The Inside Story of Historic Hotel Development
By John Tess President & CEO, Heritage Consulting Group | November 17, 2019
The core of most American cities has transformed in the past decades. For an example, one need only think of New York City's Times Square. In the 1980s, Times Square was a sketchy seedy area dominated by crime, filth, sex clubs and low rent businesses.
Today, it is a world renowned tourist destination, arguably the symbolic heart and soul of Manhattan and New York City.
Economically, this 0.1% of the City's land mass is responsible for 7% of the City's employment and 15% of the city economic output. Cumulatively, this is equal to the economic output of the City of Nashville. It generates $2.5 billion in tax revenue for the City and a nearly equal amount to the state. Real estate values are $7.1 billion, growing 18% in five years. The fundamental driver of Times Square is tourism. The district has 20,000 hotel rooms with annual revenues of $2.5 billion and employment of 12,500.
How We Got Here
Across the county, the Times Square effect, in which tourism (and more specifically hotels) are linked to the economic success of a city, is playing out in nearly every city, large and small. This symbiotic relationship is also not new. During the City Beautiful movement at the turn of the 19th to 20th century, having a first class hotel was an essential ingredient to being a first class city. It was lumped together with a good train station, public utilities, schools and parks – ingredients that spawned growth and represented a high standard of urban living.
The Plaza Hotel, New York, NY
By the 1920s, market competition elevated the first class hotel to "grand dame" hotels; to be an important city, a city needed an important hotel. Examples include The Plaza in New York, Parker Hotel in Boston, Bellevue-Stratford in Philadelphia, Palmer House in Chicago, Book Cadillac in Detroit, Brown Hotel in Denver, and the Mark Hopkins in San Francisco. Depending upon each city's aspirations, nearly every major city had a comparable example.
Sadly, following the Stock Market Crash of 1929, the decades were harsh to these great hotel properties. Depression and recession challenged their survival. Physically, properties aged poorly while dissipating operating revenue made it difficult to maintain the high end atmosphere. The Depression was followed by World War II, which was then followed by sub-urbanization. Auto-centric motels replaced the traditionally great properties as the consumer's choice.
In the name of urban renewal, many of the grand dames were demolished; the Portland Hotel in Portland, Oregon was demolished for a parking structure, which has since been replaced with Pioneer Courthouse Square. More often, in a time well before public housing for seniors, many of these buildings simply slid downward on the economic scale and became de facto senior housing where a resident might live until their social security money ran out whereupon they checked out and lived on the street until the next check came.
The late Portland Hotel, Portland, Oregon
With the rise of historic preservation, accompanied by official designations and tax incentives, the tide for these historic hotels began to turn in the second half of the 20th century. Much as the revitalization of Times Square was the direct result of the 42nd Avenue Redevelopment Plan, cities across the country embraced a "back to the city" movement, preaching the gospel of 24 hour cities, and "live, work, play."
City leaders joined with private developers to revitalize grand dame hotels, typically leveraging tax abatements and tax increment financing with federal and occasionally state historic tax credits. The existence and viability of nearly every major grand dame hotel still in existence as a top flight hotel owes its existence to that formula. Part and parcel of the physical redevelopment was the commitment to creating a clean and safe downtown, typically with downtown retail/restaurant district and an events-driving marketing program. Fundamentally, it was a pro-active commitment to the symbiotic relationship among hotels, tourism, and community economic success.
Success begat success. After the rehabilitation of the grand dames, hoteliers, such as Bill Kimpton and Ian Schrager, embraced the notion of "boutique" hotels, smaller products with an emphasis on guest relations and distinguishing aesthetics. As with the grand dames, these redevelopment projects typically relied on a combination of public funding and historic preservation incentives.
Boutiques came in two forms: One was the modernization of older but smaller properties, typically on the edge of the downtown areas. These products were often secondary properties originally, built as a residential hotel or for traveling businessmen. The second form was the adaptive reuse of smaller office buildings. Typically, these office buildings were built in the commercial style with ground floor retail spaces that hoteliers could consolidate into lobby and hotel restaurant space. The upper floors were originally built for speculative leases with offices aligned along a double loaded corridor. Hotel developers would maintain the corridor, while reconfiguring the rest of the floors and fully upgrading the buildings systems. Not atypically, these revitalized hotel projects would have a rooftop amenity, such as a pool or restaurant.
