When COVID-19 hit, Americans and international visitors dramatically cut back on travel plans. The same was true of business travel. That left the industry reeling. That fact, coupled with the current housing shortage and a need for more affordable housing, provided residential developers with the impetus to focus on vacant hotel redevelopments.
Here is a look at why hotels are prime targets for multifamily conversions.
Multifamily Housing Shortages Continue Across Southern California and the Rest of the Country
While there has long been a housing shortage all over the U.S., the pandemic and low mortgage rates have all contributed to reduced inventory.
A lack of single-family housing has had a spillover impact on apartment rentals. Those priced out of owning a home are looking to rent, especially in prime urban areas. Since the pandemic’s recovery began, rent in many cities in Southern California, such as Anaheim, San Diego, and Santa Ana, has increased over the last six months, pricing out low-and-middle-income renters.
According to the National Association of Realtors, the market needs 5.5 million more units to meet demand. Approximately 3.5 million of those units are multifamily needs. The report cites a gap of 2.5 million multifamily homes in buildings with at least five units over the last twenty years.
Residential Developers Increasingly Eyeing Hotels
One solution for residential tenant demand and rental growth is to take on vacant hotel redevelopments.
A recent report from the National Association of Realtors on repurposing vacant hotels into multi-unit residential housing highlighted key data for potential developers.
- 60% of those engaged in converting hotels were for multifamily housing, workforce housing, or veteran housing and another 11% was for senior housing.
- In 65% of the converted hotels, rent was either at or below the local market rate.
- 54% of respondents said it cost less than $50,000 per room to acquire the property
- 53% said conversion cost less than $25,000 per room.
Compared to new construction, some conversions may offer developers more for their money. In areas where land is expensive and limited, such as Southern California, having existing improvements in a desirable location puts developers a step ahead — in most cases, converting costs are far less than new builds.
Something else to consider is potential tax credits. The local, state, and federal governments offer tax credits and other incentives for developing low-income and workforce housing.
Understanding the Best Profile for Vacant Hotel Redevelopments
Here are a few key factors that make properties well-suited for conversion. These include:
- Significant size: Typically, the unit count for these properties is over 100, which can be converted into smaller apartments or combined into bigger units.
- Infrastructure in place: Having built-in parking and amenities such as pools, business centers, and outdoor space.
- Location: The adage rules here too. Properties that are well-located to highways, public transportation, and have local amenities within walking distance can attract more renters.
Zoning is another key factor for conversions in California. Developers tend to look at extended stay and suite-style vacant properties as those that fit the bill for their needs. These units tend to be larger and have the built-in infrastructure and amenities to make them attractive to prospective tenants.
With the pressing need for housing and rising rents, hotel conversions are a trend to watch.
Mandri Capital has closed over $100 million in financing for in-demand and growing apartment investments and more.
If you’re interested in learning more, don’t hesitate to contact Max Friedman via phone at (310) 554-6401 or email mfriedman@mandricapital.com for a confidential discussion on your pending deal.
