Maria Wood is senior editor of Real Estate Forum, from which this article is excerpted.

Anyone thinking of constructing a hotel would be well advised to hook up with a residential partner. Why’s that? Because in order to get out of the ground today, most high-end lodging properties need to paired with a residential component, say market insiders.

Gone are the days when a developer or hotel company could plunk down a lodging property next to an office complex and have an immediate and steady stream of business travelers through its doors. Now, customers want their hotels near retail shops or as part of a lifestyle complex. Meanwhile, condominium buyers are attracted to residences that are affiliated with a lodging property, enabling them to enjoy the hotel’s amenities, such as room service, housekeeping or a spa.

“The customer profile and behaviors are changing,” says Ted Darnall, president of the real estate group at Starwood Hotels & Resorts Worldwide Inc. in White Plains. “They would rather travel a few miles to where they are doing business and stay in a lifestyle center with retail, some entertainment and restaurants.”

Moreover, most lodging experts agree that putting a hotel in a mixed-use development makes it easier to fund. “I would make an even stronger statement,” declares Rich Warnick, founding principal of Warnick & Co., a Scottsdale, AZ-based hotel consultant and development manager. “Except for those hotels that have some form of public subsidy or bond financing, it has become virtually impossible to do a hotel at the upper end of the market that does not have some mixed-use component. And the mixed-use component that is the most powerful is residential.”

Rise of the Urban Country Club

Pairing retail outlets and office space with lodging certainly creates many crossover synergies, Warnick concedes, but it’s still not enough to support the hotel portion. “The fact that you have a retail or office component would not justify building a hotel if it didn’t make sense on its own,” he explains. “Whereas the demand and the profitability coming out of residential are subsidizing the hotel development.”

Also propelling this mixed-use trend is a movement to redevelop city centers. Starwood recently unveiled the St. Regis San Francisco, which offers 260 hotel rooms and 100 condos. “There is a growing demand from people moving back into urban markets that like the services hotels bring,” Darnall says. “I call it an urban country club. You’ve got use of the restaurant and the health club. You can have room service delivered and you can have housekeeping as well.”

But does this new marriage—lodging and residential–promise a new development cycle? Statistics point to a burgeoning pipeline. Lodging Econometrics, a Portsmouth, NH-based hotel brokerage and research firm, reported in January that there were 895 projects with a total of 120,945 rooms in the works at year-end 2005, representing the highest level since the first quarter of 2001. Scheduled to break ground this year are 1,471 hotels with 187,189 rooms, a record high.

Select-Service Development Increases

Rising costs is one of the reasons Starwood decided to enter the limited-service sector. Long known for its high-end, full-service brands and its boutique W hotels, the company launched an urban-flavored, upscale select-service concept, called Aloft, last year. And at New York University’s International Hospitality Industry Investment Conference this June, it plans to announce the official name of its new extended-stay flag, which has a working title of Extended-Stay by Westin.

“Extended stay and upscale select-serve are still very hot because, candidly, they have very good economics,” Darnall says. “They have lower full-time equivalents since they provide less services, but the consumer has a relatively high regard for them.”

Darnall says he expects to have 15 Aloft franchise applications by the middle of April. The first assets are on target to open by the end of 2007, including two that Starwood is developing in Philadelphia and Lexington, MA.

Unlike Starwood, which envisions its Aloft and extended-stay chains entirely as newly constructed assets, Hyatt acquired existing properties on which to grow Hyatt Place and its extended-stay brand, Summerfield Suites by Hyatt. (Hyatt also plans to announce the final design scheme for its extended-stay flag during the NYU conference.) Last year, Hyatt purchased the AmeriSuites chain, which had 146 hotels in 32 states. Earlier this year, it bought Summerfield Suites, which had 21 hotels in its system.

As the branded companies duel it out for market share with new names, it’s important to remember that hotels are ultimately a real estate investment. And as such, new and old brands must provide investors a solid return on capital, says Darnall. “This is a test of the lodging business over the next couple of years—that we can do a good job demonstrating to the capital partners that hotels are still a desirable investment and can provide some of the best returns.”

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