REPORT FROM THE U.S.—Do hotels within mixed-use lifestyle centers or sports and entertainment districts (SEDs) perform better than nearby similarly branded competitors that are not proximate to these support amenities? How do such developments impact a hotel’s top-line performance from a real estate investment perspective?
Mixed-use lifestyle center hotel performance
In the U.S., there has been a proliferation of mixed-use developments, many of which are morphing into more compact, vibrant, walkable, live-work-play environments. In an urban atmosphere, these mixed-use projects bring safety, convenience and a slightly European character. In the suburbs, they lend an urban feel, but still force people to arrive by non-pedestrian transportation, making them destination centers.
Classic urban examples of these projects include Miami’s Brickell City Center; District Wharf, Capitol Riverfront and National Harbor in Washington, D.C.; The Bellevue Collection (Bellevue, Washington); Philadelphia’s The Navy Yard; Boston’s Seaport; 2nd Street District in Austin, Texas; Los Angeles’s The Bloc; Atlanta’s Atlantic Station; and Pittsburgh’s Station Square. Land masses tend to range from 10 to 50 acres.
Brickell City Center is one of the more ambitious projects, positioned on some 11 acres in the heart of Brickell, Miami’s financial district. It contains a three-story retail mall with nearly 500,000 square feet of space, 240,000 square feet of office space, a hotel with serviced apartments, and 780 residential condos in adjacent and attached towers. The city’s light rail system links the project directly to Miami International Airport.
In New York City, one of the most transformative projects underway is the 28-acre Hudson Yards. While still in various phases of construction, this development is slated to be the largest redevelopment project in the U.S., at a cost of more than $20 billion. It will incorporate all elements of an urban mixed-use lifestyle development.
Suburban designs may be purpose built, or adaptive reuses. Easton and Levis Commons in Columbus and Perrysburg, Ohio, respectively, were purpose-built on land masses of 400- to 1,300-acres. Similar projects include Town Center in Jacksonville, Florida; Bridge Street Town Centre in Huntsville, Alabama; Sugar Land Town Square, in Sugarland Texas; Hill Country Galleria in Austin, Texas; Boca Town Center, in Boca Raton, Florida; CityCentre in Houston, Texas; and Avalon in Atlanta, Georgia. Similarly, Santana Row in San Jose, California, is a 42-acre suburban walkable mecca accommodating 530,000 square feet of retail, more 1.5 million square feet of office space, a hotel and 800 residential units.
North Hills, in Raleigh, North Carolina, is one of the most successful adaptive reuse projects. Once the 1960s-vintage enclosed North Hills Mall, the structure was demolished in the early 2000s, and the site and surrounding parcels were redesigned to include nearly 1 million square feet of retail space, 700,000 square feet of office, three hotels and 1,300 residential units.
Suburban projects, while walkable, with live-work-play environments, are distinguished from urban centers in that people must arrive by car, even though the projects remain architecturally, economically and socially distinct from their surrounding land uses.
We have analyzed 23 of the largest mixed-use lifestyle centers in the United States. Our selection was limited to those projects containing retail and hotel components, along with either office or residential (apartment or condo) as a third contributor. Some contain all four uses. The focus was on those with a horizontal integration of uses, not vertical mixed-use high-rises. Further, our analysis includes an independent examination of sports and entertainment districts—such as LA Live! in Los Angeles, California; The Power & Light District in Kansas City, Missouri; The Battery in Atlanta, Georgia; and the Arena District in Columbus, Ohio—as these projects tend to perform in different ways due to their sporting venue influences and proximity to convention centers.
The 23 centers studied are home to 44 hotels, with an average of 295 rooms and an average age of 10 years. All but three were branded. Three of the hotels were renovated and rebranded, while 41 were purpose-built. From a branding perspective, the properties are dominated by the largest hotel companies, namely Marriott International, Hilton, Hyatt Hotels Corporation and International Hotels Group; though upscale independent hotels also perform well in these settings.
