Downing has abandoned plans to return the Scandinavian Hotel on the corner of Duke and Nelson streets in Liverpool city centre to hotel use after failing to find an operator.
The developer is in talks with council planning officers to create an 80,000 sq ft mixed-use scheme with retail, leisure, offices and possibly residential instead.
Downing was selected to develop the site by urban regeneration company Liverpool Vision in 2002. A compulsory purchase order and public inquiry followed after opposition by former owners Frenson and two Chinese businessmen. The site forms the edge of the city's Chinatown district.
Paul Houghton, director at Downing, said the hotel market had moved on dramatically in Liverpool since the scheme began. He added: "When we originally started looking there was significant hotel interest. Having gone through a CPO, we are now five years down the line and testing the market again we found a lot of other hotels had opened and there was no interest at all."
Houghton said the off-prime location was partly to blame but also the perception that Liverpool's hotel market was now 'over-bedded' in some hoteliers' eyes.
By the end of 2008, eight hotels will have opened in 18 months, adding 1,000 beds to the city centre market.
The price Downing must pay Frenson and the other owners is still to be decided, further prolonging the Scandinavian's re-development and is due to be settled at the Lands Tribunal.
Houghton said architect Shed KM was retained to design the new scheme, which will keep the historic frontage on Nelson Street and install a new four or five storey building behind.
He added: "We envisage retail and leisure on the lower levels and residential or offices above and we are looking at several configuration options at present."
A planning application is due towards the autumn.