From retail to hotel real estate

By Dirk K. Wollweber

The structural changes in the retail trade and the current economic developments have led to more vacancies in the inner cities for years, not only in smaller shops, but also in larger retail properties such as department stores.

This fact has long been known not only to the experts – including yourself – rather, it is also easy to see for laymen and customers.

In answering the question of how to alternatively use vacant retail space, or how to supplement retail shops, from our experience one answer can certainly be: “retail, only different!”.

However, this article is not about the classic “repositioning of department stores” or their possible conversion to commercial buildings, shopping centers[1], or temporary pop-up uses, but rather it addresses a supplementary alternative use. It is a type of usage that is certainly not possible for all locations, however is getting more and more coverage: the conversion of (sub) areas into hotel or hotel-like uses such as boarding houses and serviced apartments.

Because: retail is not the only branch in the midst of big changes. The hospitality market has also changed drastically in recent years, however within the real estate sector it is currently benefiting like no other from the new market conditions.

On the one hand, due to changing customer demands, new lifestyle hotel products are finding their niche. Some of these products synergistically merge with or complement the inner-city retailers, or even replace them altogether.

On the other hand, altered travel behavior of the population generally strengthens the domestic hotel industry. It is one of the reasons why the German hotel investment market has broken all its records in the last two years, and why hotels in B and C cities, assuming good general conditions, are suddenly in the position to make investments.

In addition, the “serviced apartments” often offered by many hotel operators as a supplementary product, are changing the development of living-trends in the age of urbanization, internationalization and the evolved working environment.

“Ruby Marie” in “La Stafa”

In the life cycle of a property, it should be in the interest of the owners – as far as possible under building and planning law – to respond to all of these changes in a flexible way through adaptations in use.

Practically each of us knows a relevant example property that they have dealt with during their career. For me it is the former “Mariahilfer Zentralpalast”, better known today as the “La Stafa” on the Mariahilfer Straße in Vienna. I acquired the object as a young acquisition guy for a German open-ended fund. At that time, the Asset was mainly used as a shopping center.

Today, after a comprehensive and award-winning renovation in 2015[2], the “Ruby Marie” is located above the retail space, which, like many modern hotel concepts, does not require a large entrance and reception on the ground floor. Many vintage elements in the hotel convey the history of the building[3]. The Ruby hotels seem to agree with the proximity to retail shops. In Düsseldorf, for example, the “Ruby Coco” with 92 rooms will soon be opening in the old Brune office space above the Kö-Galerie.

Other prominent examples of such “Hospitality Conversions” are:

1. The Dormero Hotel Group and Andresen GbR want to invest in a four-star hotel in the Bavarian town of Hof. It is to be built in a part of the current Kaufhof building, in the historical part of Hof. The former sole tenant, Kaufhof, would not completely vacate the building – with its sales area of ​​around 9,000 sq m. However, it would significantly reduce its rented space to accommodate a total of 112 planned hotel rooms, as well as three meeting rooms, sauna, fitness area, and hotel bar. This would avoid vacancy, and meet the demand for more hotel beds in Hof. [4]

2. The Highstreet Group around Stefan Schnoor, Holger Wohner and Hayo Nadler, which specializes in such adaptations, is currently converting the historically protected, former Karstadt building at Holstenstraße 55-56 in Kiel, into a hotel of the new novum brand “niu”. Every niu hotel has its own character, and a design concept that is tailored to the location. Therefore, the maritime Kiel will be significantly reflected in the interior. The development project with around 5,800 sq m of usable space is expected to be completed in 2018. The plan is to build 113 rooms, as well as create 700 square meters of retail space on the ground floor. [5]

Flexible third-party use

3. Grätzlhotel in Vienna: The 21 Grätzlhotel suites, which were previously for the most part former vacant shops, are spread over the three city regions of Belvedere, Meidlinger Markt and Karmelitermarkt. The Grätzl – an Austrian expression for part of a district – in a way acts as a hotel lobby. Various services are offered in cooperation with shops and restaurants in the district: Breakfast is served in the café next door, the bar on the corner replaces the hotel bar, and the Turkish bath across the street takes over as a spa. [6] This is how flexible third-party use can function.

4. In Düsseldorf, the former Horten (later Kaufhof) on the Berliner Allee is to become the new top address in the city, known as “The Crown”. The entire complex, which the Koerfer Group in Cologne is developing together with RKW, will house around 200 rooms of the Carat Hotel Group on the fourth and fifth floors, 525 parking spaces on the first to the third floors, and an Edeka Zurheide as anchor tenant on the ground and lower floors with 10.000 sq m of sales area. There will also be numerous “gastronomy-islands” and as a result, Germany’s largest fresh marketplace will emerge. In addition, traditional office space in the skyscraper above the former department store will be added. [7] After some delays, the project should open in 2018.

5. In Oberhausen, the former Kaufhof in the city center will also be converted into a three-star plus hotel with around 200 beds, in this case by the Plaza Group from Heilbronn, with completion expected by 2019. Here too, retail usage including a Netto Markt, a Kodi and two other small areas will remain on the ground floor. In addition, there will be 2,000 sq m of new retail space on the lower level. On the upper levels 12 rental apartments of 70 sq m each will be built. The conversion will cost around 15 million euros, and is the first major project from investor Albert Kopitzki outside of Berlin. [8]

In summary, it can be said that for any asset manager or owner looking for an alternative use, third-party usage, or a supplement to existing retail space, hospitality can no longer be overlooked. Certainly, there are some location criteria necessary for the hotel industry which need to be fulfilled, and a conversion with regard to construction law, building structure and layout must seem sensible. The expenditure for conversion, especially regarding sound and fire protection, must also be economically justifiable. But that’s another topic…

[1] Cf. i.a. Martin Möhrl in Property Post, https://www.the-property-post.de/gastbeitraege/fachaufsaetze/neue-investitionschancen with the example of the train station Altona

[2] https://across-magazine.com/behf-wins-2-iconic-awards-2016/

[3] Cf. https://www.ruby-hotels.com/hotels-destinations/wien/ruby-marie/philosophie/maries-history

[4] E.g. http://www.thomas-daily.de/en/news/item/id/63378/t/Hof-Dormero-plant-Hotel-in-Ex-Kaufhof/lang/de; http://www.br.de/nachrichten/oberfranken/inhalt/kaufhof-wird-zu-hotel-100.html; https://www.tvo.de/mediathek/video/hof-dormero-hotel-zieht-in-den-kaufhof-ein/

[5] Cf. i.a.: http://www.hi-heute.de/waren_und_geschaeftshaeuser/news/karstadt-sports-in-kiel-wird-zum-niu-hotel/; http://www.highstreet-group.de/projekte/

[6]  https://www.graetzlhotel.com/; http://bwm.at/projekte/gratzlhotel/

[7] Cf. i.a.: http://www.rp-online.de/nrw/staedte/duesseldorf/duesseldorf-gourmetmarkt-zurheide-eroeffnet-im-maerz-2018-an-der-berliner-allee-aid-1.7170330; https://www.express.de/duesseldorf/supermarkt-koenig-das-crown—die-kroenung-der-innenstadt-24833062; https://www.researchandexperts.com/report/00RV-CIC179026PP/koerfer-crown-mixed-use-complex-north-rhine-westphalia-project-profile/

[8] Cf. WAZ of January 24, 2018 „City-Kaufhof wird Plaza Hotel“

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