans to open 20+ hotels in the U.S. and Canada over the next two years) are two notable examples. Hyatt House represents Hyatt’s attempt to move into the expanding extended stay space. Hyatt House tends to be more of a suburban concept, typified by properties such as the Hyatt House in Evanston, Illinois near Northwestern University. Suburban extended-stay properties are often located near office parks, airports and regional malls, with convenience the prime consideration. Assembly Row outlets in the Boston suburb of Medford within walking distance of many hotels, is a classic example. In urban neighborhoods, walkability and a vibrant selection of nearby retail, dining and entertainment options is a key factor.
It isn’t just the big national chains that are expanding the extended-stay concept. Independents like ROOST Apartment Hotel in Philadelphia and mid-sized brands like AKA (which has properties in a handful of U.S. cities and one location in London) are making their presence felt with innovative and successful new luxury extended-stay properties. The push for more amenities in the extended stay model is also helping to blur the lines somewhat between residential living and hotel concepts. Designer décor, expanded kitchen amenities, in-house gyms and workout facilities, and residential-style extras such as doormen and maintenance services. The result is something of a mash-up of luxury condominium-style living and a traditional service-oriented hospitality experience.
While the conceptual lines have been blurred somewhat, ultimately, hotels and high-rise residential represent two big pieces of a truly synergistic whole: an essential ingredient in a truly vibrant and commercially dynamic mixed-use urban environment. As hotels and multi-family developments continue to be featured more prominently in high-profile urban mixed-use environments, the impact on retail tenants is extremely positive. Larger numbers of consumers want to be in these vibrant urban communities — and as they spend more time and more money, the classic mixed-use formula of live, work and play may have to become live, work, play and stay.
Jerry Hoffman, president and CEO of Hoffman Strategy Group, brings 30 years of economic and market analysis that provides insights for all pieces of mixed-use projects. Core project specialties include urban retail corridors, infill, and suburban mixed-use as well as shopping center repurposing and redevelopment, entertainment district development, university-led development, and adaptive reuse of property. To learn more, visit Hoffmanstrategygroup.com or connect with Jerry at [email protected]
REITs: A Smart Move for Retailers?
A red-hot real estate market and sky-high property values have some retailers, including Macy’s and more recently, McDonalds, feeling the pressure to cash in on the value of their real estate assets. How? By spinning off store properties and/or land assets into a REIT and entering into a lease-back deal.
In some cases, extracting value from real estate can generate a boost in share prices. In the case of Macy’s, the July announcement of hedge fund Starboard Value’s concept to sell the veteran retailer’s real estate assets to a newly formed REIT sparked an immediate 4% bump in shares. The move has also panned out well for Hudson’s Bay Co., which has experienced a 25% boost to its shares since announcing its joint venture with mall operator Simon Properties in February.
Critics, however, argue that leasing the property back from the buyer effectively saddles the retailer with ongoing rent payments that increase costs over the long-term, and that such costs might not be worth the short-term gain.
So far, two primary funding pathways have emerged among retailers choosing to take this approach. The company can sell some or all of its real estate assets to a third party, rake in the proceeds and then lease back the property under a long-term rental agreement. Alternatively, the company can spin off its real estate assets – via either transfer or sale – into a newly formed REIT, relinquishing control of the property over to the REIT and leasing the property back for continued use.
As the retail industry weathers ongoing disruption due to the rise of e-commerce and the growing spending power of the Millennial consumer, separating a company’s real estate assets from its operating business has steadily been gaining more traction as a strategic move to capitalize on a booming real estate market. Taking a closer look, what potential benefits can retailers enjoy by taking this approach?
A Burst of Liquidity
In the short-term, spinning off real estate can be an effective tool to add value in several ways. Perhaps most importantly, creating a REIT can generate an immediate influx in cash, which could then be used to pay down debt and cut down associated interest rates, invest in store or infrastructure upgrades or expand. Of course, the influx of cash comes at a cost: a long term commitment to pay rent.
