NATIONAL REPORT–– Hotel owners are looking to mixed-use developments with increasing frequency when it comes to getting new hotel projects off the ground, particularly in urban areas. With the cost of construction and materials rising as well as land availability becoming more and more scarce, being part of a mixed-use project can often offer a solution when trying to make a new build pencil out. Douglas Artusio, chairman/CEO of Alpharetta, GA–based Dellisart Lodging is in the process of finalizing the firm’s first mixed-use project, which will be located in Milwaukee, WI. However, he noted the company was originally planning for a standalone hotel. “This is a different angle for us,” he said. “We were looking to build a traditional hotel, but we lost the bid.” Artusio then turned to Rick Barrett, managing member of Moderne, LLC, which had won the bid. “We explained to him what we wanted to do and he explained the potential of having a condo and retail component and we decided to do the project as a joint venture.” One major factor behind the growing popularity of mixed-use developments is the increasing number of people moving back to cities. “With this ‘New Urbanism’ people are coming back to the cities,” said Barrett. “In the last few years, a lot has been done to transform Milwaukee into a more cosmopolitan city and a mixed-use project with a hotel component will bring a degree of sophistication to the city.” Plans for the new 23-story tower, which is slated for completion in spring of 2007, will include an upscale day spa, an all-suite, extended stay hotel and condominiums. “The different components will add value to one another,” said Artusio. Synergy between the components that make up mixed-use developments is a major factor for developers when planning for potential hotel projects because of its ability to attract a greater population of potential customers. “The re-urbanization of center cities suggest that what people want are experiences within a self-contained environment,” said Tom Arasi, president of Atlanta-based Portman Holdings, LLC, which owns several hotels that are part of mixed-use properties in both major U.S. and international cities. “They want places where they can live, work and play. The best way to provide that is through mixed-use properties.” He considers urban areas the best setting for mixed-use projects because of the demand that can be generated. “There are exceptions, but generally these are high-density-oriented developments because they require a tremendous amount of potential demand…Although the mixed-used developments provide their own amenities, they go up because they are close to other urban attractions.” John A Belden, president/CEO of Memphis-based Davidson Hotel Company, which has mixed-use projects in major cities such as Pasadena, CA; San Diego; Annapolis, MD; Atlanta and Kansas City, echoed that feeling. “We like mixed-use because it typically signals that it is a 24-hour type of market,” he said, pointing to the increasing number of “lifestyle centers that intermingle guests, shoppers, residents, etc. There are constantly people utilizing different areas of the development.” However, mixed-use properties are also thriving in resort areas, according to David Carey, president/CEO of Honolulu-based Outrigger Enterprises. “We love mixed-use,” he said. “It offers a wider selection of choices, which attracts more customers.” One particular mixed-use component that is especially well suited for resort locations is timeshare. “As a developer, I look at timeshare as a source of capital,” said Carey. “It you have one located near a hotel, restaurant and retail, it helps to create very stable occupancy.” By far, Outrigger’s largest mixed-use project is the Waikiki Beach Walk. “It is a massive project,” he explained. “We’re taking old hotels and making a modern center. There was not enough entertainment, retail and restaurants in that area of Waikiki.” Carey also reported that one of the key reasons for developers leaning towards mixed use-projects in Hawaii is the high cost of land and construction. “I don’t think you can get a hotel project off the ground in Hawaii if it isn’t part of mixed-use development. I’m not aware of any pure hotel projects…it’s difficult for developers to take that risk.” The financial aspect of mixed-use is also a deciding factor for projects in the continental U.S. Lancaster, PA-based High Hotels, Ltd. has a portfolio that consists of mainly hotels located within mixed-use developments. “For us, because we build hotels with no less than 100 rooms, mixed-use is predominantly the way to go because to support the room rate you have to go to fairly heavily built-up areas…it’s somewhat a function of the market,” said president Frank L. McCabe. “For a hotel, mixed-use provides a built-in source of demand.” While mixed-use provides appealing synergies for guests, it also presents an opportunity for developers to curb costs. “If it’s part of a mixed-use, it’s generally easier to get the hotel component going,” said Arasi. “The different components can share common amenities and infrastructures like parking, central plaza areas and restaurants. It’s much easier when you can spread out the costs.” Mixed-use hotels with a residential component are particularly beneficial from a financial perspective. “Within the core, you may have office space, a hotel and then a residential aspect with condos that you can sell at a premium and that can offset the cost of the hotel which is driven by high construction and materials prices. That continues to make standalone hotels difficult to get built,” Belden explained. However, that’s not to say owners and developers are committing to mixed-use projects just to save money. “Land is extremely expensive, especially in urban areas,” said Artusio. “Obviously the financial aspect is important, but to me, that is secondary. It’s got to be the right location. If it’s not the right deal, it’s a waste of money…If you have the right location, mixed-use is a very valuable vehicle because more variety increases the attraction of the property.” While the type of hotel in a mixed-used development is certainly dependant upon the location, Arasi noted the most successful are often “major convention center hotels and high-end upper upscale to luxury properties because those are what sell residential space. Most boutique-type or midscale without F&B hotels are often too small to make a significant impact for most mixed-use developments.” Belden, whose portfolio includes mostly three- and four-star branded hotels, agrees. “These developments usually attract the fairly affluent traveler. Especially in urban areas, the travelers look for the full-service experience. Developers are looking for hotels that connote quality, sophistication and an upscale element,” he said, adding that soon mixed-use developments will become more common outside of major urban areas. “We’ll see the movement outward into secondary and tertiary markets. There will be a proliferation of that over the next three to five years as people try to move from urban areas to the suburbs. We’re seeing that already.” With so many factors working in favor of mixed-use development, does this mean the demise of the traditional standalone hotel is in our future? Carey doubts it. “The question on everyone’s mind right now is how long with this strong capital market will last and how we’ll be affected if it turns around. If the market for condos drops, we may see more of the traditional hotel again.”