The Right Retail for Mixed-Use

Mixed-use properties have been one of the saving graces of brick-and-mortar retail, and much of the new retail construction incorporates a mixed-use element. The trend has encouraged retail owners to redevelop a portion of the property for another use—with hotels being the most popular. However, not all retail centers are a good candidate for mixed-use, and struggling retail properties in particular are not a good candidate for partnerships with a hotel flag.

“To create a great mixed-use project, each component of the project must be strong and must be tested against the fundamentals for that type of real estate use,” Jim Butler, a partner in the global hospitality group at Jeffer, Mangels, Butler & Mitchell LLP, tells GlobeSt.com. “Just as retail developers go through their checklists to determine what will make a great retail center, if there is to be a hotel, office, entertainment, or residential components, each piece of the puzzle must be tested against its own unique criteria for success. This is particularly true for hotels, which need demand and feasibility analysis.”

Retail owners have shown a growing interest partnering with hotels, but this isn’t a good fit for struggling retail assets. There are many boxes to check before starting down a redevelopment path, and a strong retail center is the first on the list. “A struggling retail project is almost always a bad candidate for hotel mixed-use,” Guy Maisnik, a partner in the global hospitality group at Jeffer, Mangels, Butler & Mitchell LLP, tells GlobeSt.com. “A potentially strong retail project is the first threshold to pass before adding a hotel or any other property type, and when you have the elements for success for the right individual components, you then need a team with the experience to bring them all together to harmonize and maximize the legal and business structure, design, development and operations.”

If the retail center is strong, however, a hotel can transition a retail center into a lifestyle center—which will ultimately drive value. “If there are good fundamentals for the component parts, experience demonstrates that adding a hotel element to retail can be synergistic at many points in the spectrum from luxury to lifestyle to midmarket,” says Butler. “High end luxury hotels have been very successful components for high end malls. Boutique and lifestyle hotels have been extremely successful in hotel-retail mixed-use. Mid market, select service hotels have been strong additions to close out malls or mid market centers.”

Once a retail owner makes the decision to add a hotel, creating a synergy between the two property components is the next step. “Synergy is not created by plopping a hotel into a bunch of retail stores. It takes a lot of experience to provide both the technical and the artistic inspiration that makes it all work. Creating synergy with hotels and retail is like making great jazz music,” says Maisnik. “It takes good equipment, technically excellent musicians and a certain amount of “magic inspiration” that brings it all together and makes it work.”

Creating synergy comes down to working with an experienced team with knowledge of mixed-use properties. “If you don’t have the experience, hire the best people you can find to fill in the gaps,” says Butler. “You want the most active players who bring technical expertise, innovation and creativity. You want people who are used to dealing with their own class of real estate and integrating multiple classes in a mixed-use project with hotel and retail. You need people who understand the business and legal interaction of multiple uses, changing parking and marketing dynamics, impact of activities on lease provisions, carve outs from exclusivity provisions, and flexibility for project promotion by component parts.”