Many localities and companies have worked to convert empty hotel rooms to housing for at-risk populations during the pandemic.
As hospitality continues to suffer and the housing crunch intensifies, many people wonder if housing might be a permanent answer for hospitality’s struggles.
One of those people is Jonathan Needell, president and chief investment officer of KIMC.
KIMC is working on its third deal to transition hospitality to apartments. So far, it has done one in Albuquerque and two in Austin.
Needell thinks hotel concepts on the lower end of the quality scale but in good locations are ripe for conversions. Right now, some of those hospitality assets are facing occupancy issues.
“Now, they’re 20% occupied and have started to be turned into higher and better use deals,” Needell says. “We see several of those, and that’s an emerging trend.”
Other groups are also showing interest in these conversions. Billy Meyer, SVP of real estate lending at Columbia Pacific Advisors, says his team recently submitted a term sheet for a project converting a hotel into housing in a major metropolitan city .
Meyer thinks there is potential to inject unsubsidized affordable housing into the marketplace by converting old hotels.
“I think what we’ll see mostly with hospitality is converting to multifamily with affordable rent, not necessarily through an affordable housing program,” Meyer says. “It won’t be through the local housing authority or the city or state government. I think there will be pent-up demand.”
Needell calls the conversions a niche play and says that for the most part, these hotel rooms can only be turned into studio apartments if a company is doing “some pretty heavy lifting” and gets the asset “pretty cheap.”
“Maybe on the full-service side, you can do more of a mix of unit types,” Needell says.
Like Needell, Meyers anticipates hotel rooms being converted to smaller units. “They’ll have a lower cost per month, maybe $1,000 a month instead of $2,000 a month,” he says. “They’re nice and new and clean, and they’re well located.”
Needell says extended stay hotels and older hotels with larger rooms may be able to provide units larger than studios. “Also, rooms with connector doors for families always make up a minority of the rooms in most hotels,” Needell says.
If a hotel is located in close-in suburbs or strong locations, studio conversions may generate adequate demand. The good news many hotels are located in strong areas for conversions.
Needell thinks the depth of the market for these conversions will be based on the economic recovery. The longer things last, the more hotels will be ripe for conversions. “We have six to nine months before lower end hotel occupancy recovers to the point where pricing makes it more difficult [for conversions], and only certain hotels can do it,” Needell says.
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