The hotel industry has been down since the beginning of the COVID-19 pandemic, whereas the housing market has skyrocketed. Owners of hotels should at least consider converting their assets to multifamily properties.
What Is the Status of the Hotel Industry?
There is no denying COVID-19 wreaked havoc on hotels, along with the rest of the economy. However, the hotel industry has not bounced back, especially compared to the majority of the other industries of the economy.
According to a report from the American Hotel & Lodging Association (AHLA) on January 24, 2022, “hotels across the country are continuing to dig out from a two-year period where they lost a collective $111.8 billion in room revenue.”
Leisure travel is expected to bounce back in 2022, but business travel is projected to stay below pre-pandemic levels.
This new work travel standard is a major loss for hotels, not just in terms of room revenue, but also across hotels’ other income-producing services. AHLA’s report states more than $48 billion was spent annually on “food and beverage, meeting space, and other ancillary services.”
It is also important to note the nationwide labor shortage has negatively impacted hotels. Hotels ended 2021 at 77% of their 2019 employment levels. In 2022 growth is projected, but overall the industry will be down 166,000 employees or 7% in comparison to 2019.
Those numbers from AHLA’s report might not seem too bad, but CBRE’s Q4 2021 US Hotel report states “labor shortages remained a headwind to full recovery, with hourly hotel wages more than $9 less than the national average wage.”
This trend indicates a major problem for the industry. To reach pre-pandemic levels, hotels will need to increase wages to stay competitive with other industries. Of course, if hotels do increase their employees’ compensation, the result will be a reduction in profits.
The last key point to keep in mind about the hotel industry is there is a “new” traveler. AHLA’s report informs us: “bleisure travel—that is, blending business and leisure travel—has exploded during the pandemic, representing a profound shift in consumers’ attitudes and behaviors related to travel. This, in turn, will significantly impact hotel operations as the industry responds to meet the needs and expectations of their guests.”
In the past, hotels have focused on business travelers and accommodated them with on-site restaurants, laundry, gyms and meeting rooms. However, the “new” traveler is expecting to see pools and easy transportation to tourist spots. Hotels will need to pivot to meet their customers’ needs, which will cost them time and money.
While hotels can leverage technology to make the changes they need and to streamline processes, it will be expensive to implement both in terms of purchasing the technology and training their employees on how to use it.
Hotel owners have a tall mountain to climb just to reach pre-pandemic levels of revenue.
What Is the Status of the Multifamily Market?
The housing market has been on fire since the pandemic.
CBRE’s Q4 2021 US Multi-Family report reflects numbers that demonstrate the multifamily market in particular has grown:
- The average national cap rate decreased 68 bps in 2021
- “The overall vacancy rate fell by 2.2% year-over-year and net effective rents increased by 13.4%, with average rents exceeding pre-pandemic levels in all but three markets tracked by CBRE”
- “Record annual investment volume of $335.3 billion in 2021 was nearly double 2019’s previous record of $193.1 billion”
- “Multifamily accounted for 41.5% of total commercial real estate investment volume”
Overall, the report concluded the economic recovery, job additions, wage increases, household formation and future of offices will support multifamily demand in 2022.
Rent growth has been a tremendous factor in the heightened value of multifamily assets.
According to ApartmentList, “year-over-year rent growth currently stands at a staggering 17.6 percent.” While the majority of the rent growth took place over the spring and summer in 2021, the vacancy rate is still low at 4.5% compared to the pre-pandemic 6% vacancy rate.
Due to the skyrocketing values and rents, investors can feel confident in multifamily. People always need a roof over their head, but right now there is a limited supply of homes.
Realtor.com released a report stating, “the gap between single-family home constructions and household formations grew from 3.84 million homes at the beginning of 2019 to 5.24 million homes as of June 2021.”
Is Hotel-to-Multifamily Conversion a Good Move?
Although there are construction costs to convert a hotel to multifamily property, it is evident hotels already need to make major structural changes as the “new” traveler has evolved.
Meanwhile, multifamily property owners don’t need to invest as much in catering to their tenants. Tenants won’t expect as much from their landlord as a hotel guest will expect from their hotel.
The hotel industry is bound to bounce back at some point, but it is unclear when that will happen. Hotel owners should acknowledge the advantages of multifamily over hotels and convert their hotels to multifamily properties, if possible.
There is a long history of hotel-to-multifamily conversions prior to the pandemic. According to the National Association of Realtors (NAR), 57.2% of hotel or motel conversions from 2018 to 2020 were for multifamily housing.
It is particularly easy to convert to multifamily if the developer wants to feature a baseline of luxury amenities the hotel already has such as a front desk with doormen and a roof deck. And a conversion may cost less than a new apartment build.
An example of an expected major hotel conversion to multifamily is The Crowne Plaza Aire Hotel in Bloomington, MN. Part of the hotel will be renovated and kept as hotel rooms, but 295 of the 430 hotel rooms will be converted to 229 apartments in this project.
This project demonstrates it is not necessary to convert a hotel into pure multifamily.
The overall hotel-to-multifamily trend can be broken down into two sub trends: pure multifamily vs. smaller hotel and residences mixture. Often it’s as simple as taking a two-tower hotel and converting one tower to pure multifamily. Then the two towers share ground-floor amenities and staff, so there is some savings on overhead and utilities.
This example also shows converting a hotel to a multifamily in today’s market is by no means a novel move. It is happening and will continue to do so, especially as long as there is such a strong disparity in the lack of supply of housing compared to the demand.
The question then becomes: Is hotel to multifamily conversion the right move for you?
Weighing the pros and cons of the current real estate market against the hotel industry, it seems an investment in converting a hotel to a multifamily property will return profitable gains in the long run.