WASHINGTON—Once thought extinct, fractional ownership is again driving some hotel construction, according to developers speaking last week during a panel at the Bisnow Lodging Investment Summit.
Of the projects that contributed to 50% growth in FRHI Hotels & Resorts’ pipeline, for instance, 80% include some residential component, according to Michele Wimpling, VP of real estate and development.
Driving much of this shift is the nature of development abroad. In China, where FRHI has 24 hotels under development, many hotels are tied within larger mixed-use projects.
And in the United States, a recent change to a federal rule as part of the Jumpstart Our Business Startups Act has made it possible to structure condo-hotels as a securities offering to a private group of accredited investors. Previously such offerings had to be made public via media advertising and exposure through broker networks.
The path is still fraught with challenges, however.
“We look very hard at any project that was originally (conceived) as a condo-hotel or a developer who wants to come in with that model because of the uncertainty with the inventory,” Wimpling said.
Starwood Hotels & Resorts Worldwide shies away almost entirely, according to Mark Purcell, the company’s VP of managed hotel development.
“We would be willing to test the new model that’s been rolled out,” he said of the new condo-hotel offerings model, “but very cautiously.”
Jeffrey Holmes, principal with architecture firm Woods Bagot, said the fractional ownership model belies a more secular change at work.
“You see so many people in development and the hospitality industry rethinking that intersection between hotels and residences,” he said. “The future is somewhere in that intersection.”
Dissecting developments
Panelists were asked to describe their recent development activity.
Corry Oakes, CEO and founder, OTO Development: “Over the last 20 years, we’ve developed about close to $4 billion worth of hotels. Today we are a private company. We raise small funds from a handful of investors and deploy that capital toward the mid-upper-tier price-point hotels up and down the East and West Coasts,” Oakes said.
The group has $800 million worth of real estate under development at present, he said.
OTO favors brands under the umbrellas of Marriott International, Hilton Worldwide Holdings and Hyatt Hotels Corporation, Oakes added.
The company’s focus is strictly in the United States.
“Those foreign, exotic locales sound fascinating, but when you start crossing international borders with your own capital, it’s much more challenging. Having a local partner is critical. We’d rather be in control of our own destiny,” he said.
Allie Hope, head of development and acquisitions, Virgin Hotels: The fledgling company’s first hotel is scheduled to open in Chicago this year. Additional projects include a recently confirmed development in San Francisco, a 240-room hotel on Nashville, Tennessee’s Music Row and a 500-room hotel in New York.
London remains a “big focus,” she said. Also on the global hit list are Paris, Berlin, Spain and Greece.
Purcell: Purcell focuses on big-box, urban hotels with capitalization of $100 million or more, many of which are being funded through a mix of public and private monies, tax increment financing, urban development grants and other incentives, he said.
An example includes an Aloft and Element two-pack near the Boston Convention and Exhibition Center on land owned by the Convention Center Authority through a ground lease structure.
A fraction of the company’s pipeline is also funded in part with the “dreaded” EB-5 financing, Purcell added.
Wimpling: FRHI has 60 hotels in the pipeline, 30 of which are in Asia, she said. The company has three brands. The “uber luxury” Raffles brand is reserved for large gateway markets with high barriers to entry. With no footprint in the Americas, executives are actively targeting New York, San Francisco and Miami, she said.