A shortage of affordable housing is a big theme in the election this fall, and both presidential candidates have offered proposals to build more homes.
In one corner of the real estate investment business, a growing trend is developing to address that very problem: converting failing hotels or motels into apartments.
Converting hotels that have seen better days into apartments is a cheaper and quicker endeavor than converting office buildings; it’s also cheaper than building or buying apartment buildings.
The cost savings — and the smaller-sized apartments that result from hotel conversions — mean monthly rents that can be hundreds of dollars less than competitors.
“What we’re seeing is the ability to create housing that’s affordable to a lot more people,” said David Peters, who runs a company called Magnetic Invest and has been converting hotels since 2019. “The opportunities are there broadly now because the product that we tend to buy — which is, you know, economy hotels — there are a lot of them that are struggling and owners who would like to sell.”
Peters now offers a seminar to help more investors get into the business. And they are: The number of hotel units converted to apartments has risen five-fold since 2021 and is expected to exceed 50,000 units this year, according to Rent Cafe.
Now, that’s a drop in the bucket compared to the home shortage — ranging from estimates of 3 million to 7 million — nationwide. Still, it’s a welcome drop in the bucket.
“We’ve seen some neighborhoods get revitalized,” noted Ryan Sudeck, CEO of Sage Investment Group, which is based in Washington state.
Despite benefits like that, there are still plenty of challenges to hotel conversions. Refurbishing them is in many ways like house-flipping — you never know what surprises await.
Sudeck said he’s had to spend money on all kinds of unexpected costs, often to meet energy efficiency or regulatory standards, which can be stricter for apartments than for hotels. But the demand for affordable apartments is so high, that it’s outweighing those challenges.
Demand will remain high for years to come, according to Doug Ressler, a senior analyst at the data firm Yardi Matrix.
“People are renting longer,” he said. “We do not see the housing crisis, which has taken over a decade to create the gap, being fixed in the short term.”
And in the medium term, Ressler is tracking an increasing number of loans being underwritten for hotel to housing conversions, with documents showing developers confident of healthy returns on relatively cheap investments.