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Empty Hotels Becoming Apartments as Tourism Remains Sluggish


Jan 24, 2021 by Maurie Backman
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The coronavirus pandemic has done a number on the hospitality industry, and hotels are struggling immensely. And while there's a light at the end of the tunnel -- coronavirus vaccines -- some hotels may need to repurpose their empty space to survive. That's where residential conversions come in.

Real estate investors are already swooping in, buying hotels on the cheap and converting them to rental units. Not only is the price right to purchase hotels, but it's a great time to invest in affordable housing, given the number of Americans who can't keep up with their current homes or need to downsize as the result of the pandemic.

But converting hotels is no easy feat, and while it may seem like a good solution to an ongoing crisis, there are different considerations to take into account before going this route.

Should hotel operators pivot to residential use?

Hotels have been starved for guests since the pandemic began. As of Jan. 16, weekly U.S. hotel occupancy sat at just 40%.

Meanwhile, the percentage of hotels with securitized mortgages that were delinquent on their loans was nearly 20% as of November, up from 1.52% a year prior, according to Trepp LLC. And hotels have been forced to lay off workers during the pandemic. Case in point: Marriott (NASDAQ: MAR) recently announced it would permanently shed 850 staff members from its once-thriving Times Square location.

Converting sluggish hotels to residential units could be a strategic move, given the cash crunch many of these properties are facing. But these conversions take time and also, money. Often, there are zoning laws to abide by and hoops to jump through in turning hotels into apartments. And since hotel rooms are, by nature, small spaces, it takes money to adapt them so they're able to qualify as full-fledged housing units.

Of course, extended-stay hotels are ideal for turning into apartments. These units often consist of suites with functional kitchens, and they may, in some areas, already conform to zoning standards for residential rental units. But extended-stay hotels have also been faring better during the pandemic than their higher-end counterparts. These hotels tend to have a lower price point that appeals to more guests, and they tend to serve a very specific need: housing for those in between rentals, as opposed to travelers looking for a place to unpack while vacationing. As such, converting these properties to apartments may not make a lot of sense, whereas converting traditional hotels that are desperate for revenue may be a more worthwhile endeavor, despite the costs and challenges involved.

The Millionacres bottom line

Ultimately, the question really boils down to how likely the hotel industry is to thrive in a post-coronavirus world, how long it will take to get there, and whether struggling hotels can hang on in the interim. Converting hotels to apartments won't happen overnight, and if investors and operators sit tight, they may see revenue pick up as early as later this year. All told, turning empty hotels into apartments may be an investment worth making -- but ultimately, it's also a gamble.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Marriott International. The Motley Fool has a disclosure policy.