COVID decimated the hotel industry, bringing property values down significantly. Hotel owners will likely continue to struggle with uncertain demand and disrupted cash flow for the foreseeable future. With the housing crisis continuing unabated and hotel rooms sitting empty, people have speculated about the potential of using hotels for housing.
The hotel industry is in trouble.
The hotel industry took a double hit during the pandemic as travelers of all stripes — leisure and business — have been halting all movement for several months. Further, stay-at-home orders kept local or domestic travelers hunkered down in their homes. As a result, many hotel operators are feeling the pain.
In the worst-case scenario, average daily hotel rates will still be down 20% even by 2023. This long recovery, particularly for luxury and boutique hotels, presents acquisition scenarios for real estate investors who may be able to reposition the asset as a long-term multifamily asset.
People always need a roof over their heads.
Multifamily typically outperforms lodging assets during economic downturns for exactly the reasons you imagine: people are traveling less and saving money, but they still require a home and are less likely to purchase one as employment becomes precarious.
Although a standard multifamily unit generates roughly 2.5 times less revenue per unit than that of a hotel room, it typically throws 60 percent of the revenue to the bottom line, compared to 35 percent for hotels. This supports considering a multifamily conversion because the revenue derived from annual leases is stickier than what is generated from the more transient hotel business.
Multifamily tenants are also more likely to renew their lease when it matures annually, creating a more predictable cash flow stream.
In contrast to offices, hotels easily lend themselves to housing conversion. For those concerned about the expense, the signs here are promising. A hotel could, for example, be purchased for about $40,000 a unit and sold for $120,000 per unit. Since hotel layouts and plumbing are typically amenable to housing conversion, it’s a simple refurbish.
Another question about conversions is whether enough workable properties exist to meet housing demand. Building suburban housing is bread-and-butter work for most housing contractors. Converting hotels and especially office buildings is an entirely different ball game.
Add in considerations like historical landmark limitations and the risk associated with less common work, and pricing can go up, bringing back expense concerns.
We’re here to help
Investing in multifamily conversions of offices and hotels requires knowledgeable partners and informed decision-making. To ensure you’re making the best commercial real estate investment decisions for your goals, reach out to us at Asset Point Capital today.