Residential uses dominate hotel conversions
As hotels weathered the pandemic, the housing under-supply persisted. It is perhaps not surprising that, as more and more hotel conversions progress, they are often aimed at accommodation.
Sixty percent of the 187 hotel or motel conversions that members of the National Association of Realtors reported engaging in were multi-family housing, workforce housing, senior housing fighters or housing for healthcare workers, according to a NAR report. Additionally, 12% of hotel and motel conversions were to homeless shelters, 11% to senior housing or assisted living facilities, and 8% to student housing.
Some non-residential uses were represented among the conversions. Six percent of hotel and motel conversions were being converted to healthcare facilities such as hospitals or quarantine facilities. There have also been conversions to retail establishments, for industrial use or converted to ranch land or for other types of development.
Of the hotels converted to multi-family accommodation, 64% involved a limited-service hotel.
In 65% of hotels and motels converted to apartments, rent was either 100% below market rate or a mixture of below market and market rates.
Suburbs, small towns, seaside resorts or rural areas are home to 82% of hotels converted into accommodation. Just over half, 54%, were purchased for less than $ 50,000 per room. These results show that most of the conversions involved limited-service hotels and motels that are less expensive than full-service hotels and more likely to be located outside of city centers.
While 80% debt financing is possible for these acquisitions, respondents said 60% of the acquisition cost ratio was debt financed. For projects below the market, the loans finance 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 expansionary monetary policy,” according to NAR.
Private lenders were the main financiers for 27% of hotel and motel conversions to multi-family homes. While local, regional and national banks provided 46% of the funding, government funding accounted for 7%.
Affordable housing developers have also provided funding.
A developer, Repvblik, built a pipeline of redevelopment projects, including the transformation of a Days Inn hotel into an affordable 341 unit property in Branson, MO. The company says the conversion is the largest affordable project to be developed without federal funding or tax credits.
Distressed assets at discounted prices help make affordable deals – which are notoriously difficult – in pencil. “A lot of these asset classes had P3 loans and other federal programs that allowed homeowners to throw the can down the road,” Richard Rubin, CEO of Repvblik, told GlobeSt.com. “When it comes to a lot of these programs, they end up running out of track. For properties that don’t have a discernible path to follow, there will be plenty of lender-owned inventory available. It’s very clear to see what’s going on, and I think a lot of the distress is going to be a housing bridge.