we are in a current environment with higher rates and sellers are facing higher carrying costs , which make sellers more willing to meet the market on pricing .”
Certes recently converted a Rodeway Inn close to downtown Nashville into Hermitage Studios , which offers furnished and unfinished units starting at around $ 1,000 per month . Other amenities include a gym , pool and dog run . Certes is currently repurposing a former SureStay Plus Hotel By Best Western in Raleigh , N . C ., into a multifamily property .
Others aren ' t as convinced of the opportunity and upside of hotel-toresidential conversions . “ I don ’ t believe that hotels are the best asset class for developers to be targeting for multifamily conversions right now ,” said Rachael Rothman , CBRE ’ s head of hotels research & data analysis . “ The hotel industry is performing exceptionally well , outpacing other asset classes on many key metrics and attracting institutional investors who may have previously shied away from what has historically been perceived as a riskier asset class .” Rothman doesn ' t rule them out entirely .
A hotel unit in the midst of being converted to a residential unit at Certes ’ Raleigh asset .
“ In instances where we see hotel loan maturities coming due in the next few quarters , you may begin to see distressed hotel sales — something we really haven ’ t seen much of despite the lingering effects of the pandemic — due to the high cost of financing , which could force some hotels to trade at discounts . Those opportunities may present quality conversion candidates .”
In the case of Certes ' Raleigh project , the owner had two hotels and Certes structured a deal whereby the owner was able to unlock capital for a renovation of an upscale hotel he owned nearby the other . “ This allowed us to repurpose the hotel to its highest and best use — multifamily ,” Wolf said , adding that converting hotels is also a way to alleviate some of the housing pressures that cities face .
At this , Rothman argues the opposite . “ Another headwind facing hotel-tomultifamily conversions is the disparity between the supply-and-demand fundamentals between the two sectors ,” she said . “ New unit deliveries in the multifamily sector is expected to exceed demand growth through 2026 , while new hotel supply remains at record lows , and well below the forecasted demand over the same period of time .”
The best hotels to convert to residential are , not surprisingly , those with built-in residential amenities , such as kitchens — think extended-stay brands , such as Homewood Suites , Hawthorn Suites or Extended Stay America . Wolf added that hotels with large common areas work great for residential conversion because they can be transformed into things like a coworking lounge or screening room . In its Raleigh project , Certes is converting the breakfast area into a coworking space , the conference rooms into the gym and the hotel lobby into a tenant lounge .
RISKY BUSINESS Multifamily and hotels have different risk profiles . Much of hotel performance is at the mercy of market conditions and if there is one thing it disdains , it is volatility . Conversely , residential carries with it less risk and more stability due to long-term rental agreements and consistent demand , but , potentially , has lower upside .
“ There is greater risk associated with a hotel investment versus traditional multifamily as there is more uncertainty and volatility in connection with hotel ownership ,” Wolf said . “ Hotel demand is more closely correlated to market performance and seasonality than residential housing . Economic downturns and fluctuation in travel and lodging demand can have a significant impact on hotel revenue . In addition , hotel investors need to have a deep knowledge of the market and the nuances of operating a hotel in order to keep it running successfully .”
Hotels , depending on the market and type of asset , can be one of the most compelling plays for an investor , as CBRE ' s Rothman pointed out . “ A high-performing luxury hotel in a desirable , growing , high barrierto-entry market is going to carry far less risk than a multifamily asset in a tertiary market seeing outbound net migration ,” she said .
September 2023 hotelsmag . com 45