Starwood Hotels & Resorts Worldwide Inc. was on a mission. Making its ICSC convention debut in full force last month, the hospitality chain was eager to do business. In fact, it prebooked 100 meetings with developers to find projects for which their hotels would be a good match.

While still sorting through a mountain of proposals, Starwood came away happy.

And they weren't alone.

“There was a lot of talk about integrating as many uses as possible, and we saw drop-ins from hotel chains that we weren't expecting,” says John Bacon, a spokesman for RED Development LLC, which plans three hotels at its Greenway Station outside Madison, Wis.: A Hilton Garden Inn, a new Residence Inn By Marriott and a third to be named later. “We're looking at hotels for future projects.”

The trend most apparent at the show was the number of mixed-use projects that incorporated one or more hotels. Certainly, hotels have always existed near major retail hubs, but the projects were developed independently. The push today is to meld the two from the start.

Several factors drive this hotel-retail trend. For one, cities encourage developers to add hotels because they want the room-tax revenue. Developers themselves get more payback, too. In the U.S. at least, you can rarely stack retail more than two floors, but hotel rooms can rise as high as the market will bear. Moreover, the right hotel brand re-enforces the upscale image developers crave. You want family; put in a Great Wolf Lodge water park; you want hip Gen Y and Gen Xers, go with the W. Luxury is the Ritz or the Four Seasons. Or pick any combination thereof.

But the most important lure connecting shopping centers with hotels is the increased focus on mixed-use, combining shopping, Class A office space and entertainment, which generate demand for hotels and provide business from coffee in the morning to the late-night movie. It's not enough to be a shopping center or a single hotel these days; retailers and hoteliers are vying to create “destinations” and are playing off one another to do so.

“The traditional business model that existed for years really doesn't work anymore,” says Marty Collins president of Gatehouse Capital Corp., which plans a Starwood W for its Victory development in downtown Dallas. “You have to go and search beyond your four walls and create more of a destination than simply a single business unit.”

Think light industrial development, interstate location, offices, transportation hub and leisure activities, such as theme parks, says Bill Fortier, senior vice president for franchise development at Hilton Hotels Corp. in Beverly Hills, Calif. Other attractions are retail centers and mixed-use complexes with sports connections, such as minor league ballparks or NASCAR racing, or nearby hospitals. Woodbine Southwest Corp, for example, is negotiating to sign on a hotel at its planned Main Street Commons mixed-use development, located near Mercy Gilbert Medical Center in Gilbert, Ariz. Like so many developers who were visited at the ICSC show, Woodbine is in the early stages of negotiating with hospitality companies.

This mixed-use bonanza is part of the trend to create entire towns from scratch.

R. Webber Hudson, executive vice president of New York-based Related Urban Development, calls it “city building.” Related Urban's latest and biggest “city-building” plan, in conjunction with Thomas J. Klutznick Inc., calls for a 5 million-square-foot mixed use development, City North, in the Northeast Valley of Phoenix. The project will include two hotels; “one spa-related and one more transient oriented,” he says. Ideally, the hotels would carry two different flags from the same family. Negotiations with hotel chains are under way.

City North will feature 1 million square feet of retail, 2 million square feet of office space and up to 1,500 condos. Related Urban is also considering putting in a cultural venue, similar to the Jazz at Lincoln Center entertainment in the Time Warner Center.

In urban settings, retail shopping and hotels have long been paired: the Mandarin Oriental at Time Warner, for example, or the Westin at Copley Place in Boston and the Four Seasons at 900 North Michigan Avenue in Chicago. But this new push combines the two in other, less likely locations, such as West Des Moines, Iowa, where General Growth Properties Inc.'s 2 million-square-foot Jordan Creek Town Center opened in 2004 featuring enclosed shopping, a lifestyle center, and a 3.5-acre lake and a Residence Inn by Marriott. The goal was to create a regional shopping destination that would pull visitors from beyond the state's borders. Providing a place to stay made sense.

The hotel segment is the most volatile of all commercial properties. Today it is hot again after a disastrous slowdown following September 11. Business and leisure travel are back near pre 9/11 levels and hotel companies have kick started once-dry pipelines. In the first quarter alone, 445 new hotels with 63,005 rooms were announced — the largest number of new projects in four years, according to Lodging Econometrics. The overall construction pipeline at the end of the first quarter included 2,388 hotels and 322,177 rooms. The pipeline is up from a low in the fourth quarter of 2003 of 1,903 hotels and 246,895 rooms.

In addition to General Growth, the other mall titan, Simon Property Group Inc., is looking at hotels — for the first time since 1989. In March the Indianapolis mall builder opened St. Johns Town Center in Jacksonville, Fla., a 1.5 million-square-foot open-air retail project. A Homewood Suites opens there in June. That's its first hotel since it included a Ritz-Carlton at its Fashion Centre at Pentagon City in Arlington Va.

What changed?

The main difference between 1989 and today is the creation of the Town Center, where people live, work and play. Westfield Corp., is considering a hotel as part of a regional mall redevelopment in Montgomery County, Md. The 1.2-million square foot Westfield Montgomery mall received preliminary county approval this year for an additional 300,000 square feet. County approval includes entitlements for a hotel “at some future date,” says a Westfield spokesman.

