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Blast from the Past

Converting a prime location into a unique hotel can provide great rewards, for those willing to risk it.

Monday, June 25, 2012
Sal Vaglica
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Hotel brands aiming to give guests a memorable experience, in a unique setting, are faced with a harsh truth: in most cities the best real estates has already been developed. So when building from the ground up is out of the question, developers turn to adaptive reuse—converting an existing building to serve a different function than it was originally designed for.

Turning a department store, city hall, or Post Office into a hotel for guests looking to stay in a building with an unusual story to tell, isn’t a new concept but it is grown in popularity over the last 20 years. Nearly every major brand has added an adaptive reuse project to their portfolio, and several have projects under development. When done well, and adaptive reuse hotel is one of the most talked about spots in the city, allowing the brand to command a premium from guests.

The success of these projects depends on a lot more than finding an old building. But finding that perfect spot is the first step. That was the case when Boston’s Charles Street Jail was converted from a prison into The Liberty Hotel, part of Starwood’s Luxury Collection. The two year, $75 million dollar renovation was an ideal opportunity to use existing architecture, which would be too costly to replicate today, on property that would never have been made available otherwise. The Liberty’s mix of architecture, history, six restaurants and bars, location in Boston’s Beacon Hill neighborhood, and the 6,000 square feet of banquet space to host anything from corporate events to weddings, allows the hotel to command room rates starting at a 33 percent more than the nearest premium hotel, the W Boston. The risk is paying off in one of the most critically acclaimed Boston hotels in recent memory. “The Liberty has experienced significant growth year-over-year in revenue and occupancy,” says Nicole Gagnon, public relations and marketing manager for the hotel.

Cities, like Boston, that cherish old buildings are a natural fit for adaptive reuse, and the bounty of old, unused public spaces and private office space doesn’t hurt. “People love the Liberty because it’s unique,” says Richard Friedman, president of Carpenter & Company, the developer of the property for Starwood. “The architecture is a huge draw because and the soaring lobby, which was the old exercise facility of the jail, wouldn’t be economical to replicate today.”

Adaptive reuse isn’t exclusive for the biggest hotel brands. Boutique hotels, with smaller budgets, are getting involved too. Recently the $32 million dollar, 72-room Wythe Hotel, opened in a cooperage built in 1901 on the Brooklyn, NY waterfront. Both the Wythe, and its greatly anticipated restaurant, Andrew Tarlow’s Reynards, have been covered by local media in a market that already has a healthy dose of hotels and good eateries. The Wythe distinguishes itself by using the building’s characteristics, like the exposed ceiling and brick walls, and mixes in local flavor like artisanal furniture and custom wallpaper. The website describes rooms fit for artists, friends, brew masters, musicians, concertgoers, bowlers, interns, twins, engineers, and chefs, so the Wythe is carving a niche for itself by going after guests who are looking for something a little different and unique.

Adaptive reuse is happening outside the top tier markets too, according to Gary Gutierrez, President of HRI Lodging, developer for Hilton Garden Inn, Starwood’s Aloft, Marriott’s Renaissance Residence Inn and Courtyards, and Hyatt. “Certain investors are only going to look at the top 5 to 10 markets,” says Gutierrez. “But we’re willing to look at the top 10 and then the following 30 or 40, because we’re also developers and have a different criteria.” HRI developed Richmond, VA’s Hilton Garden Inn in the shell of the former Miller and Rhodes department store, part of a larger revitalization of the downtown area.

Here the due diligence told Gutierrez that the location didn’t warrant a 500 room hotel, with a Marriot property across the street, so they developed a mixed use facility. The building was carved up into a hotel with 250 hotel rooms, leaving the rest of the space for apartments, a restaurant and bar. Currently 98 percent occupied, and Gutierrez estimates that the apartment residents, and those living elsewhere in the community, make up about 60 percent of my business hotel’s bar, a sign the project is a welcomed addition. HRI and Hilton Garden Inn kept the local feel of the department store in the hotel by incorporating the old building’s artifacts into guest rooms, retaining menu items from the department store’s original restaurant for the hotel’s restaurant, and hosting events like tea with Santa—a Miller and Rhodes store staple.

Often, adaptive reuse is part of a larger, urban renewal project or an effort to save a National Historic Landmark. One of the biggest and most talked about projects has been the plans for the Old Post Office building and annex on Pennsylvania Avenue in Washington, D.C. Earlier this year the General Services Administration (GSA) announced the plan to convert the space into a 250 room luxury hotel with spa facilities, restaurants, and meeting space put forth by the Trump Hotel Collection, which should bring the best chance for a Federal financial return on the investment. Cities that bolster infrastructure appeal to developers who can capitalize by turning around a beloved, local building. New Orleans is one such city after spending about $300 million dollars to improve the airport, $50 million on the convention center, and with cruise ship capacity returning to pre-Katrina levels, the city’s growth and tourism is forcing developers to look at reusing existing building in otherwise land-locked neighborhoods.

Beyond the normal due diligence that is part of any hotel development deal, working with these unique buildings has their own equally unique challenges. Buildings marked historic by the governments often have restrictions on what can and can’t be done to the buildings during renovations. Kimpton kept the original mail sorting room in the Monaco DC hotel, a former General Post Office and Tariff Building, and converted it into a restaurant without disrupting the existing stone work. “We tend to work around those restrictions and use them to our advantage or incorporate them into the design,” says Ken Reynolds, senior vice president of development and construction for Kimpton Hotels. “Because if you don’t you can add lots of time and cost to the project.”

Developers work within these demands to take advantage of the significant tax credits like the Historical Rehabilitation Tax Credit and New Market Tax Credit. Without state and federal tax incentives, these expensive projects would not happen, and should these credits get dropped from the federal budget, adaptive reuse projects might grind to a halt. “If the tax credit got cut from the federal budget it would dramatically impact this business because that’s a big source of capital for these deals,” says Friedman. “These projects generate a lot of jobs, they restore a lot of historic buildings, and they revive areas of the city, but there is a cost to the tax payers for it.”

The results are usually worth the expense because the right building, in the right location, can for the right brand deliver a unique experience to hotel gusts. “In general you get much higher quality locations to work with and we like adaptive reuse because you can be extremely transformative in what you do,” says Friedman. For developers, and brand willing to take the risk on adaptive reuse projects, the windfalls can be substantial.

Sal Vaglica
Hotel Interactive® Editorial Division
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