It’s true… the Covid-19 pandemic has dealt a major blow to the hospitality industry. With tourism stifled and convention centers abandoned, many hotel owners have put their hotels for sale at bargain prices. Enter the savvy real estate developers who understand the cost of construction and recognize the value in acquiring and then converting hotel properties into affordable multi-family, senior, and student housing units.
A hotel conversion is a win-win strategy for hotel owners and investors. Financial distress for struggling hoteliers is alleviated and new investors can quickly meet increasing demands in the housing market. Still, there are potential pitfalls to consider with your hotel brokerage for conversions.
Is Hotel Conversion the Best Option?
Hotel conversion isn’t a turnkey business concept, but it has a leg up on ground-up construction. Regardless of the hotel’s condition, it won’t be ready for immediate operation as a housing unit. Not all hotel properties are equally suited for conversion into housing units. So, before real estate developers dive into hotel brokerage, they must carefully evaluate a property’s features and how it is situated.
Not all hotel owners can benefit from selling their properties to real estate investors for hotel conversions. They need first to evaluate the property’s potential for recovery and redevelopment.
Property Features for Consideration Before Hotel Conversion
Before deciding if a hotel property has potential as a housing unit, investors should consider the following factors:
Location. When it comes to real estate, location really is everything. Real estate investors should think about whether the location is someplace people want to live. With that in mind, a hotel in a bustling downtown might convert better than one near the airport.
Site Suitability. Most hotel units consist of one bedroom and a bathroom. So, a hotel conversion would involve merging units into two- or three-bedroom apartments. And not all building structures can support that kind of conversion. In addition, investors should consider what percentage of the building can be transformed into sellable or rentable space. Factors like ceiling heights and floorplans, which can impact rental rates and sale prices, should also be inspected.
Zoning. Legal and zoning constraints can complicate hotel conversions. Investors should research these restrictions before purchasing a hotel property for conversion.
On-Site Amenities. Investors might shy away from hotels with commercial kitchens and full-service laundry rooms. These facilities aren’t essential in apartments and could translate into unprofitable space. On the other hand, some investors convert these spaces into creative features that increase the housing unit’s value, such as gyms, bowling alleys, movie theaters, and ballrooms.
Financial Considerations with Hotel Conversions
Even when purchased at bargain prices, hotels don’t automatically make suitable real estate investments. Yes, some investment potentials depend on the hotel property’s features, but financial factors also play a role. And there are key differences in financing for hospitality versus multifamily assets.
Key considerations include:
Revenue Per Key. The average standard multifamily housing unit produces 2.5x less revenue than a hotel room. 60% of the revenue from a housing unit goes to the bottom line. In contrast, is the 35% of the revenue from a hotel room.
Renovation Costs and Timeframe. Both the costs and time needed to complete renovations can affect investment returns. So, properties that require complex structural changes might not be sound investments. However, one of the most substantial considerations for conversion hotel properties is the cost per key plus renovation expense per unit compared to new construction. With current construction prices, most conversions can save hundreds of thousands to millions of dollars for investors.
Property Tax. Taxes paid on a property used as a hotel are not the same as those paid for a multi-unit housing building. Investors should research taxes relevant to the building’s location before buying.
Financing. Lending programs are available to investors looking to convert hotels into multifamily housing. There are many conventional financing opportunities, including bridge loans, as well as government-supported options.
The hotel conversion business is booming. There are many struggling and foreclosed hotels for sale. Researching the factors mentioned above to see if a property is viable for conversion may prove well worth the time and investment for savvy developers.