Seattle broker explains the many reasons she loves such projects
There’s no easy solution to the housing shortage crisis in the US, where there is a deficit of some 6.5 million homes against a backdrop of unaffordability. However, increasingly, brokers are eyeing hotel conversions as a potential fix.
According to the US Government Accountability Office (GAO), the shortage of affordable homes has been exacerbated by high interest rates and low inventory. This poses a particular problem for millennials looking for larger homes to house their families and low-income people seeking affordable housing, GAO researchers noted.
In a report published in late 2023, they explained how the Department of Housing and Urban Development (HUD) leads housing efforts nationally – including everything from mortgage programs to construction. To that end, HUD has multiple programs aimed at increasing the supply of affordable housing – including the Self-Help Homeownership Opportunity Program (SHOP), which provides grants to non-profits to help develop affordable housing units for low-income buyers.
And yet there’s the rub. Rising land and construction costs have added pressure to the program, GAO researchers found. To illustrate, they cite a 60% rise in land prices from 2012-2019 coupled with a more-than-doubled cost of homes from 1998-2021.
Given such dynamics, hotel conversions into multifamily complexes are increasingly being viewed as a viable alternative. Seattle-based mortgage broker Frances Nguyen – a mortgage loan advisor at NEXA Mortgage and founder of Frances Nguyen Group – extols the virtues of hotel conversion, particularly in today’s volatile environment.
Hotel conversion projects
The reasons Nguyen loves hotel conversion run the gamut from altruistic ideals to sheer profit motive. “One of the reasons why I love buy and hold real estate – especially hotel conversions – is that there’s so much appreciation involved with this,” she said. “We can get cash flow, we can get appreciation and we can also get the tax benefits with projects like this.”
ROI is one element that makes such projects appealing, she said. “Return on investment is so much greater with hotel conversions versus buying an apartment building and rehabbing it,” she said. “The other reason I love hotel conversions is that it’s so much cheaper to find a hotel you can convert into multifamily versus trying to build it from the ground up with construction costs, development and so forth.”
Recently having completed a 145-unit hotel conversion project in Tacoma, Wash., she also sees value in the idea of adaptive reuse space in areas where affordable housing is especially acute. “There’s such a shortage of housing here, and what we’re doing is creating homes and opportunity for people who cannot afford housing,” Nguyen said. “So, we’re increasing the inventory supply and helping people into homes.”
Stopping the broken windows theory from taking root
Hotel conversion projects also help mitigate the proverbial broken windows theory – the idea that a busted panel on a building grows into further disorder if left unattended. The broken windows theory was introduced in a 1982 Atlantic Monthly article by social scientists James Q. Wilson and George L. Kelling, and was later popularized by New York City municipal officials.
Nguyen cited the notion as another benefit to taking on hotel conversion projects.
“A lot of these projects are in dilapidated areas,” Nguyen said. “And if we keep them vacant and not do anything with those hotels, this could increase the crime rate in the neighborhood, increase vandalism and really ruin the neighborhood. What we’re trying to do is bring the community together, create homes for the workforce and make the space a better environment for the community here.”
Nguyen chronicled her first hotel conversion project in the form of a YouTube video that also acts as something of a primer for other brokers. The video shows finished units converted into studio apartments from their former incarnation as hotel rooms, details some of the more expensive elements involved in the conversion and reveals the total investment cost of the project.
Nguyen is hardly alone in discovering the appeal of hotel conversions amid a softened single-family housing sector. Lodging Econometrics revealed in its Q2 2023 US Construction Pipeline Trend Report that renovations and brand conversions reached record high project counts year-over-year. The report found that upscale, upper midscale and economy brands accounted for the majority of conversion projects in the pipeline at the end of last year’s second quarter.
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