Press

July 9, 2019 | By: Laszlo Syrop

On Wednesday, June 19^th, ULI New York brought together a group of industry leaders whose organizations are disrupting the residential, office, and retail asset classes to speak on the topic of “The Hotelification of Real Estate.” Ellen Sinreich, Founder and Managing Principal of the Sinreich Group – a New York City-based real estate law firm that represents commercial landlords and tenants – moderated a wide-ranging and rich discussion that explored how changing customer expectations, macro-economic trends, and technology are driving a hospitality-inspired convergence in tenant experiences across asset classes.

She was joined in conversation by David Barry, President of Ironstate Development Corporation; Craig Deitelzweig, President and CEO of Marx Realty; Ken Himmel, President and CEO of Related Urban; and Ryan Simonetti, Co-Founder and CEO of Convene. Ironstate is a Hoboken, NJ-based developer of apartments and boutique hotels, including its hospitality-inspired residential brand Urby. Marx Realty owns and operates office and retail assets in 16 states plus the District of Columbia, including the 10 Grand Central office building in New York City. Related Urban develops and manages large-scale mixed-use assets as a part of the Related Companies, including Hudson Yards in New York City, CityPlace in West Palm Beach, FL and a 240-acre development in Santa Clara, CA. In contrast to the three more traditional real estate companies, Convene is a technology-enabled and vertically-integrated branded operating platform for commercial real estate. The company partners with class A office asset owners to create premium spaces that it manages as part of two primary lines of business: a meeting and event venue business and a third-party commercial property management business.

Kicking off the session, Sinreich prompted the group to explore what the term “hotelification” means in the context of their respective businesses. Several prominent themes emerged. Ultimately, the panel agreed, the trend reflected the emergence of an emphasis on core tenets of hospitality delivery: anticipating customers’ needs, providing comfort and flexibility, and utilizing human-to-human interaction to create emotional connection. Moreover, the term implies an attempt to avoid commodification by pursuing differentiation and authenticity.

“As opposed to commoditized, sanitized [product]… to talk about hotelification [is] to talk about inspired product, true product – something that’s authentic,” reflected Barry.

In service of these ambitions, hotelification involves dedicating significant attention to matters of aesthetics and design, operating partner selection, and programming – particularly the incorporation of multiple use types within a single asset.

“What separates our projects and the way we execute them is a level of taste, it’s about curating a project directly, it’s about having the kind of relationships with restaurants and hotel companies who have the confidence that you’re going to be successful with what you’re doing,” explained Himmel.

Using a specific building to illustrate this further, Deitelzweig discussed 10 Grand Central: “[it] was built in the 1930s, it’s Beaux Arts style. So we try to bring all of that in… We’re very into the details of making sure that it is authentic… we’ve got walnut wood and brushed brass and herringbone floors and we don’t do it in the Disney way, we do it in a modern interpretation… It’s really the attention to details that makes the difference and the tenants can tell.”

But the panelists were also careful to emphasize that the approach they were describing went beyond the level of design and programming that would be a standard part of any new development. Speaking from a philosophical perspective, Barry described a commitment to “elevating the product in a holistic way.”

Deitelzweig built on this by elaborating how his firm achieved a similar type of elevation on a tactical level, explaining “we look at hotels for inspiration and the reason for that is hotels are spaces that make you feel good… [Our spaces incorporate this emotional response with a] holistic approach for the entire building – as you approach, our buildings have doormen like you would see at a hotel, we have oversize doors… we look to all of your senses, outside there’s music playing, for instance, in our lobby we have a signature scent.”

Zooming out even further, Himmel described the process for approaching mixed-use projects and how different aspects of the projects create an interplay. “You’ve got to start with the programming… if you build hotels in your projects… you’ve got to decide who that operator’s going to be, the brand of that hotel… you’ve got to decide today, in mixed use projects, how much retailing you’re going to do… [Retail’s] not dead, it’s just being reinvented like so many parts of our business. So you’ve got to decide how you’re going to curate the retail… [it’s] the toughest question today.”

This attention to detail across design, programming, operations, and other dimensions can be understood as part of a broad shift in relationships within the real estate industry, opined Simonetti. “What’s happening, really, is the customer is being redefined and the expectation of the customer is now what the building owner has to do.”

Re-focusing on the end user experience in this way also demands a deep understanding of who these end users are and what they want. Data, intuition, and interactions with tenants can all help to inform that base of customer knowledge.

Convene is increasingly focusing on leveraging data and technology to do this, Simonetti explained. “Personalization within brick-and-mortar real estate is going to happen and it can’t happen without technology… In order to get to personalization… I have to actually know you, the individual: how you move through space, which spaces you actually go to, when do you work, when do you not work, which services you consume?”

