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Converting hotels to multifamily: Hospitality industry offers more permanent housing solutions

It’s no secret the hospitality industry is suffering from low occupancy and prospects of a long recovery from the effects of COVID-19, but an unexpected silver lining has appeared for those property owners looking to find uses for underutilized rooms. Some hotels are undergoing transformation into multifamily properties.

Converting hotels to multifamily

This application of adaptive reuse – where an existing building is repurposed for a use other than its original design – from hospitality to multifamily is allowing property owners to take a money-losing venture and transform it into an income-producing property.

Developers switch to affordable housing

Many communities are in dire need of affordable housing, and with desirable locations in short supply, developers are making the switch now that distressed hotel properties are available at a reduced price. While such a conversion requires zoning changes, many municipalities with housing challenges are very open to such opportunities.

Communities benefit from multifamily conversions

In some cases, communities have benefited when an old, distressed hotel property gets a new lease on life after a multifamily conversion. Affordable Housing Finance cites The Luna Lodge on Route 66 in New Mexico. The 1950’s hotel had seen better days, which prompted developer NewLife Homes to jump in, who used federal low-income housing tax credits to help finance the renovation.

“It’s neighborhood revitalization,” says John Bloomfield, executive director of NewLife Homes, the developer who recently transformed the Luna Lodge property into 30 apartments for low-income residents and people with mental illness and other disabilities. “Route 66 has so many of these old motels. We want to share the knowledge. We like the problem solving. We like to demonstrate that this can be done.”

Extended stay hotels stand to benefit from quicker conversions, as traditional hotels will require more extensive renovations and will also often have to repurpose meeting spaces. As Malcolm Davies and Zachary Streit of George Smith Partners’ Davies Group tell Commercial Property Executive,

Extended stay hotels and motels have the advantage of already having a bedroom, bathroom, living space and, often, kitchenette in one unit. Amenities are usually not extensive at these properties. Limited amenities like a pool, business center and gym can easily remain in place to serve residents.

Additionally, extended stay properties won’t require dramatic modification of mechanical, electrical and plumbing systems.

During an economic downturn, with precarious employment and people traveling less and saving their money, the multifamily sector typically outperforms the hospitality sector. A Motley Fool report cites a May 2020 19.13% delinquency rate for lodging commercial loans, compared with a 3.25% delinquency rate for multifamily assets. Affordable housing, student housing, market rental and seniors’ facilities all represent potential adaptive reuse options that could stand to benefit investors.

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