It's an intriguing idea but not an easy one to accomplish
As the hotel industry continues to recover from a pandemic-era drop in bookings, some structures are seeing new incarnations – either as multifamily dwellings or special use. But whether the conversion move becomes a larger trend will depend on this year’s travel season, a commercial broker says.
“We’ve seen it go both ways,” Abe Bergman (pictured), president of Eastern Union, said of hotel conversions. “We’ve seen older motels that either needed to have a major rehab or be turned into something else, and we’ve seen hotels that have gone multifamily; we’ve seen hotels that have gone into some sort of specialty use - whether homeless shelter or some sort of battered women’s shelter.”
Such conversions are seen more in markets where there may have been too many hotel rooms to begin with, he suggested during a telephone interview with Mortgage Professional America. “You have certain hotels that were built in areas that can’t necessarily absorb a tremendous amount of hotel rooms,” he said. “And what happens is you have a new hotel but the others are suffering.”
Hotel industry continues to recover from the COVID-19 pandemic
In some cities that are not traditional destination points – either for business or leisure – the calculus on whether or not to convert is now being calculated. “We’ve seen some of that in certain areas you wouldn’t classify as travel destinations… the owners of those properties will take a fresh look at them,” Bergman said. “At some point, they have to put money into the building – hotels get a lot of wear and tear. They’ll start thinking about it and say, ‘is it really the best idea to put $5 million, $6 million, $7 million in this building and keep it as a hotel or can I do something with a little less risk and convert it into an apartment building or some other use?”
Only time will tell if such conversions take hold on a grand scale, he suggested. “I don’t know if it’s a developing trend,” Bergman said. “It’s hard to answer the question because we really need to see what happens in 2024 with travel. It’s no secret hotels suffered a little bit in 2022, some of them at least, and that continues.”
In the post-pandemic landscape, he described some markets now pushing for new hotel development while others are not – depending on how hard they were hit. In cities looking to increase housing, hotel owners willing to convert their properties for multifamily use would likely encounter friendly audiences at local government bodies, Bergman added.
Office to multifamily conversions even less feasible
It’s another thing to take an office and convert it to multifamily – an idea gaining traction amid a depressed office market in many cities. Bergman agreed it’s a more complex conversion from office, even when considering the complexity of converting a hotel to multifamily.
“It’s not so easy to take a hotel and convert it to anything,” he said. “When you’re converting a hotel to multifamily, it’s a gut renovation. In all likelihood, you’ll have to rip out every wall and do it all new - the layouts are all different.”
With more office space sitting empty in the US since 1979 per a report last week by Moody’s Analytics, the idea of transforming “zombie towers” into multifamily housing is growing in popularity in cities such as Boston, Cleveland, New York City and others where occupancy levels are low after protracted periods of remote work during the pandemic. Coupled by a housing shortage of some 5.5 million units per the National Association of Realtors, the idea of transforming office into housing continues to grow in its appeal.
But the office tower shape, with little natural light flowing, is where the challenges of conversion first begin. Zoning issues and politics are added roadblocks. Ultimately it may be cost that is most prohibitive toward conversion into multifamily.
Maren Reepmeyer, a Boston architect with SGA, told CNN that buildings with larger floors are even harder to convert. “As an architect it is really fun to think of ways to solve that – carve out the inside with nooks and crannies, punch out a light well, create a courtyard, add little balconies. But they cost money.”
CBRE estimates the costs to make such physical changes can range from $100 per square foot to more than $500 per square foot, CNN reported.
So while the idea remains intriguing, it may not be easily accomplished.
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