Taking a look at one of the hottest trends in new hotel developments
Luxury hotel developers have a lot to think about. While they’re expected to build profitable hotels in desirable locations, that’s just the starting point. There are also residential, office and retail components to consider — the sort of value-added parts transforming high-end hotels into fully integrated, revenue generating, multi-use facilities.
That’s not to say there isn’t a future for the single-use traditional hotel development. There is — just not in the luxury sector. When the cost of building and operating hundreds of five-star appointed rooms — and all the services that come with them — can’t be covered by room rates alone, developers need to offset those costs in other ways. Pre-selling condominiums and creating office and retail space to lease alongside the hotel not only makes sense financially, it may actually help the hotel function better.
“Mixed-use classes interrelate and become a catalyst for other developments, whether it’s hotels, offices, retail, or residential,” says Michael Beckley, vice-president of Lodging Development for Marriott Canada. “Practically speaking, there’s a huge boost in value to everybody that comes to the party.”
The new Ritz-Carlton Toronto project is not only mixing luxurious wholly owned residences with full access to the amenities of the hotel, there’s also an RBC office tower being erected right next door. For one of Canada’s largest banks, having offices attached to a five-star hotel creates a wealth of opportunities, not the least of which is aligning itself with another powerful brand. Travelling executives can also work and stay in the same location, benefiting RBC, the hotel and even the residences. “The newer Ritz models are looking at synergy and the lifestyle that flows between components,” says Beckley. “It’s about the integration of parts to create a total environment.”
The thinking is if each part of the project complements the others, that integration will create greater RevPAR for the hotel, more lease revenue per square foot for the office space, and higher revenue per square foot on sales of the condominiums. “It’s a win-win-win situation,” Beckley says. “And that’s not including retail that can be put in to balance those three components.”
In downtown centres, luxury hotel developments are continuing to diversify. They’re blending more components to help leverage risk and create additional revenue streams, which are extremely attractive to financiers. Many new players are clamouring to entrench themselves in the next big deal. With five new mixed-use luxury hotels being built in Toronto, the formula works for investors and developers alike, but the structure is a good fit in a resort setting as well.
“One of the main advantages of building a mixed-use project is it draws different types of people into the development,” says Kent Richardson, vice-president of Sales for Three Sisters Mountain Village, a massive resort development in Canmore, Alta. “It has major economic spin off.”
The Three Sisters project is a sprawling 1,800 acres incorporating hotels, residences (wholly owned, fractional and condo hotel product), retail outlets and golf courses, including a 1,000-acre wildlife preserve. More than 4,000 homes are slated for the site. There’s also 150,000 sq. ft. of retail planned, and directly on top of one of those retail blocks, apartments which will serve as employee housing for the businesses and hotels on-site.
“In urban centres the blend is more practical, but in resort settings it’s about lifestyle,” says Richardson. To date, about 65 per cent of buyers at Three Sisters are Albertans, 15 per cent are residents of the U.K. and the balance are Americans. But one thing they all have in common is the desire to attain the upscale-wilderness lifestyle Three Sisters is selling, whether it’s for living, vacationing or retirement. Richardson expects a glut of adventure retailers like Mountain Co-Op and fishing and snowboarding stores to help create that lifestyle.
“The real challenge is getting all of the components working simultaneously to make it work,” says Richardson. “It’s about orchestrating everything so it comes out of the ground harmonized.” That’s easier said than done when you are looking at catering to different groups of people with different needs. But when it all comes together, when the fit is right, the components feed off each other.
That’s why it’s essential to ensure the pieces fit before striking partnerships. “Our approach is to line up the right partners, who have the depth of expertise, the depth financially, and are a cultural fit with what we want to do,” says Beckley. Pairing divergent entities can stunt the success of any mixed-use development. “You need to spend time getting the right alignment and then positioning it in the market. It’s no use building a Ritz-Carlton hotel and slapping a Budget rent-a-car inside it. You need to understand the vision from two, three or four different perspectives.”
A few city blocks from Toronto’s Ritz-Carlton site, the Trump organization’s new hotel and condominium project — which is now 83-per-cent sold — is selling both residences and hotel suites to a distinctly international clientele. With 291 hotel suites and 149 residences, that’s a lot of product to move in a town that’s been slow getting hip to the condo hotel game.
“A lot of people in Toronto don’t understand how buying a hotel suite works,” says Lisa Searchfield, a former sales executive from the Trump International Hotel & Tower, Toronto, who has since moved on to the Four Seasons. (Investors can purchase guest suites at the Trump hotel, which are put back into the reservation system when not in use by the owner.) Unfortunately, Canadians who know about condo hotels are also familiar with the bad press surrounding them — Toronto developer Harry Stinson made frontpage news by filing for bankruptcy, which included his high-profile condo hotel at 1 King West.
Does a stigma exist in Canada about condo hotels? “Maybe locally, but that’s not an issue when you are dealing with international clients,” says Searchfield, pointing out the same Trump project in Hawaii recently sold out in eight minutes. In New York in 1996, Searchfield says Trump hotel suites were sold to investors for US$1,000 per square foot. But because tourism has been booming in New York, and occupancy rates in the hotel average around 85 per cent, the returns have been huge. “It’s difficult to pick up one of these suites on the market, and they are going for $3,300 per square foot.”
There are differing opinions on whether condo hotels are the right fit for urban centres. Some feel the structure may be better suited to mountainside lodges or ocean-front views, but the Trump organization hopes to quiet that debate. “The rate of return for hotel suites can range anywhere from eight per cent (on a low occupancy hotel) to 25 per cent (if the property averages more than 75 per cent occupancy),” says Searchfield. “On strictly a business level the numbers make sense.”
While the mixed-use hotel trend is just getting going in Canada, with so many high-profile projects being built in Toronto, could the market become oversaturated? “These international purchasers are diversified,” says Beckley. “Toronto is a hub, and it’s perceived as a relatively safe backdoor to America. There is a lot of money out there, whether you are looking at the pound, euro or any of the Asian currencies. It’s value for money.”
Judging by Ritz-Carlton’s worldwide pipeline, the development structure should be around for a long time. “Ritz-Carlton has another 26 mixed-use projects planned in both urban and resort settings,” Beckley adds. “We’ve had bumps along the way, and learned an awful lot. But if we get those synergies right they’re going to do great.”