At the convention, most planned mixed-use projects include proposed hotels, though the concept is so new few have signed deals yet. In reality, the hotel and retail real estate sectors are just at the beginning of courting one another. One of the hitches that they have to work through is that though both are part of the commercial real estate world, the two industries have different ways of doing business.

Retail is dominated by REITs, hotels, less so. Moreover, the hotel side is divided into developers, franchisers and franchisees. Just because you're looking to build a Hilton, doesn't mean that you'll be working with the company itself. There are also issues to be worked out around who should own the land. Should the retail developer sell the land to the hotel company or lease it?

Hudson said terms are still being worked out. “The complexities of any anchor arrangement you have in other centers is something to be negotiated,” he says.

For example, hotel developers who covet sites next to Westcor's upscale Phoenix-area destinations, Scottsdale Fashion Square and Biltmore Fashion Park, have offered up to $100 per square foot — more than $4.3 million per acre, says David Scholl, Westcor senior vice president of development. “That's pretty enticing, but if my tenants just lose a few dollars in sales volume, it wipes out our $4 million, over half a million square feet of shop space, with just the blink of an eye.”

Working it out

Adding hotels at the development stage provides the ability to design an entire “cityscape” in the same motif. City North, for example, will be updated Frank Lloyd Wright and Woodbine's Main Street Commons, will focus on the historical and agricultural roots of the surrounding area.

What are other benefits? Retail developers see hotel guests as likely shoppers. “With 200 to 500 people coming in every night, it just breathes life into the retail,” says developer Gary Safady, managing partner at O&S Holdings LLC of Los Angeles.

Adds Jim Alderman, Starwood development senior vice president: “You're bringing in international visitors who are staying there for three days to do nothing but shop.”

Partners parlay hard in such mixed-use deals over who's bringing more to the table.

“That routinely gets negotiated,” says Roger Hill, CEO with Gettys Inc., a Chicago firm that helps design flow patterns for hotels. “They each presume that since the sum of the parts is greater than the whole, in return they should be rewarded for that, not penalized for it.”

Retail developers must accommodate hotel expectations — such as big, dramatic entryways. Hotels also need emergency exits, overnight parking and 24-hour staff. And developers must allow hotel guests to move freely into retail areas — while barring mall rats who just want to use the rest rooms from the hotel. Key card access for hotel guests is one solution, says flow specialist Hill.

Given the complexities, some developers are biding time. Westcor, Macerich's Arizona unit, has hotel offers — but is looking out for its retail tenants. “You might create value in a new component,” says an avid Scholl, “but you want to make sure you don't hurt the value of what's already there.”

Getting lost in retail clutter is another hotel turnoff. Veteran owner-operator John Q. Hammons said no to a recent invitation for a hotel at a shopping center. Retailers on the periphery of the property would have buried his brand, he argues. “I couldn't be seen if I built a hotel in there, and I wasn't going to pay the cost to go up 15 stories,” says the gruff 86-year-old chairman and CEO of John Q. Hammons Hotels Inc. The Springfield, Mo., chain owns and operates 163 hotels in 40 states.

But Hammons seems to be an exception.

Forest City Commercial Group has shopping centers with hotels at its home base of Cleveland, in Pittsburgh and in Cambridge, Mass. “Retail is not just retail anymore,” says Ed Chanatry, Forest City's asset-management vice president. “It's a form of entertainment.”

And in tourist haven Branson, Mo., Rick Graf is building not one but two hotels to make the numbers work for his $300 million Branson Landing development opening in 2006. Hilton will manage the hotels and a convention center as one entity to limit costs. “The biggest challenge,” says Australian Graf, development director with HCW Development Co., “was making it stack up financially because of the very soft hotel market the last couple of years.”

One hotel is part of the convention center, the other 400 feet away on the waterfront. Some hotel suites are “condotel” — sold but available as hotel lodging when owners aren't occupying the suites. This lets Graf target two markets — business and convention during the week and leisure on weekends.

While counting the pennies on hotel costs, Graf is splurging on public space at the 95-acre, 1.8 million-square-foot lakefront development, where retail is spread over half a mile. The centerpiece will be an $8 million “fire and water” show.

In comparison, developer Safady's $200 million BridgeStreet lifestyle center in Huntsville, Ala., is fairly straightforward. The 200-room Westin and conference center with 40 private residences in the top five floors of the 12-story complex anchors the lifestyle center near Cummings Research Park, the second largest U.S. research park.

At the 2006 ICSC convention, expect to see the fruits of the labors begun this year.

Using Psychographics

Hotels are beginning to borrow ideas from retail. InterContinental Hotels Group of Dunwoody, Ga., positions its new Indigo hotel concept as an affordable luxury — like Pottery Barn, Crate and Barrel and Restoration Hardware, says Kirk Kinsell, InterContinental senior vice president and chief development officer.

“In order to capture these people, we had to create a relevant environment so Indigo would fit in the emotional life set of the customer,” adds Kinsell, “so there couldn't be a disconnect from places they were in.”

Hotels are studying psychographics to determine why people of similar educational and economic backgrounds have different buying habits. “Retailers understand psychograpics,” says Kinsell. “The hotel industry has stopped watching demographics and started watching behavior.”
Mark Hequet