Sell for More News is a weekly blog series with interesting information from the world of commercial real estate.
Investors are buying hotels and turning them into rental apartments, in the latest sign of how the Covid-19 pandemic is changing the American real-estate market.
These buyers are trying to take advantage of the hospitality industry’s crisis by taking over struggling or foreclosed properties at bargain prices. They are also looking to profit from rising demand for cheap housing from households forced to downsize during the recession.
The small but growing number of hotel conversions—some properties are also being turned into offices—is a symptom of the turmoil the pandemic has caused in the hotel sector. Many properties are shut down or running steep losses because of a drop in travel.
The share of hotels with securitized mortgages that were delinquent on their loans was 19.66% as of November, up from 1.52% a year earlier. Even before the pandemic, a surge of hotel construction over the past decade had left some cities with a room glut.
Vivo Living has converted its first hotel into apartments in late 2019 with the former Bigelow Hotel in Ogden, Utah, a property with about 112 rooms.
Since the start of the pandemic, Vivo has added three more hotel conversion projects in Mesa, Ariz., South Bend, Ind., and Winston-Salem, N.C. The company is in contract to buy a fourth hotel, outside San Antonio early this year.
Many of the properties Vivo is looking at are older motels with open-air corridors and staircases shunned by big hotel brands. There are so many of these exterior-corridor motels throughout the U.S., and it’s a functionally obsolete product type for the hotel industry.
SHIR Capital has converted hotels into hundreds of apartments in South Carolina and Texas. It says the business plan works best in markets where the price of studios in new buildings has crept over the $1,000 a month mark.
Hotel-room-sized studios can compete with those apartments with a 20% discount on rents.
Extended-stay hotels are ideal for creating the cheaper apartments because while they typically measure smaller than the average apartment, they already have kitchenettes built into them.
More conventional hotels need a more expensive rebuild, but even that often takes less than a year and is much faster than building from the ground up, investors say.
These conversions sometimes require zoning changes that can be time intensive.
In many cases, hotel rooms are just large enough to qualify as the smallest housing units allowable under zoning law.
Austin has been a particularly hot market for converters. The city has an average rent of about $1,500 a month, a level that makes it difficult for many young professionals to have places of their own.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com