A new deal by Lockwood Development Partners represents more than the purchase of nine hotels with plans to transform some of the properties into apartments. It accelerates an emerging push into hotel-to-apartment conversions across the country after the hospitality industry stagnated and the multifamily market reached record demand.

The developer bought the hotels from different sellers with plans to convert some to multifamily housing. The company, which spent $225 million on the hotels that span a collective 1.5 million square feet across eight Sun Belt states, is the latest to pursue the strategy in areas where the population is quickly growing as tourism has dropped off.

“Travel and leisure falls off a cliff during lockdown, and every hotel goes on sale,” said Elan Gordon, a principal at real estate investor Shir Capital who was not involved in the Lockwood deal but is working on similar projects nationwide, in an interview. “It moved what was kind of a side business front and center.”

The move by Lockwood Development Partners is part of a broader movement of apartment developers grabbing hotel properties, many of which are struggling or closed.

During the pandemic, stay-at-home orders left hotels in a lurch as events that bring out-of-towners to cities vanished: Parents weren’t staying in hotels to visit their kids in college because colleges were shut down, too. And the weddings, dances and conferences that otherwise sustain a hotel’s events business disappeared. Scores of hotels either permanently or temporarily shuttered, with 28,084 hotels representing 3,915,416 rooms having closed for some portion during the crisis, according to CoStar’s hospitality analytics firm, STR.

Because of that, hotels hit the market in droves, and more mom-and-pop owners of smaller hotels were open to selling off their properties, apartment developers working on conversion projects told CoStar News.

Meanwhile, availability rates in suburban apartments around the country have fallen to unrivaled lows of below 4%, according to a CoStar Group analysis. That figure in urban properties has fallen to below 5%, a significant improvement for landlords from its COVID-era high of more than 8%, according to CoStar. Much of this demand is being driven by significant migration to the Sun Belt.

“With such strong demand throughout the country, developers are playing catch-up as they try to bring new projects to market,” David Kahn, director of market analytics at CoStar Group in Atlanta, said in a recent CoStar report.

Sun Belt Focus

Some industry analysts and executives have questioned whether the conversions will be a temporary phenomenon, fading away as the nation gradually recovers from the pandemic and more people get vaccinated and resume travel.

However, the purchases show long-term financial commitment as some developers see hotel-to-apartment conversions as a long-term solution to housing shortages in major cities. Converting a hotel to an apartment complex is cheaper than building an apartment building from the ground up, which allows the developer to offer lower rents and attract more residents, Gordon said.

Most of the properties Lockwood Development has acquired are in Memphis, Tennessee; Orlando, Florida; and in the fast-growing Texas cities of Austin and Houston, all surging Sun Belt cities that experienced population increases in the pandemic.

“This venture provides relief to that segment of the hospitality industry that has been decimated by the pandemic,” Eddy Nevarez, associate director of brokerage Marcus & Millichap’s national hospitality division who brokered the Lockwood deal, said in the statement. Lockwood did not return a request for further comment.

Shir Capital has converted hotels to apartments in Austin, Pittsburgh and South Carolina. Before the pandemic, the company focused on apartment acquisitions with the value-add strategy of fixing up the property to boost rents. It has since shifted its entire focus to hotel conversions, Gordon said.

“We go where the market opportunity is. Hotels are cheap, comparatively, to what they’ve been the last five years,” Gordon said. “Conversely, multifamily is very expensive.”

Because hotels are comparatively cheap these days, the lower conversion costs and rents could help more renters access housing, too, a significant need amid a national housing affordability problem.

Lucern Capital Partners is also in the conversion business. The investment firm is working to convert the 96-key TownePlace Suites by Marriott Charlotte University Research Park in Charlotte, North Carolina, into a 96-unit multifamily property, Frank Forte, chief investment officer and managing partner at Lucern Capital Partners, said in an interview.

The hotel’s rooms span between 555 square feet and 1,103 square feet, which Forte called “phenomenal” from a conversion perspective because that means the units could skew larger than many other apartments in the market. Plus, the hotel was an extended-stay property, so many of the rooms have kitchens and full bathrooms already built out.

The company is adding amenities, including a lounge, business center, grilling stations and fire pits, Forte said. They’ll also be renovating the units to add stainless steel appliances and updated bathrooms.

For apartment developers, demand for inexpensive conversion opportunities doesn’t appear to be slowing. When it comes to this type of deal, “if I could find 10 more of these, I would,” Forte said.