The rise of dual uses: Hotel complements office

The Denver skyline is witnessing the addition of several projects that pair office properties with boutique hotels. We spoke with developers and owners of three of these projects – Dairy Block/Maven Hotel, Union Tower West/Hotel Indigo Denver Downtown, and A Block/Hotel Born – to discover the intrinsic benefits as well as the complications these pairings add to a project.

While mixed-use projects are nothing new and the convenience of a hotel near an office property is implicit, these projects offer a fresh perspective. They are projects that host the hotel and the office on the same site and all benefit from owners/developers who view their respective properties holistically and with a long-term mindset.

In order to maximize the added value each use brings to the other, it wasn’t enough to have the projects in the same vicinity. No, instead, the energy is created by building one property that houses the two uses, which these developers are finding is difficult to replicate in a standalone of either type.

“We knew that both uses would do well on their own, but as we got further along in the planning process, we looked at the synergies between having the two buildings really interact together,” said Michael Everett, chief investment officer with Sage Hospitality, a co-owner/co-developer of The Dairy Block. “We saw an opportunity to create something that was much more integrated than just having a traditional office building next to a traditional hotel.”

At the Dairy Block, the hotel and the office lobbies are connected and designed to give the office building a more upscale, lively feel, while also drawing visitors’ eyes to the bar and restaurant located in the hotel, he said. Many of today’s office tenants are attracted to the 24/7 environment created by hotel guests visiting every night of the year as well as customers visiting the multiple restaurants and the retail that round out the mixed-use development, he said.

This speaks to a broader trend of people’s desire for reintegration. “People want to be around other people, and I think this integration of uses facilitates that,” said Dan Cohen, McWhinney senior vice president of mixed-use development, and co-owner/co-developer of the Dairy Block.

The most straightforward appeal of these projects is the efficiencies the pairing brings to owners and tenants alike. For example, the single environment can easily support an office tenant’s out-of-town clients and visitors.

“The two uses are synergistic, particularly when the hotel is a 4+ star property that has great meeting space and appeals to business travelers,” said Frank Cannon, development director at Continuum Partners, lead developer of A Block/Hotel Born.

Office employees can use their time more efficiently as well thanks to many of the shared amenities. Be it having easy access to a café, gathering at a convenient happy hour spot after work, using the fitness facilities on site or conducting business meetings with catered-in lunches in one of the hotel’s meeting spaces.

From an operational perspective, there are intrinsic benefits as well. Shared, often larger, amenities, such as fitness centers, lobbies and restaurants, allow the developer to build only one amenity to service both uses.

Mechanical, electrical and plumbing systems can be shared (but built in a way that allows the owner to meter the two separate uses differently at a later date, if so desired). At Union Tower West, the two sides even share an engineering team, which cuts down on overhead, said Charles A. Pinkham III, senior vice president of development at Portman Holdings.

During construction, since it’s a single building, regardless of how many uses it will serve, there are many ways to capitalize on shared expenses. For example, the building only needs to connect to the city water supply one time. Only one crane is needed with only one hoisting expense, and the general contractor can mobilize to a site one time – instead of twice, Pinkham said.

Another benefit to this type of mixed-use project is the diversification it provides.

“From a pure financial standpoint, when you mix the use types, it really spreads the risk of the asset and the exposure of that supply to the market,” Pinkham said. “Instead of delivering 200,000 square feet of office – which will require some sort of significant prelease or a pure speculative office play, which is a relatively risky play – you deliver 100,000 square feet of office. You literally cut your supply risk and your prelease risk in half, and then you deliver 100 hotel keys, which has some level of inherent occupancy that financing institutions will accept by virtue of the fact that occupancy will come based on the market. And granted, it has its own absorption risk, but it’s much less risky from an occupancy standpoint than an office building.”

Everett agrees. “You’re not putting all of your eggs in hotel or office,” he said. “Office tends to be a lower, but more consistent return, looking at it long term, and hotels tend to be higher, but a more volatile, type of cash flow stream, so it’s useful to combine the two.”

However, even if the risk may decrease with multiple uses, finding financing for these projects is one of the more challenging aspects, because most equity investors and lenders are single-product oriented. Often the development team must search out the right equity and lender partners who understand all the components for these projects.

“We have to find a lender who will look at a hotel for this type of value in this type of industry and will look at the office in a different way, yet blend it all together into one loan package for you,” said Everett. “So that is a smaller universe of equity investors and lenders who understand that and are willing to play in that kind of situation.”

Other complications stem from the physical layout of bringing these two different uses under the same roof. “The biggest single challenge is vertically stacking different uses,” said Pinkham.

Developers must take into consideration the MEP systems. For example, consider the different plumbing and electrical needs from hotel floors to office floors. On a hotel floor, there might be 40 individual bathrooms, each with multiple fixtures, while the office might only require 10 bathroom fixtures for an entire floor, he said.

Additionally, they must determine how to facilitate different layouts within the same structural grid, because wherever a column is dropped in the office space, it’s going to be in the same space for the hotel (and in the same spot in a garage, if that’s included in the project).

They also must consider how to properly accommodate different floor plate needs. Office wants large floor plate, while hotel floor plates meet a maximum efficiency that is much smaller, said Cohen.

Once all these complications are handled and the property is open, one looming challenge remains: the fickle consumer market. “We don’t have any specific predictions about how office is going to look in 20 years and how hotel is going to look, but we know it will be different,” said Everett.

Because each of these projects enjoys an ownership group that maintains control over both uses, they can manage the properties holistically and make decisions based on what’s best for the greatest good. This agility to be flexible with decisions affecting the long-term health of the property will become increasing important as the projects inevitably make tweaks and adapt to changing consumer needs.

However it may evolve, anticipate more projects pairing office and hotel in Colorado’s future, especially as multifamily continues to flirt with oversupply, potentially diminishing its desirability as a mixed-use component, according to one source.

“You can build a great hotel as a standalone, and you can build a great office as a standalone, but the opportunity to do this type of project more is something we’re super excited about,” said Everett.

Featured in CREJ’s September Office Properties Quarterly.