The hotel industry has been one of the hardest hit by the Covid19 pandemic. As the New Year brought hopes of some revival, it also gave the opportunity to hotel owners to introspect their assets for better utilization. Learning lessons from the crisis, hotel owners could see through the pandemic to discover some silver linings amid the wide-scale disruptions that brought their business to a halt for an indefinite period, explains Maxwell Drever, one of the pioneers in the affordable workforce housing segment.
His advice to hotel owners is to consider one of the two options – convert hotels to affordable housing and gain access to new funding through several federal programs included in the recent budget, or capitalize on the unprecedented demand by converting hotels to market rental apartments.
The housing crisis sparked hotel conversions, confirms Maxwell Drever
The demand for affordable housing has been increasing during the years preceding the pandemic. Coupled with the housing crisis, it has provided lucrative options for converting hotels and motels into affordable workforce housing, assisted living or senior housing, and even student housing. However, it will be wrong to assume that all hotels are following the same route by changing tracks and foregoing their existing business, waiting for a comeback by banking on pent up demand.
Proper due diligence about the existing assets by considering the demand for affordable housing is critical to decide whether the conversion would be fruitful enough to provide the desired returns.
Consider the type and size of the hotel
Maxwell Drever suggests it is better not to go with the flow and instead properly evaluate the prospects of conversion to make a well-informed decision. Since the demand for affordable multifamily homes is the highest, it is evident that the conversions would usually aim at it. In addition, the hotel’s location influences the decision because the majority of the hotels and motels (82%) that preferred to convert the asset were located in rural areas, small towns, and suburbs. Another interesting aspect is the type of hotels chosen for conversion. Most of the hotels are under the less expensive category with limited- services and not full-service hotels.
Go for debt financing
The prevailing low interest environment resulting from an expansionary monetary policy based on the enormous fiscal stimulus provided by the governments has made debt financing a better option to garner funds for the acquisition of hotels for conversion into affordable housing. Most of the acquisitions in recent times used debt finance, and about 54% of acquisition costs hovered around $50,000 per room. It happened despite the interest on a loan being approximately 5.1% on average according to Maxwell Drever.
Fund sources
From national banks that provide the bulk of loans to limited government financing options, private lenders also play an important role in acquiring hotels to convert them into affordable housing. Developers and investors of affordable housing are also taking an active interest to invest in the conversions.
Evaluate the asset well to ascertain the financial liabilities that it carries before you take a final call because distressed and discounted assets can be too much of a challenge with high chances of faltering.
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