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September 23, 2024 | 1.5 Minute Read
Multifamily conversions are experiencing unprecedented popularity. From repurposing distressed offices and old warehouses to transforming defunct baseball stadiums, developers are turning diverse properties into multifamily housing. The latest trend in this booming category is the conversion of hotels.
In the wake of the pandemic, the hospitality industry has faced significant challenges. With travel declining and travelers prioritizing quality, many outdated and underperforming hotels have become available for redevelopment. This shift has created a prime opportunity for developers like Alex Cartwright, managing principal at HotelSHIFT.
Cartwright transitioned from multifamily syndication to specializing in hotel conversions in 2022, positioning himself at the forefront of this rapidly growing field. His efforts have contributed to a remarkable surge in hotel conversions. In 2023, 4,556 apartments were created from repurposed hotels—a 38.8% increase from 2022 and nearly double the volume of 2021 according to RentCafe.com. Notably, hotel conversions now represent over one-third of adaptive reuse projects in the U.S., surpassing the office sector as the leader in this area.
Cartwright’s move into hotel conversions was driven by several factors:
Purchasing distressed hotels at a fraction of stabilized multifamily prices—ranging from $25,000 to $35,000 per door—offers substantial upside. By acquiring these properties at high cap rates and refinancing at lower multifamily cap rates, developers can achieve significant returns with manageable risks.
The market for new C-class apartments is virtually non-existent, while investors are keen on B- and C-class properties to upgrade into A- and B-class. As those apartments get upgraded, the supply of C-class housing is squeezed, and that’s an indication of strong rent growth in a lot of markets.
However, hotel-to-multifamily conversions come with their own set of challenges. Converting hotels involves tackling complex renovations, often including properties with high crime rates and vacancy issues. Additionally, navigating zoning restrictions and working with municipalities to change zoning regulations can be daunting.
Hotel-to-multifamily conversions represent a dynamic and increasingly significant trend in real estate. The substantial growth in this sector highlights the evolving landscape of adaptive reuse projects. With favorable purchasing conditions and a strong demand for affordable housing, developers are capitalizing on these opportunities, driving innovation in property redevelopment. As the market continues to shift, hotel conversions are likely to play a crucial role in addressing housing needs and reshaping urban environments.
