Economists' Outlook

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Q&A Corner: Case Studies on Repurposing Vacant Hotels/Motels into Multifamily Housing

In May 2021, NAR published a report entitled: Case Studies on Repurposing Vacant Hotels/Motels into Multifamily Housing. In 2020, the hotel occupancy rate plunged due to the COVID-19 pandemic and subsequent lockdowns. Even as the demand for lodging recovers with the return to normalcy, stiff competition from short-term rental providers will continue to challenge the viability of the lodging industry. On the other hand, there is an acute undersupply of housing. One obvious adaptive reuse of vacant hotels/motels is for multifamily housing.

Brandon Hardin, Research Economist, is one of the lead authors of the report. In this conversational Q&A, he provide insights into the data, perspectives on how members can use the report, and the results he found to be most interesting.

How did this report come about?

Brandon Hardin: Having recognized that the conversion of vacant hotels/motels to multifamily housing is a great solution and one solution that addresses the supply of underutilized hotels/motels and current housing inventory issues, the Commercial Real Estate Research Advisory Board under 2021 Chair, Dawn Aspaas (SD) and 2021 Vice-Chair, Beth Cristina recommended research be conducted with respect to the conversion of vacant hotels/motels into multifamily housing to draw insights and best practices.

This new report builds upon the adaptive re-use research we have performed over the last year as the National Association of Realtors® research group prepared case studies that illustrated how vacant retail malls are being repurposed and the sources of financing for those projects in support of the research agenda of the 2020 National Association of Realtors® Commercial Real Estate Research Advisory Board under 2020 Chair Soozi Jones-Walker, CCIM, SIOR and Vice-Chair Dawn Aspaas.

What questions is this report trying to answer?

Brandon Hardin: To provide some color, the 2021 Case Studies on Repurposing Hotels/Motels into Multifamily Housing report was completed in an effort to support the research agenda of the Commercial Real Estate Advisory Board. The research group gathered information for case studies using two approaches:

  1. Conducting a survey among its commercial members and
  2. Conducting secondary research of examples of hotels/motels that have been successfully repurposed as multifamily housing

The report not only captures the trend of the obvious adaptive re-use of vacant hotels/motels to multifamily housing, but also addresses the COVID-19 pandemic's impact on hotel industry.

In the 2021 Case Studies on Repurposing Hotels/Motels into Multifamily Housing, we look at hotel indicators such as the average daily room rates, revenue per available room, revenues, cap rates, and jobs. We also look at hotel market supply and demand conditions by looking at changes in occupancy rates and vacancy rates for example. We also conducted a survey for which members of the National Association of Realtors® responded to questions about their activity in hotel or motel conversions. For example, we know that of the 187 hotel/motel conversion members reported participation in, 60% of the conversions were for multifamily housing, workforce housing, housing for veterans, or housing for health care workers. For the case studies aspect of the report, we analyzed 5 successful cases of hotel/motel to multifamily housing where more than 820 new living units were created.

What important trend does this report capture?

Brandon Hardin: This report captures the trend of converting underutilized hotel/motels into multifamily housing. Adaptive re-use is not only economical, but also can be more environmentally-friendly in comparison to new commercial developments as adaptive re-use emissions for example, are lower. In addition, new commercial construction costs more than re-use by about a two-thirds on a per square foot basis. While the hotel/motel to multifamily conversion is not new, as revenues and occupancy sharply decreased as a result of the pandemic, investors are increasingly utilizing this property to help alleviate the housing shortage whilst providing some affordable housing options.

On a more positive note, while revenues and occupancy have sharply decreased, there have not been as many distressed sales in comparison to the Great Recession. Distressed sales are about a tenth of what they were during that period. So, while the hotel industry recovers from the short-term decline in demand as a product of the pandemic, long-term is more dependent upon COVID variants, vaccines, industry competition such as AirBnB and consumer lodging preferences. While the hotel industry has seen better days, we can now see the clouds dissipating as COVID-related restrictions are being eased with consumers feeling better about going out and returning to some traditional activities.

What aspects of this report do you find most interesting?

Brandon Hardin: The aspect that I find most interesting are the case studies that take a deeper dive into emerging hotel/motel trends. This is interesting because it affords the opportunity to look beyond what is happening but provides more context as it pertains to why and how things were done.

For example, in the Luna Lodge case study, we were able to see all of the obstacles the lodge had faced in order to successfully convert a historic Route 66 motel into affordable housing as it underwent LEED certification while adhering to and retaining historical standards. I learned that while zoning can pose a significant challenge in converting hotels/motels into multifamily housing, having a significant community buy-in, that being residents, local and city officials and department backing is key to the redevelopment and can be the determining factor if a re-zoning is permitted. Just how much of an impact does it have? In the Luna Lodge case, a dispute with a neighbor about the re-zoning went all the way to the New Mexico Court of Appeals. I learned that having such a backing by the community can lead to the re-zoning of an entire corridor as the Luna Lodge benefited from this for which allowed them to move forward with the conversion of the hotel/motel to multifamily housing and left the lawsuit irrelevant. While not every case faced zoning obstacles of that stature, it was fascinating to see the impact that the beloved Luna Lodge property had on the surrounding area to the effect that governments wanted the project to succeed.

How can our members use this data?

Brandon Hardin: Members can use the data to understand overall hotel market trends or use the information to inform their transactions. An example of this would be funding. While going the traditional route of no permanent debt, that is utilizing LIHTC or other subsidies to finance multifamily housing is an option, this report illustrates numerous ways an individual can source financing via alternative methods. These methods could entail obtaining financing via a traditional commercial lender, utilizing all cash, or perhaps equity. But, in any event, the financing members find in the report is only one aspect of many that goes into the successful conversion from a hotel/motel to multifamily housing.

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