Current multifamily trends in housing show an ever-increasing demand for affordable multifamily rental units. However, on the other hand, there is a growing number of hotel and motel closures due to low occupancy rates and high and unsustainable overhead.
The lodging industry’s recovery in the new normal is going to be an uphill battle; many hospitality properties have already admitted defeat and closed their doors permanently. But there is an emerging trend in the hospitality real estate industry that could breathe new life to these recently closed and abandoned hotels and motels: converting them into rental units. As a lucrative long-term investment, hotel-condo conversions can also leverage smart housing technologies to enhance property value and ensure higher and longer occupancy.
Multifamily Trends in the New Normal
A recent study conducted by the National Association of Realtors has revealed that the housing industry is short by more than 5 million housing units (including single-family homes, townhouses, condos, and rental units). Expectedly, the great demand combined with insufficient supply has led to the astronomical rise of housing prices and rents.
The study argues that the existing demand-supply gap is mainly due to underbuilding. The economic arrest and impairment caused by the COVID-19 pandemic contributed to this enormous housing shortage. It was only compounded by the long-term or permanent transition to work-from-home arrangements for a large portion of the U.S. workforce, with an unprecedented number of workers across the country looking for suitable housing options that will meet new-normal realities and needs. Where there is high demand and short supply, an opportunity for profitable investment awaits. Fortunately for real estate investors, developing properties from the ground up is not the only option available.
Hotel-Condo Conversions: A Stable Investment with Long-Term Returns
With travel and tourism grinding to a halt for many months during the pandemic’s height and the hospitality industry’s touch-and-go reopening as the world still struggles to adapt to the new normal, numerous lodging properties were shuttered permanently.
Irrecoverable losses and foreclosure did not spare even big hotels. In New York, some of the renowned hotels that closed their doors for good include the Embassy Suites-Midtown West, Hilton Hotel Times Square, New York Marriott Eastside, W New York Downtown, The Blakely New York, and Roosevelt Hotel.
Washington, D.C.’s century-old Marriott Wardman Park, the Luxe Rodeo Drive in Beverly Hills, and the iconic Standard West Hollywood are other notable COVID-19 casualties. And then there are the countless rooms in mid-class hotels and run-of-the-mill motels across the country that will never again see a turndown service. The real estate value of these hotels and motels is at an all-time low. And the massive demand for affordable housing opens the door wide open for real estate investors to step in and give new life to these properties.
Properties within the city and in tourist destinations present an attractive investment opportunity for obvious reasons. Indeed, hotel-to-apartment conversions have been slowly gaining traction. The trend is not a new one. California’s Homekey funding initiative, which was launched in mid-2020, made available “$600 million in grant funding […] to local public entities, including cities, counties, or other local public entities, including housing authorities or federally recognized tribal governments within California to purchase and rehabilitate housing, including hotels, motels, vacant apartment buildings, and other buildings and convert them into interim or permanent, long-term housing.”
In addition to the reduced property value, private investors can also benefit from their local government’s incentives when they invest in converting hotel properties into multifamily housing units. With proper renovations, these conversions can deliver stable and sustainable returns to investors while delivering affordable and comfortable housing to renters.
Smart Housing Innovations for Motel and Hotel Conversions
Solving the immense housing demand-supply gap by converting closed hotels/motels into housing units is undoubtedly an innovative solution that can also deliver considerable profits. But one of the major challenges for these conversions is the scale of renovations that may be needed to meet the demand for both affordability and comfort.
Fortunately, the essentials are already in place — albeit some remodeling and repairs may be necessary. The property’s “facelift” should also include smart housing technologies, which will substantially increase its real estate appeal in terms of comforts and amenities, and property value.
Building smart home features into these conversions will make the property and its management more efficient. For example, having pre-installed and ready-to-go smart home technology — such as keyless locks, access control, smart lighting, and smart thermostats — is a smart investment that will attract and please residents and further improve an investor’s bottom line.
Converting shuttered hotels and motels into multifamily housing units is an innovative and profitable strategy that real estate investors should explore as soon as possible, especially given the enormous and nationwide housing shortage. This and other multifamily trends are growing in popularity for a reason.
The hospitality industry’s still ongoing crisis also presents and a real estate opportunity. The adaptive reuse of these lodging properties is an efficient solution to the high demand for affordable and comfortable housing. Taking the conversion one step further by including smart home automation in the renovation process will make the investment even more profitable.
California Department of Housing and Human Development – Homekey