When in doubt, condo it out: Investors sleep a little easier knowing there's a more reliable income stream like high-end housing attached to a hotel project.
Developers around the world in recent years trimmed back luxury hotel guest room counts in favor of adding condos to a project to boost profitability. Condos will now play an especially important part in helping the luxury hotel sector grow in an uncertain travel climate.
Developers didn’t shy away from building or proposing new locations for ultra-luxury hotel brands like Raffles, Waldorf-Astoria, and Four Seasons during the pandemic.
Nearly ninety percent of the Four Seasons Hotels & Resorts development pipeline includes a residential component. The 1,049-foot Waldorf Astoria Miami, a 205-guest room and 360-condo project slated to begin construction next year, would become Florida’s tallest building when complete.
Accor leaders maintain the company’s Raffles brand is on track to essentially double its footprint within the next five years. The Paris-based company last year inked 17 mixed-use hotel and condo projects across all its brands, a company record that may be short-lived. Accor plans to beat that figure this year.
There may be uncertainty in when travel demand across all sectors returns to pre-pandemic levels but incorporating more condos into luxury hotels enables developers to offset some of the financial risk. That helps win over investors in a notoriously tight lending market, too.
“One hand feeds the other,” said Ryan Shear, managing partner at PMG, the development firm behind the planned Waldorf Astoria tower in Miami. “Having a Waldorf hotel helps sell the condos, and having the condos helps finance the hotel. You kind of need both.”
Ultra-luxury hotels don’t come cheap, especially on the development front. It can cost as much a $1 million per room to develop a Raffles hotel, Accor leaders told Skift.
While there is generally a sense the clientele for these properties can afford sky-high room rates, real estate investors typically err on the cautious side.
“If you think about how much construction costs have been going up, the shortage of [construction] labor, and the increase in materials, adding a residential product to it makes the development a little more feasible,” said Geraldine Guichardo, global head of research at JLL’s Hotels & Hospitality group. “It leads to income diversification. You’re not just relying on the hotel to make the property profitable.”
Having a residential component, which begins sales early in the development process, can offset some of the uncertainty and apprehension around hotel room demand. Developers can even find ways to use some of the condo sales revenue to help finance the project until it is fully developed and starts making revenue on its own, Guichardo added.
That thinking may particularly come into play following the global pandemic.
“If we were building a standalone Waldorf with no condos and it’s just a hotel, I don’t know,” Shear said. “It’s going to be a tricky world to navigate, and I don’t know what that process looks like coming out of the gates next year vs. what it used to look like. All I know is it’s going to be difficult to get financed.”
The Miami project’s total condo sales volume could exceed $1 billion, Shear previously told Bloomberg. While he initially gave Skift overall financial figures for the project in an on-the-record interview, his representative declined to confirm those numbers when later contacted.
What’s Old Is New Again
Luxury residences at a hotel aren’t a new concept. In fact, it’s at least a century-old tradition.
The family of Katharine Graham, the late owner of the Washington Post, moved in the early 1900s into the St. Regis in Manhattan following some of her father’s investments that weren’t paying off as much as the family would like.
“In an effort to retrench, they sold the house [at 70th Street and Park Avene] and moved into an entire floor at the St. Regis Hotel — not exactly poverty row, but enough to set off rumors that Wall Street’s boy wonder had gotten into trouble,” Graham wrote in her 1997 autobiography.
The Waldorf Astoria in Manhattan, currently under renovation, was home to several high-profile residential tenants, from gangster Benjamin “Bugsy” Siegel to Paris Hilton.
The hotel-branded residential sector began to pick up more of a standardization in the 1980s when companies like Four Seasons in North America and Aman in Asia launched dedicated residential components to hotel projects. Interest is expected to continue further on the other side of the pandemic now that more people are looking at second homes as a way to have greater control over their vacation experience.
“The future is certainly bright, and these residential components will go from strength to strength,” said Dino Michael, senior vice president of luxury brands at Hilton. “Covid has accelerated and amplified trends that were already there.”
Accor’s residential growth with its Raffles brand includes future hotels in Boston, Dubai, and London. But some of the investor logic doesn’t apply to many of these hotels given how their capital is structured, Accor leaders say. Raffles projects are often funded through high-net-worth individuals or sovereign wealth funds.
“It’s very rare to have private equity funds or institutional investors going into this type of project,” said Francois Baudin, senior vice president of development for Accor’s luxury hotels. “The high-net-worth individual will have a lot of connections to get the best dealings in terms of financing.”
Don’t Discount Luxury
The standalone luxury hotel may seem like a development anomaly, but leaders at major hotel companies say they are still possible.
“I don’t think it’s a standard answer. It depends on where you are,” Michael said. “I certainly haven’t seen the hotel-only aspect diminish in any way.”
Half of Accor’s luxury hotel development pipeline are standalone hotels without a residential component, and the company doesn’t expect to see hotel-only projects fully disappear in the future. But Accor leaders see where adding condos fuel the company’s mission to offer more tailored experiences for individual guests.
Most of Accor’s Raffles properties with condo components don’t exceed 150 guest rooms.
“The smaller inventory of guest rooms allow you to deliver higher services,” said Agnes Roquefort, chief development officer at Accor. “A smaller luxury hotel helps deliver better service to get higher [daily rates] and at same time have a profitable project.”
Photo credit: Accor saw its highest rate of newly signed hotel-condo projects for brands like Raffles (pictured) in 2020. It hopes to break the record one year later. Binyan Studios / The Architectural Team