As the so-called "back to the city" movement has matured, three dynamics have shaped the modern marketplace. First, the meeting and convention segment has grown in size, professionalism, and sophistication. This continues to spawn new hotel construction in proximity to major meeting halls and convention centers. Second, quality locations have become more and more scarce, raising interest among developers in adapting older properties, and creating a willingness to develop smaller properties, and concomitantly a readiness to create flexible products.
The third dynamic is a segmentation of the marketplace, with hotel developers increasingly developing niche products for niche markets. This third dynamic is varied and includes aspects of creating the boutique hotel experience in modern construction, and in developing products specifically intended for certain segments, such as millennial travelers. The weight of success under this third dynamic often lies with value added services, such as creating a curated or "locally authentic" guest experience.
What Makes For Success?
The watchword for today's historic hotel marketplace is complexity. Most projects require two vital pieces. The first is the ability to capture federal and where possible state historic tax credits. These credits play a singularly important role in the financial viability of the development. The second is to secure a brand relationship. The brand association is critically important in providing the name recognition, reservation system, and national marketing system that allows for operational success.
The historic component involves filing a historic tax credit application through the State Historic Preservation Office (SHPO) to the National Park Service (NPS). This tax credit process first involves securing certification that the building is historic. In today's market, with increasingly scarce pre-War properties available, this task can sometimes be challenging. At the same time, with post-war buildings now reaching a vintage stage, there are increasing opportunities in unexpected places.
By using the federal tax credits, NPS has design review authority over the property - site, exterior and interior. As typically the developer is seeking to understand potential issues prior to actually acquiring the building, early government design reviews are often based on concepts with the understanding that additional though hopefully lesser issues may come up later. All that said, even in the best of circumstances, the process to secure historic preservation incentives require up to six months to reach a point where the credits may seem viable.
The second element of success is brand standards. Simply put, brand standards are the design and product requirements that result in a building looking and feeling, distinguishing one property from being a Hilton Garden versus a Hyatt Place. Each brand and product line has different standard and often a differing willingness to be flexible and resolving conflicts.
Not infrequently, balancing historic standards and brand standards can be a challenge. Both pieces are critically important. Within the framework of each, there is flexibility, but that flexibility can only go so far. For the federal tax credits, the project must meet the Secretary of Interior's Standards, particularly focused on the treatment of historic materials and compatibility of new construction. For the brand, it comes down to achieving a consistent and targeted experience across all products under that name.
For a seasoned historic hotel developer with existing relations with brands, balancing historic requirements with brand requirements may be easier in that the developer has a better understanding of expectations and process. For a novice, the challenge can be exasperating and time consuming simply from coming to understand the scope, magnitude and nature of the problem.
The Old No. 77 Hotel and Chandlery, New Orleans, LA
Finally, there are some outliers in the world of historic hotel development. The first is the brand that develops its own properties. One national company is Provenance Hotels. Focused on smaller boutique properties, Provenance owns and operates both old and new properties. They also are their own brand, focused on creating a "curated" hotel experience. Examples of their hotels include the Woodlark Hotel in Portland and the Old No. 77 Hotel and Chandlery in New Orleans.
Alternatively, a popular and unique Pacific Northwest brand is McMenamins. The owners of the company embrace the quirkiness of historic buildings and their team of craftsmen uniquely adapt each building, with uniqueness being the common denominator of each property. Examples of their hotels include Edgefield Manor in Troutdale, Oregon and the Elks Temple in Tacoma, Washington.
Finally, there are individual endeavors by those seeking to take a single building and by virtue of passion for the building create a unique product. One great example is the Hotel Henry Resort in Buffalo. In each instance, the developers first tendency is to accept the building as it exists and integrate a hotel operation into it.
Hotel Henry Resort, Buffalo, NY
Even after a strong decade of real estate development, the hotel development market continues to thrive without any end in sight. A major component in hotel development today is the historic hotel, which comes in a multitude of forms. Until recently broadly categorized as "boutiques," the hotel marketplace continues to segment toward smaller and smaller niches, each with specific development parameters.
Fundamental to most historic hotel developments are two critical pieces: the use of historic incentives, such as the federal investment tax credit, which facilitates the rehabilitation of the property, and the association with hotel brand, which allows the property to achieve operational success. These are parallel paths that can and do conflict. The key to a successful project is navigating among these varying standards, being pro-active, and timely.
More than any other real estate sector, hotels play a defining role in uplifting cities economically. Not only are they economic engines, but in style, service and quality, they convey the value system of the surrounding community. In the modern world, the lines between tourism and community reputation are very much blurred. Properly executed historic hotels can become both timeless, character-defining to the community, and incredible economic generators.
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