From Empty Hotels to Affordable Housing. A Formula for Success??
Converting unused hotel properties to rental units, affordable housing, and alternatives for the homeless population seems like a winning formula, but is it that simple?
You have undoubtedly seen closures and re-purposing of hotels in all sectors of the market. Whether larger brands have selected underperforming properties for the chopping block or small lodging operators have had to fold up their business, hotels sit empty due to the shortage in demand caused by COVID-19. Investor groups and charitable organizations alike are seeing opportunities in this distressed inventory. Organizations like California's Project Homekey and New York's Breaking Ground are converting locations to house homeless and shelter vulnerable populations. Brenda Rosen, President, and CEO of Breaking Ground told Fast Company that “converting hotels can be done at roughly half the price of new construction. And they can also be brought online much quicker." This formula takes care of two needs at once. It provides housing for groups of people that otherwise would have no choice and fills the vacant properties creating opportunities and jobs.
Besides housing for homeless populations, other companies like Vivo Living are capitalizing on the opportunity by creating rental properties. Many Americans have been forced to downsize or seek more affordable housing outside of metropolitan areas. Vivo provides that opportunity by converting an otherwise obsolete product, exterior corridor hotels and motels, that are shunned by big brands, into studio-sized apartments. “We consider ourselves a building recycling company,” Dan Norville, president of Vivo Living, told the Wall Street Journal. The company has converted four hotels so far in smaller markets Mesa, Ariz., South Bend, Ind., and Winston-Salem, N.C. They are currently in contract to buy a hotel in San Antonio this year. The targetting of extended-stay hotels in these areas also makes the conversions that much easier. These properties are likely to have a kitchenette and offer amenities that appeal to renters looking for a cheaper version of their pricey "studio" counterparts in the same market.
So where is the downside? Zoning and tax revenue. Local municipalities rely on tourism dollars in the geographical areas where hotels are zoned for a good portion of their tax revenue. This is not just in the form of occupancy tax, but also in the anticipated income, a guest will bring to the local economy from retail, events, and restaurants. Speaking to Hotel News Now, Eric Jacobs, chief development officer at Marriott International for its select brands in North America, said that "A lot of municipalities also rely on the occupancy tax rate that hotels generate as well as the multiple days that a hotel guest will spend in a market with retail and sporting events." The timing and logistics of lobbying for a zoning variance from local government are important. Rental properties, sans the occupancy tax, will still bring revenue to the local economy. Renters will likely shop and dine at local businesses so highlighting this as an amenity to the property rather than a hypothetical economic outcome will go a long way in garnering buy-in from the local zoning board. “I think it really is community by community and opportunity by opportunity, but I know that they’re very excited, because the last thing they want to have is a building with 120 units, and it’s sitting empty,” David Peters, an investor buying properties in Minneapolis, said recently to CNBC's Diana Olick.
The less talked about downside to this business model is the absence of job creation. Converting a hotel into a rental property creates opportunities in the short-term construction and trades sector but does not address labor shortages in the service industry. Apartment complexes rarely have services like concierge, housekeeping, and on-call maintenance and certainly do not keep these services staffed 'round the clock. This change in the labor and housing landscape of certain regions can have lasting social-economic effects. Hospitality workers that see their jobs disappear may have to make tough decisions to relocate or transfer their skills to a new industry.
Even with these challenges, it seems like a match made in heaven for investors and housing organizations to have such a great opportunity with the vast number of vacant inventory. The circumstances are prime now for these properties to be re-purposed and utilized to fulfill the current needs. And yet these circumstances will not last forever. As travel returns to any normalcy and workforce housing strengthens in metro areas, the opportunities for these organizations will be slimmer. Municipalities will be more selective on what properties can be converted and inventory will begin to evaporate. For the time being, however, it can be seen as a positive outcome of a pandemic that otherwise has had serious adverse effects on communities across the country.