Owners and operators of hotels and retail centers are increasingly partnering up in an effort to help drive traffic to retail properties and create more pedestrian-friendly developments.
It’s a trend that has arisen amid continuing headwinds facing retail real estate, a sector that has long seen challenges from the growth of e-commerce and changing consumer behaviors.
To curtail the effects of these challenges—which have led to mass store closures, particularly amid big-box chains and department stores—some retail property owners are looking to hotels, as well as multifamily uses, to help fill vacant space. This comes as a wide variety of non-traditional retail uses, including fitness centers, medical offices and entertainment venues—are being brought in to also help boost foot traffic and, ultimately, sales.
“The common thread among all of that is the redevelopment of these retail assets into real estate assets,” says Jeff Ziegler, chief operating officer of Starwood Retail Partners, the retail division of privately-held Starwood Capital Group that focuses on regional malls and lifestyle centers.
And hotels appear to be a particularly good fit for retail centers, which tend to have ample parking, prime locations and shopping, restaurants and entertainment options readily available for travelers.
The lodging sector continues to fare well. In the first quarter, the sector saw demand grow by 3.0 percent, according to data from real estate services firm CBRE. This was due to the 2017 hurricanes in Texas and Florida and the continued growth of the U.S. economy, says R. Mark Woodworth, head of hotels research, Americas, at CBRE. For 2018 and 2019, CBRE forecasts lodging demand to increase by 2.1 percent, down from 2.7 percent in 2017 after the hurricanes’ effect subsides.
There is also no threat yet of overbuilding in lodging. Supply is anticipated to rise by 2.0 percent this year and 1.9 percent in 2019, according to CBRE’s forecast. Supply rose by 1.8 percent last year. CBRE forecasts occupancy for 2018 to come in at 66.0 percent, up from 65.9 percent in 2017. “When you look at the lodging industry and the outlook, it’s a very stable, durable outlook,” Woodworth says.
Starwood has partnered with a local developer to add multifamily units and a hotel—the first among its retail properties—to its MacArthur Center mall in Norfolk, Va., a move that likely will be the start of several other potential hotel additions at Starwood sites, Ziegler says. The hotel will offer limited services, but will stand adjacent to the center’s restaurants and other amenities.
The push to add hotel and multifamily components is part of an effort to minimize retail at those sites and increase other uses, Ziegler says. “As the areas have matured and the demands have increased, we’re able to layer in other uses into those projects,” he notes. The firm is also looking to get back department stores to create additional non-retail opportunities, he says.
The densification of retail is a trend that is expected to continue and expand, says Suzanne Mulvee, director of research at CoStar, a real estate research firm. “Typically, what’s happening is the store closures tend to be concentrated in these bigger boxes, and so it’s creating an event for these owners,” she says. “These owners have to do something.”
In March, Toys ‘R’ Us announced it is liquidating hundreds of stores, many in the 30,000-sq.-ft. range, after filing for bankruptcy in 2017. Sears also continues to close stores as the aging retailer struggles with slumping revenue.
In addition, much of the retail property stock in the U.S. is decades old, though many stores and centers are located in good locations with ample parking, Mulvee notes. Building upward and adding non-retail uses brings more people to the properties, making strong centers even stronger, she says. “This trend of adding multiple uses to these centers is something you’re going to see more and more, and class-A mall owners are going to lead that charge.”
Simon Property Group, one of the biggest class-A mall owners in the U.S., has already taken a big step in this direction. Last month, the REIT announced a partnership with hotel chain Marriott International to build five hotels at Simon properties over the next several years. Simon declined to comment on the partnership beyond its press release on the deal, in which Patrick Peterman, vice president of development and asset intensification at Simon, noted that the “uses are very complementary. We’ve recognized this for a long time.”
Simon is linking up with Marriott’s selected management companies to run the hotels, says Eric Jacobs, chief development officer for North America of Marriott’s select service and extended stay brands.
The push to add hotels has never been greater, and it’s a trend that appears to only be growing, Jacobs says. And while it may be a relatively new phenomenon in the U.S., it’s not elsewhere. “In some ways, we’re catching up to different parts of the world,” Jacobs notes.
That’s not to say such partnerships are without challenges.
For example, Marriott prefers to purchase the land under its hotels or own it through a joint venture, as it’s difficult to finance hotel deals in land leases, Jacobs says. But some retail property owners don’t want to part with their land, instead hoping to lease the land to hotel operators for 10 or 15 years, as they would do with restaurants or other retail tenants. Hotels, however, are meant to last for decades, Jacobs notes. “From an ownership perspective, it makes it more difficult to underwrite and finance a hotel deal when there’s an underlying ground lease,” he says.
Another issue can be parking, with concerns that hotel guests might make finding a space at a busy retail center harder for shoppers. Jacobs notes, however, that ride-sharing service providers including Uber and Lyft have reduced the need for parking spaces, and hotel guests’ usage of parking spaces peaks overnight, while the retail centers’ parking usage peaks during the day.
Adding a hotel to an ailing mall also isn’t a panacea if the center is in a weaker market, Mulvee notes. “You can’t do this where you’ve got very few people living there and low household income,” she says. “This works where you already have a strong trade area.”