CBRE Hotels collected data over a three-year period from 2016 to 2018. The hotels within the mixed-use centers were compared to their competitive sets, which were largely outside of, but nonetheless proximate to the centers. Competitive sets were determined by the property ownership/management from ongoing operations and not by CBRE Hotels, thus eliminating distortion in competitive-set data to arrive at perceived predetermined premiums or deficiencies.
As depicted in the chart below, these hotels outperformed their competitors by a significant degree.
The benefits tend to be manifested more so in average daily rate than occupancy. The hotels achieved a revenue-per-available-room-penetration premium of 28%. Granted, this is the average, with five of the properties underperforming in occupancy, but only two underperforming in ADR. Over the three-year period, the properties’ occupancy penetration ranged from 91% to 151%, with ADR penetration ranging from 93% to 147%.
Further, there does not appear to be a strong correlation between property age and the premiums achieved. Nor does branding appear to be a significant factor. The data suggests that travelers prefer to stay in hotels within walking distance of support amenities and are willing to pay a premium for this advantage. One interesting finding is that there tends to be less of an occupancy penetration premium if there are multiple hotels within the mixed-use project. On the other hand, ADR penetration premiums are not significantly affected.
Sports and entertainment district hotel performance
Also growing in popularity in the U.S. are sports and entertainment districts, which are typically focused around one or more large-scale regional venues such a convention center, an arena and/or a stadium. These districts are often mixed-use with live-work components, much like mixed-use lifestyle centers.
Many successful entertainment districts have served as a destination within their respective city and have helped to gentrify otherwise blighted areas. In essence, they are urban redevelopment catalysts. Advantages of a planned entertainment district include increased tourism, tax revenue, greater after-hour use of existing parking and transit facilities, managed district sponsorships and expanded hotel offerings.
Many of these projects have taken advantage of special entertainment overlay taxing districts to assist with infrastructure, security and promotions. They are often connected to public transportation networks tying airports and other notable attractions.
Prosperous districts are not isolated islands. They cannot exist only for the benefit of the sports venue, but must function as part of the city on non-sporting event nights. Accordingly, live-work components of the district, such as a central plaza for gatherings, are essential.
Internationally, one of the first entertainment districts was London’s The O2. Opened in 2007, the O2 Arena occupies some 60% of the district, with the remaining space occupied by the 2,350 seat Club IndigO2, 25 restaurants and bars, an 11-screen Cineplex, public entertainment attractions and retail outlets. In the Caribbean, El Distrito San Juan is under construction, adjacent to the Puerto Rico Convention Center in San Juan. Plans include retail, restaurants, a rum distillery, a 6,000-seat performance venue, a Cineplex and a 177-unit hotel.
Many other similar sports and entertainment districts exist or are planned in the U.S., including the $250-million Texas Live! development in Arlington, Texas, and the $4.25-billion Los Angeles Stadium and Entertainment District in Los Angeles, California. The Denver Broncos are planning a multimillion-dollar entertainment district on 52 acres in the north part of Denver’s Sun Valley area. Austin, Texas, is proposing the 1.5-million-square-foot East Austin District to replace the Travis County Exposition Center with a 15,000-seat arena, a 40,000-seat outdoor stadium, a 28,000 square-foot youth education and enrichment facility, retail and restaurants. The Los Angeles Clippers have proposed the Inglewood Basketball and Entertainment District, to be privately financed on 23 acres, with an 18,000-seat arena, a hotel, retail and parking.
Our research of seven hotels within the largest sports and entertainment districts in the U.S. shows penetration premiums similar to those achieved within mixed-use lifestyle centers, as shown in the chart below. It is interesting to note, however, that the RevPAR premium was driven by ADR, with only a slight occupancy premium.
Conclusion
Given the demonstrated success of hotels within these environments, the current trend of lodging developers migrating to such projects will undoubtedly continue. Although land costs are typically much higher for desirable sites, the incremental net operating income resulting from the RevPAR premiums yields value enhancements that exceed the greater land investment.
Aaron Carone, MAI, MRICS has been a Director with CBRE Hotels (formerly PKF) since 2015 based in the Jacksonville office, focusing on the Southeast and Caribbean. He provides real estate valuations, market/feasibility studies, consulting and market research in the hospitality industry.
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