Historically, there has been a limited supply of potential capital partners, but it is a much different story today. Anticipate more demand as there is a lack of multifamily properties, and old, dilapidated hotels are easy to convert to apartments. The big part of the appeal is providing affordable housing in markets with a need. Borrowers will see leverage between 60% and 85%. Rates will range between 3.5% and 10%. The types of hospitality assets that lay the foundation for a successful conversion are those located in strong infill and suburban locations that are experiencing positive rental rate growth, a shortage in housing supply, and positive net migration. Given the small unit footprints, the primary and secondary markets with walkable amenities and transportation will be sought after. Local community acceptance of the loss of an old hotel that might have had sentimental/historical significance an issue. Most of these conversions result in studios created out of old hotel rooms with no change to the structure. The alternative is a one-bedroom apartment that converts two old hotel rooms into one space. Well-located unflagged extended-stay and select-service hotels are the easiest to convert. Older dilapidated hotels will be targeted, as they usually have low occupancy or have been closed for some time. COVID-19 catapulted the need to reposition old hotels, as many became obsolete and nonfunctional over the last two years. Borrowers also need hospitality and multifamily renovation experience and meet net worth and liquidity requirements.
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