MIXING IT UP

Mixed-use properties bring mixed revenue streams

BY ROBIN ROBERTS

With commercial property prices continuing to soar, developers are determined to squeeze profit out of every square inch of any square footage available. Enter mixed use. A well-planned combination of hotel, residence, office and commercial assets co-existing in harmony allows investors to derive revenue from diverse sources to maximize returns, while also spreading development and operations costs around to minimize any potential risk.

While some developers have become creative with their types of mixed use — URBY’s conversion of a 35-acre navy base in Staten Island includes the usual retail and restaurants, but also walking paths and parks; Liberty Lorton’s transformation of a former prison in Washington, D.C., turned the inmates’ baseball diamond into a shared green space; Parq Vancouver’s gamble on an attached casino — most stick to the dependable blend of hotel/ residential/commercial enterprises.

“Residential real estate has started to correct itself a bit, but the valuations for site-plan approved properties to develop have not,” says Sandeep Gupta, vice-president of Toronto-based Sunray Group, which has several mixed-use properties in development, primarily in the GTA. “So, to buy the land and develop a hotel in a downtown core is cost prohibitive. Developers view [mixed-use] as a way to unlock the highest value for their land as a whole, and residential tends to play in that field a bit more. Once site plans are approved, the valuations become astronomical. And a mixeduse development limits our risk on the property from a cash perspective.”

Mixed-use properties typically command higher rents from commercial tenants, who have a vested interest in keeping up appearances with ongoing improvements to their businesses, further benefiting the developer.

Aaron Laurie, senior director, Lodging Development, Eastern Canada for Marriott International, says the brand is actively involved in several mixed-use properties. A few recent launches include Autographs in downtown Halifax and Montreal, which feature retail, food and beverage, office space as well as rental apartments.

“In large urban centres like Vancouver and Toronto that have seen unprecedented land costs and now unprecedented construction costs, it’s more important than ever to diversify the [number] of components within a development,” says Laurie. “Also, available land in prime locations is limited, so it’s all about floor-area ratios relative to the size of land.”

Laurie says Marriott’s select-service brand, Moxy Halifax, which comprises 160 hotel rooms and 250 rental apartments that share facilities such as a swimming pool and fitness centre, is designed to get guests out of their rooms. “The hotel has very small rooms because the focus is really ensuring guests maximize their time in some of the social spaces,” he says.

Another plus is that lenders are often more confident financing mixed-use developments because of the various sources of income that will cover the debt. “Hotels, as an industry, are cyclical; they have their scales and the lending is always difficult,” says Gupta. “But lenders look very positively on mixed-use: if one portion is a bit slower with cash flow, you can offset it from the other.”

Carrie Russell, senior managing partner at HVS, however, says lenders place different criteria on mixed-use projects that could prove challenging. “They look at the components separately [and] do underwriting for the hotel and [another] for the residential. They’re complicated projects with a lot of legal agreements that have to go between the two.”

To bypass the high costs and space constraints of a downtown core, Sunray and others have cast their eyes to the suburbs or, as they’re also referred to, “secondary markets.”

“We opened a Marriott in Markham (Ont.) about six years ago, Markham being a great example of a secondary market,” says Gupta. “The Marriott building itself is adjacent to, or connected to, residential, plus loads of retail, entertainment, and a movie theatre. The same with an Autograph we recently opened in Burlington (Ont.), a secondary suburb 45 minutes west of Toronto, where the residents living within that mixed-use community benefit from the services of that Autograph as well as all the food and beverage nearby.”

Business With Benefits

Laurie says the majority of luxury projects in the Marriott pipeline are in the mixed-use space, noting the appeal of cross-over services between branded hotel and residential as a lure.

“Condo owners get those 24/7 on-demand hotel services – in-room dining, access to spa services, use of the hotel’s event space for functions, and, I believe, platinum status for other Marriott hotels around the world.”

He says many people who lease these units are also emotionally tied to a brand. “That connection turns into a desire to live within that lifestyle or distinctive community.” When that emotion cools, condo owners can opt into a voluntary rental program for a revenue stream themselves.

Being part of a community, as it were, the businesses benefit from each other’s patrons, not to mention the prestige of being associated with an upscale brand such as a Marriott or Ritz-Carlton.

Perfect Partners

The key to a successful mixed-use property is partnering with the right mix of retailers, restaurants, service and entertainment options that not only complement one another but will offer residents and guests distinct experiences that keep them coming back. Hoteliers, for example, might stock products from an onsite spa, or offer coupons for attached hair salons or restaurants.

Partnered companies should also reflect the hotel’s own brand, image, reputation and status. “If you’re affiliated with a five-star hotel, your condo development [and business] has to justify being associated with a five-star hotel,” says Gupta, who himself calls Ritz-Carlton home. “It plays a big role from a prestige perspective.”

Russell agrees. “A hotel brand often will add cachet and increase the value of the condo. You can sell the condo units for a higher price per square foot because they’re associated with an [upscale] brand like Shangri-La, Ritz-Carlton, or Fairmont Pacific Rim.”

CHALLENGES & DRAWBACKS

Russell says the initial planning for such a development can be the most challenging. “It’s about all the numbers coming together, pencilling out the various complexities of how to build because the floor plans are different for condo versus hotel and office versus hotel,” she says, including having enough parking for residents, guests, and the businesses.

Security can also be an issue. If, for example, you have a rooftop bar or restaurant that draws outside traffic, you’ll need to protect guests and residents with their own key card access to their floors.

Gupta also points out that maintenance and property taxes for residents are generally higher because the property is considered commercial. As well, during the development phase, efforts to change a zoning to mixed use takes time and money. “And you don’t have cash flow coming in during this period.”

In addition, Gupta says it’s preferable that the developer of mixed-use projects specialize in the segment. “In many cases, the hotel is the smaller component and the residential is the core anchor of the development. It’s important to engage a brand not only for the name and trademarks and licensing of the hotel, but also to have proper management in place.” ◆