Residential Uses Dominate Hotel Conversions

While hotels struggled through the pandemic, the undersupply of housing persisted. Perhaps not surprisingly then, as more hotel conversions move forward, they are often for housing. 

Sixty percent of the 187 hotel or motel conversions that members of the National Association of Realtors reported they were engaged in were for multifamily housing, workforce housing, housing for veterans or housing for health care workers, according to a NAR report. In addition, 12% of the hotel and motel conversions were for homeless shelters, 11% were for senior housing or assisted living and 8% were for student housing.

There were some non-residential uses represented among the conversions. Six percent of hotel and motel conversions were being converted into health facilities such as hospitals or quarantine facilities. There were also conversions into retail establishments, industrial use or converted into ranch land or for other types of development.

Of the hotels converted into multifamily housing, 64% involved a limited-service hotel. 

In 65% of hotels and motels converted into apartments, the rent was either 100% below market rate or a mix of below-market and market rate.

The suburbs, small towns, resorts or rural areas were home to 82% of the hotels converted to housing. Slightly more than half, 54%, were acquired at less than $50,000 per room. These findings show that most conversions involved limited-service hotels and motels that are less expensive than full-service hotels and more likely to be outside of city centers.

While 80% of debt financing is possible for these acquisitions, respondents said that 60% of the acquisition cost ratio was debt-financed. For below-market-rate projects, loans financed only 50% of the acquisition costs.

While the loan rate ranged from 4% to 6.3%, the average loan rate was 5.1%. “Debt financing remains relatively inexpensive given the current low-interest-rate environment due to an expansionary monetary policy,” according to NAR.

Private lenders were the main financers for 27% of the hotel and motel to multifamily conversions. While local, regional and national banks provided 46% of the financing, government financing accounted for 7%. 

Affordable housing developers also provided funding.

One developer, Repvblik, has built a pipeline of redevelopment projects, including transforming a Days Inn hotel into a 341-unit affordable property in Branson, MO. The company says the conversion is the largest affordable project to be developed without federal funding or tax credits.

Discounted distressed assets help make affordable deals—which are notoriously challenging—pencil. “A lot of these asset classes had PPP loans and other federal programs that allowed owners to kick the can down the road,” Richard Rubin, CEO of Repvblik, told GlobeSt.com. “When it comes to a lot of these programs, they eventually run out of runway. For the properties that don’t have a discernible path forward, there is going to be a lot of lender-owned stock available. It is very clear to see what is happening, and I think a lot of the distress is going to be a bridge for the housing.”