Publications

- October 1, 2021: Vol. 8, Number 9

The prospects for post-COVID hotel conversions

by Kristi Waterworth

The travel and tourism industry was all but devastated by the COVID-19 pandemic, especially due to many local and international lockdown restrictions cropping up throughout 2020. Things were looking up for hotel operators for summer 2021, until, of course, a fourth wave of the viral infection took hold across the South and Midwest and began spreading rapidly. Hotels that were already on shaky ground are yet again facing an uncertain future, even with the American Rescue Plan poised to help.

What happens to those hotels that don’t make it through this endless Groundhog Day of COVID wave crests and troughs? Many of their owners will have to make hard decisions, like filing bankruptcy to protect what assets they can, or even selling hotels off in a market that’s maybe not the best for opening up a new hotel operation.

WHO’S BUYING HOTELS?

Although there are likely some potential hoteliers picking up hotels that come on the market right now, there are also many developers and investors who are buying them to convert. After all, what is a hotel but a building full of potentially tiny condos or apartments? They have pools, gyms, offices and tons of parking, plus they’re generally located close to city amenities, giving them great walkability ratings.

With a massive housing shortage creating a disastrous lack of affordable housing, COVID hotel closings were practically begging to become other sorts of multi-unit housing. For developers, the right hotel models are virtually overnight conversions, since many contain kitchenettes, wide hallways, tall ceilings, individual climate-control systems, and even extra rooms with units, like sitting areas and private bedrooms.

Since these hotels are being picked up for pennies on the dollar, and many require only minimal conversion investment, the biggest input is in time and effort toward getting the structure’s zoning changed. This all makes it possible for old hotels to be repurposed as affordable housing, which, in many cities, also comes with additional incentives for builders and investors. Housing of every kind is in such short supply at present in many municipalities that these hotel conversions could theoretically serve a wide range of tenants.

OTHER POTENTIAL CONVERSIONS

Apartments and condos are almost an obvious conversion for former hotels, but that’s not all developers can or will be doing with them. In fact, many interesting repurposing options have been proposed. Although office space seems like the last thing anybody needs right now, the truth is that in some areas, there’s still significant demand. Hotels could easily become office buildings, either for individuals looking to rent small units or companies needing much more space. Hotels that have catered to business-class travelers in their past may already have conference rooms and other business amenities in place, again easing conversion pains.

Another interesting option that’s been proposed is turning these former hotels into different kinds of senior living. Real estate developers may not be interested in getting into the assisted living business, but hotels with the right kind of flow could easily become units where seniors can live mostly independently and still be monitored by a nursing staff.

THE BOTTOM LINE

Hotel conversions seem to be the next hot thing, though these are the types of refits that can take some time to complete due to the size of the project, need for zoning changes, and other waivers that an investor may need to obtain, like permission to use existing parking lots that may not meet multifamily minimum standards for new construction.

For these projects to be truly successful, though, an investor needs to do more than follow the crowd; they need to be smart about where the hotels they choose are located, their original designs, and their ultimate intent. An example would be scooping up defunct hotels that are ideal for conversion to tiny apartments in the hearts of large cities where it is nearly impossible for young people to get onto the property ladder.

In these areas, these hotel conversions are not only appealing to younger people due to being less expensive, but also their locations in walkable areas near mass transit and large employers puts tenants right where they need to be. Former hotels can be specifically outfitted so they cater to groups anywhere from entry-level workers to young professionals, creating various levels of demand within the hotel-conversion sector as well.

Senior housing is another interesting niche, considering that many areas are also facing affordable senior housing shortages. Whether the hotels were converted to be compatible with more advanced kinds of housing, like assisted living, or simply outfitted with 55-plus housing in mind, a landlord of a converted hotel may find they have far more demand than units to lease.

In short, if the right hotel stock is available and relatively inexpensive, the possibilities are endless for housing (assuming planning and zoning is amenable to the necessary changes). These hotel conversions could make good investments for anyone who is willing to put the extra effort into seeking additional incentives, such as those for affordable housing.

 

Kristi Waterworth wrote this article for Millionacres, a Motley Fool service. Read the original article at this link: https://bit.ly/3j6YSJm

 

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