Hotel occupancy rates took a historic plunge during COVID, hitting an all-time low of 22% in April 2020. Rates slowly began to show signs of recovery, rising to around 50% over the summer and settling at 41% in the off-season. Now, as one of the country’s largest commercial real estate lenders Walker & Dunlop
reports their hospitality portfolio at 70% forbearance, the relative winners and losers of the hospitality industry in the COVID era are beginning to shake out. While we expect well-positioned U.S. hotels to bounce back quickly post-pandemic, some less-competitive assets likely won’t be able to hold out for widespread vaccination and the return of the travel industry. At the same time as many hotel rooms sit empty, the affordable housing crisis continues. In 2016, Harvard researchers found that
nearly half of renters spent more than 30% of their income on rent, and the pandemic has only exacerbated the problem. The National Low Income Housing Coalition estimates at least an
additional 7.2 million affordable housing units are needed nationally. But there is a unique solution to both problems at hand. The intersection of these two imbalances has created the opportunity to give distressed hotels a new life and add much-needed affordable housing units to tight markets—hotel to multifamily conversions.
Keeping all-in costs low
With hotel industry experts
forecasting a four-year timeline to return to pre-pandemic revenue per available room (RevPAR), some uncompetitive hotels are coming up for sale at steep discounts. Some sponsors are taking advantage of this opportunity and looking for hospitality properties that can be converted in unique multifamily buildings. While some build-out costs, like adding functional kitchenettes to hotel rooms, might be higher than traditional value-add multifamily deals, the overall lower purchase prices mean sponsors can charge affordable rents, up to
20% below average market rates, and still deliver a return to investors. “The result is housing that’s both market rate, as in they do not receive a public subsidy, and affordable to people living at or below median income levels. This is what the industry calls naturally occurring affordable housing, or NOAH,” says Anna-Marie Allander Lieb, Director of Investments at CrowdStreet. “When done right, this business plan offers investors the opportunity to participate in a solution to the affordable housing crisis that is prevalent in our country, while also earning a return on their investment.”
Adaptive reuse provides value for renters
We’ve seen renter demand for
micro-units, particularly in major metros, so there is precedence for smaller-than-average studios or one-bedrooms. Hotel rooms may be small by apartment standards, but with thoughtful reconfiguration residents can still live large, and at an attractive price point to boot. On-site amenities like fitness facilities, pools, or even dining and retail offer tenants big benefits in exchange for living small. Because hotels are generally designed with a traveler’s needs in mind, they’re often in highly walkable, accessible neighborhoods or close to large business districts. This makes the converted units particularly useful for workforce housing. In some markets,
spatial mismatch—the disconnect between where job growth is fastest and where potential employees can afford to live—is making it harder for employers and workers to find one another. Adding affordable housing where job opportunities are dense helps close that gap.
CrowdStreet’s outlook on hotel to multifamily conversions
With widespread vaccine distribution (hopefully) only months away, we believe this convergence of market factors won’t last long, so investors interested in these kinds of deals will need to take advantage of the moment. Our Investments team is looking for deals featuring well-located distressed hotels in markets with an excess of hotel beds but limited workforce housing supply—Orlando and San Francisco, for instance. We believe sponsors who have executed similar conversions will provide the best chance of success so we’re looking to partner with sponsors who understand how to handle the entire process.
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