Checking in on Multifamily Conversions

June 3, 2021

Checking in on Multifamily Conversions

June 3, 2021

What’s driving the rising trend of multifamily conversions in the hotel space and how to assess whether your property is a fit

As vaccine rollouts continue and the domestic travel ticks up, we’re starting to see the hotel industry bounce back. A welcome sight for all of us in the industry, but the truth is, not all hotels will make a full recovery. In fact, a number of the hardest hit properties in the pandemic were approaching obsoletion well before March 2020. Many big box, urban destinations were already suffering from low occupancies and declining RevPAR numbers pre-COVID, so the last 18 months have just expedited their exit from the market.

The pandemic has created a significant pool of assets that will not recoup their value on the open market, at least not without some creative thinking. Berkadia Hotels & Hospitality has increasingly been working with clients to consider whether their assets could be marketed as a multifamily conversion. Our hotels expertise is complemented by Berkadia’s broader multifamily expertise—in 2020, Berkadia’s combined mortgage banking, investment sales and JV equity placement volume exceeded $35 billion, including $19 billion in combined agency production—enabling us to provide truly comprehensive insight and advice. As a result, a number of clients have achieved higher purchase prices for their assets from market-rate or even affordable housing developers interested in conversion, most recently with the sale of the Georgetown Suites in Washington, D.C.

While every property is unique, at a high level we advise clients to assess feasibility in three key areas when determining whether and how to market their property as a conversion opportunity.

Redevelopment Feasibility

A primary question to address is: how easily can the property be physically converted into multifamily? The size and shape of the property can affect the feasibility of the conversion and Developers will be considering what level of investment will be required. Certain product types, and even brands, lend themselves more easily to conversion. Extended stay, all suite products are ideal, as are older generation, more scattered site boxes, which can be most easily modified to replicate garden style multifamily.

Legal Feasibility

Even if a property can be converted from a physical standpoint, there are a number of legal considerations that impact viability. The specifics of a property’s location—flexibility in zoning, parking allowances, etc.—are essential to understanding the level of complexity and opportunity that may be involved in a conversion. It is also essential to understand the terms and flexibility within a property’s franchising agreement. More flexible agreements make the process smoother. Considering a specialty conversion, whether affordable, seniors or even student housing, presents another layer of intricacy, but can also present significant benefits, especially for affordable housing, which can offer excellent tax advantages for future owners.

Financial Feasibility

Ultimately, owners have to take a big picture view when physical and legal hurdles are accounted for to understand how the cost of a project stacks up against the market economics. If the value of the finished property is greater than the purchase price, plus hard and soft costs, the project may be viable. Given current construction costs, locating an existing property that can be converted is an attractive and cost-effective opportunity for multi-family investors.

This only scratches the surface of the conversation, but the goal of the exercise is to help clients understand the full spectrum of options to generate value from an asset sale and determine the right strategy to go to market. At Berkadia, we have the benefit of having the industry’s best advisors to assess the multifamily landscape and considerations broadly, as well as drilling into the niche challenges and opportunities offered by targeting a specialty conversion.

Assessing these factors has been an incredible tool to help clients unlock value in an uncertain hotels market by broadening the buyer base for any sale. Contact us to learn more about how we can work with you to make the best disposition decisions for your portfolio.

-Andrew Coleman, Head of Berkadia Hotels & Hospitality