Hotel-Retail Mixed-Use, The Rebirth of Bricks and Mortar

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LOS ANGELES-Many major shopping center and mall owners were in various stages of adding hotels to their projects in 2006 and 2007. But when Lehman Brothers filed bankruptcy on September 15, 2008, virtually all new projects were put in cold storage. The retail industry--like many other sectors--hunkered down in survival mode.

Over the past five years, the retail sector has improved substantially, along with the economy. We are now at the dawning of a renaissance in retail, which includes adding a hotel mixed-use component to shopping centers and malls. An important part of this revival is rediscovering and remembering the compelling analyses and technology that has been largely set aside or forgotten in the wake of the Great Recession.

Adding the right hotel component to retail, in a well-structured hotel-retail project, can provide a powerful competitive advantages for both the retail and the hotel components. The competitive nature of retail demands that owners and managers implement strategies that entice customers to their locations for a unique shopping experience where they can enjoy the latest consumer trends. Competition for consumer shopping is not only with other retailers but extends to internet sellers.

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Just before the Great Recession, our hospitality and real estate lawyers were working with one of the nation's largest retail center owner-developers, which had studied the hotel-retail synergies very carefully.

The client had six major projects and master planned communities where it could study the impact of hotels on the shopping centers and malls. Some of the projects included the Ritz-Carlton Tysons Corner Galleria, Westin Dallas Galleria, and Ritz-Carlton Water Tower Place. Its findings were compelling. After a multi-year study, the company concluded that its 200 property portfolio was “capable of supporting 80 near term hotel developments ranging from extended stay to select and full service product.”  They found that a hotel adjacent to retail results in a substantial boost to both the hotel and retail components—the increase in revenues ranged from 20% to 40%.

It's difficult to ascertain exactly what accounts for this revenue increase. But according to the U.S. Travel Association, more than three out of every four (77%) US domestic trips are for leisure, and for many years, “shopping” has been the No. 1 or No. 2 travel activity for leisure travelers (others in the top five are visiting relatives, visiting friends, sightseeing, and beaches). And a hotel-retail center creates more excitement, synergy, and a greater sense of destination, then “just going to the mall.”

The revival of hotel-retail mixed use is underway. In appropriate projects, this renaissance offers powerful enhancement for competition with other retail sites as well as internet sellers. It may be a significant factor in revival of brick and mortar retail. In the next few months we will see some of the biggest names in the industry announce hotel-retail projects, both adding a hotel component to existing shopping centers and malls, and new ground up construction. For both hotel and retail owners and operators, it's time to take a look at this trend.

Retailers should understand that “hotels are different.” The hospitality industry has its own norms, customs, players and practices. Developers need to get experienced hotel advisors to guide them through the exploration and execution of any hotel strategies.

Jim Butler is the chairman (jbutler@jmbm.com or 310-201-3526) and Guy Maisnik is the vice-chairman (mgm@jmbm.com or 310-201-3588) of the Global Hospitality Group at Jeffer Mangels Butler & Mitchell LLP in Los Angeles. They are both active in national hotel-retail mixed-use projects.

The views expressed here are the authors' own.