Renting store space can be more practical than owning for high-performing retailers, or even retailers experiencing a mild slump while still remaining profitable, since funds aren’t tied up in a long-term asset. Investing the funds instead in the primary operating business can generate a higher ROI. For some retailers, particularly those in a growth phase, freeing up these funds can justify the potential drawback of entering into a lease agreement with the buyer and committing to increased costs over the long-term.
Lower Asset Management Costs
One very tactical benefit of REIT spin-off deals is the shift in property management responsibility from the retailer onto the buyer – in this case, the REIT or third-party buyer. This is advantageous for retailers in a number of ways, namely by reducing costs associated with maintenance and capital projects. It also reduces day-to-day expenses, like payroll for property management personnel or the cost of third-party property management.
It’s important to note that the investment community’s push to take advantage of the current real estate market has been a driving force behind the rise in popularity of lease-back deals. REITs can trade at higher multiples than public retail companies, and REIT earnings are taxed less heavily as long as profits are distributed to investors as dividends. If a store’s retail operation is profitable, spinning off real estate assets could generate a windfall that can then be passed along to investors, as well.
Retailers should remain especially mindful of investor satisfaction, particularly in the current climate of change in the consumer business industry. If investors were to underestimate the value of the business’ real estate holdings, its valuation could be artificially lowered, so spinning all or part of the real estate off into a REIT can increase valuation and boost shares, adding value from an investment perspective.
It’s worth noting, however, that while spinning off real estate assets can produce some benefits, doing so won’t singlehandedly salvage a troubled business. If a retailer’s value proposition isn’t resonating with its target consumers, a short-term windfall might be a short-term fix rather than an effective value add in the long-term. Historically, retailers direct more of their attention to store operations and top-line metrics (sales and revenue) than on pursuing new strategies to add value for investors. But in today’s business landscape, retailers could benefit from taking new approaches to unlock value as their industry weathers ongoing disruption.
Stuart Eisenberg is an Assurance Partner and the leader of BDO USA’s National Real Estate practice, with more than 25 years of experience in audit and business advisory services in the real estate, hospitality and mortgage banking industries.
Off-price retailer remembers 9/11 and city with mural
New York — The storefront of Century 21 Department Stores’ flagship in lower Manhattan has been given a stunning makeover to honor the city and in remembrance of the 9/11 terrorist attack.
The off-price retailer has partnered once again with internally famous street artist Thierry Guetta (commonly referred to as Mr. Brainwash), who has painted a vibrant mural on a 65-sq.-ft. by 225-sq.-ft. wall on the flagship’s façade. The store is in the financial district and close to where the World Trade Center once stood.
The mural depicts painted images of iconic NYC sights and sceneries. It also includes an oversized hashtag that reads: #NYCISBEAUTIFUL. (The artist also painted a mural last year for the retailer.)
A year in the making, the mural is meant to project a forward thinking remembrance of 9/11.
"This isn't just about New York; when 9/11 happened the whole world was watching. We wanted to do something that is a representation of the city's resilience and diverse beauty, of the strength of the community – that shows we won't forget and remind us to give love on this day and every day," said Mr. Brainwash. He painted a similar mural last for the store.
Developed through the artist’s friendship with Century 21 co-owner Isaac Gindi, the mural is meant to acknowledge the strength of the city and lower Manhattan, where the retailer’s flagship has been since 1961. The interior of the store was heavily damaged in the collapse of the twin towers that made up the World Trade Center.
"We're so honored to be collaborating again with Mr. Brainwash; his piece represents the vibrancy of New York City and the power of the Downtown community. It's an honor to be headquartered in one of the city's most thriving areas and pay tribute to the beauty of New York City and all Americans as we remember 9/11," stated Isaac Gindi, co-owner and executive VP.
Century 21 is headquartered in downtown Manhattan, and operates five stores in New York City, and three additional locations in New Jersey including Paramus, Morristown and Elizabeth.
In October 2014, Century 21 Department Store opened its first store outside of the New York City metro area, in Philadelphia.