Reimagining real estate: How “hotelization” is changing the role of managers

Originally published in iREOC Connect April 2021

A few years down the road, real estate may look very different than it does today, as “hotelization” trends continue to pick up within the various asset classes.

Hotelization is the shift from the traditional idea of space as an asset, to space as a service. In some cases, developers are expanding properties beyond their original purposes to make them more like lifestyle centers, with a focus on enhancing tenant and customer experiences. This can take the form of community wifi, artificial intelligence in HVAC, and electric-vehicle charging systems. In other cases, developers are building wellness into spaces, with a focus on natural sunlight, green space, better air quality and energy efficiency. Experts say this is gaining traction across various property types, particularly office and multifamily. As a result, the role of property managers, construction managers and asset managers are changing, as well.

Trendsetters

Industry participants point to several factors that are driving hotelization in the United States. Within multifamily, the increasing number of people choosing rental housing as a longerterm option is driving demand for enhanced community amenities and services.

“We’re seeing more renters by choice today, whether it be young professionals in a roommate situation, families deciding to rent in order to be in a top school district, or empty nesters giving up the hassles of homeownership,” says Bryce Popoff, director, investment management at Western National Group (WNG), a vertically integrated multifamily firm focusing on acquiring existing properties and developing new projects. WNG has added functional common areas, floorplans that are more conducive to remote work, and spaces that appeal to lifestyle trends, as well as fitness centers and pet grooming stations, according to Popoff.

At the forefront of the hotelization trend are millennials, who tend to lead a more transient lifestyle and place more emphasis on experiences, as well as speed and convenience. As a result, multifamily, office, industrial and retail sectors have shifted toward offering more flexible and dynamic spaces, and developers have grown to be more nimble. Crow Holdings, for example, has met the growing demand by including co-working centers, electric vehicle charging stations, Amazon package lockers, speakeasies and short-stay rentals at its class A multifamily communities.

“Whether it’s at home, in the office, or while shopping, the physical environment should facilitate those activities taking place in these spaces,” says Michael Levy, CEO of Crow Holdings. “Reimagining communal areas in retail centers, increasing focus on the office as a gathering hub, or innovating in new uses and layouts for apartment spaces are all responsive to these activities.”

Changing attitudes

Although the hotelization trend was in place prior to the pandemic, experts agree COVID-19 has played a role in accelerating demand for multipurpose spaces with a focus on wellness. Some of this stems not from economic factors, but something as inherent as the desire for human connection.

“Humans are social animals, and many of the traditional ways that humans have interacted socially have been reduced, such as shopping — think malls — dining, work environments, entertainment events — sports, fairs, etc.,” says William Ballard, CIO and CFO of RedHill Realty Investors. “Therefore, residents are looking for their residential communities to offer more opportunities to engage socially, especially in safe environments — outdoor areas — dog parks, resort-style pools, firepits and barbecue areas.”

An additional trend in the multifamily sector is residents’ increased sensitivity to their environmental footprint and social impact.

“Pre-COVID, some multifamily developers were choosing amenities over space as essential,” says Levy. “As people continue to shift to workfrom- home, apartment renters not only want premier amenities, but they also expect thoughtful layouts and adequate workspace in their apartment home.

“In office [properties], the trend was all about density pre-COVID. Today, we see a de-densification of office space, while maintaining amenities and common spaces, as well as an increased focus on wellness,” he adds.

Grappling with pandemic challenges

One of the biggest challenges facing developers is the transformation of existing workplaces, according to Joe Sitt, founder and chairman of Thor Equities Group. Thor Equities specializes in the development, leasing and management of commercial, residential, retail, hotel and mixed-use assets in urban locations. Sitt says developers and employers will need to make workplaces as comfortable and hospitable as possible to incentivize people to leave the comfort of their homes.

This could pose some challenges. A workplace survey conducted by JLL shows employees are primarily concerned about the cleanliness of common areas and the close proximity of workspaces. JLL predicts owners and investors that rioritize health, safety and wellbeing will be rewarded with greater returns. In 2020, the average space per employee was 196 square feet, according to JLL. In the future, implementing socially distanced floorplans will mean increasing the average square footage per employee by almost 50 percent.

“The pandemic challenged us to re-examine our current assets and see what features are most important to tenants and employees,” says Sitt. “We recognize the power and appeal of technology and integrating wellness into

building design, but also found flexible-space operators are ideal tenants.”

Experts such as Joe Muratore, principal and co-founder at Graceada Partners, also view the changing face of work as one of the biggest challenges facing developers and operators in the office sector. According to a survey conducted by PwC, more than 55 percent of employees surveyed said they would prefer to be remote at least three days a week after pandemic concerns fade. As tenant

sizes continue to change, developers and operators will need to be more nimble to anticipate future footprint sizes and needs, notes Muratore.

“Tenants have a bit more leverage with some landlords,” explains Muratore. “In some cases, as a landlord you’ll cut very aggressive deals in this climate to secure tenants. Ultimately, you’re developing a product. Tenants have lots of options, and a way to stand out is to offer amenities, to advance the space as a service model.”

Industry participants agree the challenges associated with switching to the space-as-a-service model will be divergent among the various property types.

“For the multifamily developer, the challenge is to develop more affordable housing,” says Ballard from RedHill. “Therefore, it is challenging to meet this challenge by expanding amenities within a project.

“For workforce housing projects, determining the improvements that produce the highest ROI — interior improvements versus offensive exterior improvements to amenity spaces.”

Opportunities on the horizon

Nevertheless, a wealth of opportunities awaits industry participants. According to Muratore, some operators are capitalizing on the popularity of Airbnb rentals by reserving portions of a building for these types of accommodations.

Properties may also be tailored to a specific audience depending on location,

such as space for executive apartment rentals near a business center that are available to remote employees when traveling to an office.

Graceada Partners, for example, is acquiring a class C duplex across from a hospital it is buying. The company is redeveloping it into a cottage-style class B property and will gear a portion of it toward nurses for temporary accommodations.

Levy says anticipating trends among property types and geographic markets will be key, moving forward. Crow Holdings has largely been focused on industrial and multifamily in fast-growing southwest and southeast U.S. markets, based on compelling secular demographic, ecommerce and domestic

migration trends. However, as Levy tells it, “Understanding the customer and creating a physical environment to address their needs remains our biggest challenge and opportunity as an industry.”

In general, industry participants are in agreement that, while partially shaped by the pandemic, the hotelization of real estate will most certainly outlast it. One of the biggest misconceptions, according to Levy, is that traditional office and retail are dead. Although these asset classes are undergoing fundamental

changes, developers are also becoming more in-tune with tenant expectations, underscoring the resilience and flexibility of private real estate.

Muratore puts it this way: “People crave amenities, they crave flexibility — the more the developers and operators can be on the cutting edge of this trend, the more they will meet existing and future tenants where they are.”

He adds, “This is not a trend stemming from the pandemic. It is something that was already in the works and will likely continue into the foreseeable future.”