When it comes to new-build urban properties, mixed-use is here to stay.
Gone are the days a big name hotel could plonk its grand and solitary self down in an urban setting and call it good. Such a high-end hospitality project could simply not sustain itself in today’s market, plagued as it is by out-of-reach financial expectations, large-scale economic failings and industry-wide average daily rates that consistently miss the mark. The new landscape for large-scale hotel undertakings is predicated on a partnership arrangement, wherein the hotel pairs up with another profit based interest, and each enjoys the cachet of the other.
This so-called “mixed-use development” typically matches a hotel with a residential component. Sometimes retail and commercial office partners sign on, too. “Buildings are very expensive to develop and involve quite a bit of risk before ever reaching the construction stage,” explains Val Levitan, developer of Toronto’s Trump International Hotel & Tower. “Mixed-use development offsets the shortfalls.”
More than that, participants in a mixed-use environment enjoy myriad advantages to engaging in such an affiliation. Certainly residents’ and guests’ lifestyles are dramatically enhanced by their time spent in a dual purposed building, thanks to the perks that come with the hotel component, including access to room service, the concierge desk, world-class spas, celebrity-chef restaurants and certain elite privileges within those brands with respect to hotel chains in other parts of the world.
Developers, meanwhile, score all kinds of financial gain in a mixed-use pact, with the hotel partnership allowing them to achieve a premium on their residential sales prices. Indeed, the financial injection this arrangement allows is often critical to a project’s very existence. Without the balancing influence such a partnership has on the plan to get a building financed and ultimately constructed, many modern projects would simply die on the vine. “We are still in a relatively healthy period for residential development,” says Brian Stanford, director of PKF Consulting Inc., “so the development community is saying, ‘We may not be able to fully support the capital costs and investment return expectations on a five-star hotel, but if that hotel is part of our project, and increases our returns on residential, we can afford to take a lesser return on the hotel.’” Ultimately, that each component helps sell the other to potential buyers is the most powerful rationale for engaging in a mixed-use arrangement. “The hotels are in there as a stimulus to assist in the residential sale of the units and enhance the profits,” says Stanford. “That’s why the development community is interested in this: it’s an ability to generate profits that is much easier than it would be without the hotel.”
Having played host to precious few new-build hotels, because of a recent combination of soaring construction costs, increased property taxes and depleted top-line performance, urban centres have waned over the last decade in their ability to support solo-powered hospitality enterprise. Instead, downtown Toronto is currently accommodating a slew of hotel development as part of mixed-use projects, with the Ritz-Carlton, Shangri-La, Four Seasons, Thompson Hotel and Trump developments leading the charge.
The alliance that produced the Trump International Hotel & Tower in Toronto — featuring a five-star hotel on the lower floors and luxury residences above — began as mixed use developments typically do: as a collaborative effort among multiple parties. For Trump, those are: the City of Toronto, the architect (Zeidler Partnership Architects), the developer (Talon International Development) and the hotel operator (Trump Hotel Collection). Sales of the hotel condominiums provided the necessary construction financing to build the property and the residential portion of the building. Unit sales of 60 to 70 per cent are typically cited as the break-even point for such an achievement.
Still, the progress of these developments isn’t always simple. “You need to assemble a good team of advisors who can walk you through all these components,” cautions Jim Mouzourakis, senior managing director at the Vancouver-based Paramount Lodging Advisors. “For most developers who aren’t familiar with hotels — and most aren’t — it’s a much more sophisticated and complex animal than they’re used to, and they need to be able to structure these deals properly. Otherwise, they might be fraught with legal problems and operational issues. How do you distribute your parking area between the hotel and residential, for one? Or manage the egress and exit of the lobby areas? Where do you put the loading bays?”
In urban settings, mixed-use activity has been cyclical. When the commercial office sector was stronger in the 1970s, a significant amount of hotel development took place in association with commercial office complexes. When both vacancy rates and office construction costs started to climb, the two could no longer support each other, and the loss leader that was the hotel was abandoned. Only with the residential market gaining strength in the last half decade have developers started looking at the situation again. Not surprisingly, high-end residential has taken the lead in mixed-use activity over the last few years.
But, for all the fanfare about condominiums now subsidizing five-star hotel developments, Mouzourakis urges caution in sweeping assessments. The reality that condos provide the most economically viable use of urban land notwithstanding, there’s no question a hotel brand also delivers a hit of prestige to a condo project that positions the latter significantly above its peers. “This provides a competitive advantage and marketing edge that contribute to accelerated sales absorption, most importantly, and greatly enhances the value realized,” says Mouzourakis. “Meanwhile, the recovery in the market, shrinking cap rates and significant growth in RevPAR, are allowing five-star hotels to become justifiable on their own accord. So condos drive deals, but hotels drive condo deals.”
When Quebec City-based hotel developer Groupe Germain announced news of its own deal: namely, Hôtel Le Germain Maple Leaf Square in Toronto, it too was part of a larger operation. This $450-million project, which features an eight-storey boutique- hotel with 171 guestrooms, is aligned with an associated condo project, developed in association with Maple Leaf Sports & Entertainment, Cadillac Fairview and Lanterra Developments.
“No question, when it comes to doing that kind of hotel, with the costs involved, the residential component makes it more affordable,” says Jean-Yves Germain, co-president of Group Germain, the seven-hotel Canadian chain behind the initiative. “Twenty years ago, you were doing a five-star room for $125,000, but those rooms today are between $350,000 and $500,000.” And, it’s not the cost of the construction that’s pushing dollar figures to the sky, Germain points out, so much as it is the cost of the product. “The level of quality upon which brands are now insisting has multiplied dramatically. The standards are higher now.”
Indeed, agrees Mouzourakis, “each time we do one of these deals, we’ve raised the bar to a higher level of luxury. Architecture and interior design are becoming more important, and the market’s been paying for it. Now you’re selling these condos at $2,000 a square foot instead of $500 a square foot.”
Suffice to say, the mixed-use concept appears to have moved in for good. “It’s very rare these days to see any hotel property developed without a retail or residential component,” says Trump’s Levitan, who credits his firm — currently selling real estate for more than $1,500 a square foot — with being the first in Toronto to successfully sell a five-star luxury property on this scale. “Our efforts have proven to other hotel properties that Toronto was ready for top-tier luxury living in the heart of the city. We’ve proved the market is not only viable but vastly untapped.”