NY Makes it Easier to Convert Hotels to Apartments

As NYC hotels struggle to rebound from crushing losses during the pandemic, the Empire State has enacted a series of measures aimed at making it easier for nonprofits to purchase struggling hotels for conversion into affordable multifamily units.

Gov. Kathy Hochul recently signed a bill exempting hotel conversion projects from a lengthy review process, which developers had blamed for the low number of applicants seeking access to a state program that funds adaptive reuse projects.

The new law lets hotels keep their certificates of occupancy if they switch to residential use, alleviating them of the need to acquire new COs. The bill makes it easier for Class B hotels inside or within 400 feet of residentially zoned districts to access funding from NY’s Housing Our Neighbors With Dignity Act (HONDA).

The HONDA grant program was established last year, but the requirement of NYC’s Uniform Land Use Review process that hotel owners get new certificates of occupancy for conversions stymied grant applications.

“As New York’s housing crisis continues to impact families, we are thinking outside the box. This new law allows us to tackle the affordability crisis head-on and convert empty, underutilized spaces into homes,” Hochul said, in a statement.

The HONDA grants are aimed at projects converting distressed hotels and office buildings into affordable housing owned and managed by nonprofits. HONDA requires half the units to be set aside for the homeless, while the other half will be subject to an 80% medium income cap for tenants. Rents can’t exceed 30% of a tenant’s income, according to the program requirements.

Hotels in Manhattan continue to trade for bargain-basement prices as investors bet they’ll be able to turn a profit when tourism and business travel eventually resume at full strength in NYC.

Apollo Global Management and investor Newbond Holdings last month announced a deal to buy the Hilton Times Square for $85M, roughly 35% of the $243M California-based REIT Sunstone Hotel Investors paid to acquire the 478-room hotel in 2006.

Recent Manhattan hotel trades involving steep discounts include the Sheraton New York Times Square, which reportedly sold for half the price the owner paid when it was last acquired in 2006. MCR and Island Capital Group said they paid $373M for the Sheraton.

CBRE recently raised its 2022 national forecast for hotel sector performance, citing better-than-expected fundamentals and below-average supply growth as well as strong domestic leisure travel.

The largest brokerage now is projecting that hotel RevPAR will reach 2019 nominal levels by Q3 2022, moving up its previous forecast of Q3 2023 by an entire year. RevPAR actually exceeded the pre-pandemic average of $184 in December, but then fell about 20% below the 2019 level during Q1 2022, GlobeSt.com reported.

CBRE now is forecasting average daily room rate (ADR) growth of 29.7%, a 41.8% increase in demand and a 75.06% increase in RevPAR this year nationally.

The company said ADR will once again exceed 2019 levels following a “pause” during Q1 2022, citing an anticipated recovery in inbound international travel, the resumption of more business travel and higher inflation as drivers of higher hotel rates.