Ironside takes a more analog approach, per Barry. “You need to think through the pieces… what does this resident need and where is the market going?” he explained. “It’s intuitive. Some of it is data-driven, in that other projects we have [allow us to] source feedback off the sites… [and ask the properties’ management staff] ‘What’s being used? What renewals are occurring and what reasons are people giving for that?’”

The panelists also took time to highlight a number of broad difficulties they faced. Scale and project complexity emerged multiple times in the conversation as critical drivers of execution risk.

“We always say that hospitality is the emotional, human-to-human delivery of a service experience, and that’s really hard to scale,” Simonetti added.

The scale and complexity of these types of projects also intensifies the uncertainties relating to developing product for future delivery, which all real estate projects face.

“You’ve got to really anticipate what’s going on for the next three to five years,” Himmel added. “Some of the programming items are so important to get right because you can’t change them… You can’t build a box for Restoration Hardware. Restoration Hardware is a bespoke product.”

Part of delivering a hospitality-like experience, is anticipating customer needs and providing seamless, end-to-end solutions. Historically, Simonetti pointed out, a significant amount of uncertainty fell on the shoulders of office tenants, who needed to understand what their future space needs would be. The advent of flexible space – either for core operating space or special-purpose event space – has begun to put asset owners in the position of delivering an office experience as opposed to static, un-activated space. That has shifted complexity and uncertainty to them, which – he added – is where partnership with an operator like Convene can add value.

Another major challenge facing the space is the tension between short- and long-term investment horizons. The scale of large mixed-use projects often requires an extended timeline to realize gains.

“I’ve been working in West Palm Beach for 21 years… finally that community has matured enough where it’s become a real city… but it’s taken a long time,” shared Himmel.

Returning to a more philosophical frame of reference, Barry mused that “we talked about how long it takes to plan these projects – eight years or ten years – but they sit around for fifty or a hundred years or longer. And so, in a sense, there’s a responsibility beyond just creating whatever thing can be created [easily] for return.”

Deitelzweig drew another parallel with the hospitality industry: “when [the macro-economy] gets bad, the hotel industry is the first one to feel it.” In other words, with shorter lease terms playing an increasing role in the office market, asset owners may experience increased market volatility.

Additionally, assets competing in the premium end of the market through increased investment in capital and operating costs may not find easy comparisons, thus incurring complexity in the financing and sale processes.

“Our rents are higher so when we look at a new acquisition we don’t really comp well… because we’re highly-amentized we have trophy-like rents and so it’s interesting when you’re educating capital partners on that. Some of them get it and some of them don’t but at the end of the day it’s about the NOI and we believe we’ll get that in NOI,” Deitelzweig shared.

This is particularly pronounced for assets comprising a mix of uses, which remain the exception rather than the norm. While “blended” rates may eventually emerge to account for different market standards that apply to the various component portions of hybrid products, there remains little consensus about how to value and assess such assets across the capital markets.

“There is no consensus in the debt capital markets and equity capital markets on how these assets will be valued… [but] my sense is in the next three to five years, we’ll get to a point where the capital markets know how to value [these types of assets],” Simonetti forecast.

Despite these challenges – significant as they may be – the night’s panelists made it clear that successfully applying hotelification strategies presented substantial opportunities to increase profits and mitigate risk.

“Our rents were $44 per square foot, we hoped to increase our rent by about $10 per square foot and we actually increased it by about $30 or $40 per square foot by delivering this hospitality-infused office,” noted Deitelzweig. “We had a full return in less than a year on that [investment].”

“This approach has been getting us 15-20% more per foot or per unit if it’s going head-to-head with other product,” Barry shared.

“If there’s a Convene in your building, you’ll get higher rents, your velocity is higher, and your retention is higher,” Simonetti asserted. “In our meetings and conferences product we can generate anywhere from four to seven times market rent [and in our workspace as a service product] we tend to see a two-and-a-half times revenue premium.”

“A lot of this is about deciding, programming, curating it, mixing it, the right way. That’s what’s fascinating about it: no two projects will ever be quite the same. That’s what I love about our business compared to what’s happened over the years in the commodity mall business where everybody had a formula. They had a formula, they thought they got it right, and they did forty of them,” added Himmel. “[Of] those forty, thirty of them aren’t going to be there in the next five years.”

Closing the session, Himmel neatly summarized the overall lesson of the conversation: “These are crazy wild undertakings and you have to staff yourself to be able to deal with it… We say, ‘how can we truly differentiate ourselves from our competition?’ There’s nobody [that’s] going to take on the kind of thing I’m describing to you. But if you could do it and you’re really equipped to execute it with the caliber of people we’re dealing with, it’s what the market’s looking for.”

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