Why Hotel Conversions Work as a Long-Term Housing Solution
Eddy O'Brien, Blaze Capital Partners co-founder & managing partner, takes us behind the company’s strategy for addressing affordability.
Hotel-to-multifamily conversions have gained momentum in the wake of the health crisis and have proven to be a strategic investment option. While the idea of transforming hotels into housing isn’t new, the trend typically accelerates in times of economic hardship and abates once the market bounces back.
However, Blaze Capital Partners is taking a different approach by making the move a long-term strategy for the company. Multi-Housing News spoke to Co-Founder & Managing Partner Eddy O’Brien to find out what’s behind this decision and why transforming distressed hospitality assets on a large scale is a great way to address housing affordability in the long run.
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Why do you consider hotel-to-multifamily conversions a good fit for a long-term strategy?
O’Brien: It is our belief that most great investment strategies in rental housing are based on answering a simple question: What is the housing problem that needs to be solved? With this resident-centric philosophy as the guiding foundation, our team then works to craft a thoughtful plan around capitalization and execution.
Housing affordability remains a—if not the—preeminent issue in our space. Hotel conversions are our attempt at creatively defining a new approach to deliver attractive communities in great locations at attainable price points for renters that otherwise can’t be delivered through traditional ground-up development.
Many groups see conversions as a short-term “trade” to take advantage of distressed hotel pricing and therefore view it as an open opportunity, so long as hotels remain distressed. We simply don’t view it that way. With our longer-term viewpoint, we believe that conversions should be here to stay, so long as affordability remains an issue somewhat irrespective of the health of the hospitality landscape.
How common are these conversions in the multifamily industry right now?
O’Brien: Not as common as many people may think. The strategy makes for exciting headlines, which leads to a lot of groups talking about it. From our experience on the ground, however, there are few that are successfully executing on the opportunity given the nuances, time and execution difficulty. There are even fewer that view conversions as a longer-term business—we like to think of ourselves as the latter.
What goes into securing financing for such projects? Is it challenging to find the right financing partners?
O’Brien: If you were to ask us a year ago, we would have told you there was limited debt capital out there. As with most pioneering, outside-the-box strategies, it takes time to educate the lending community. We are fortunate in that we have a lot of great lending relationships that dug in early alongside us.
Today, the landscape is much different. Traditional construction lenders, bridge lenders and, in some cases, perm lenders have become active and are really buying into the opportunity. It certainly helps to have case studies and be able to quantitatively demonstrate the results we are seeing on the ground.
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From an investor’s perspective, what are the benefits of transforming a hotel into housing? What about from a renter’s standpoint?
O’Brien: We say at Blaze all the time: “If you focus on the resident first, investors will benefit.” It is simply the natural order of things in our minds. From the resident perspective, the benefit is clear—live in a Class A, amenitized apartment community in a great location at rent levels that are several hundred dollars a month below the other options. We are able to do so by redeveloping an existing footprint at a cost structure significantly below the cost of new construction.
When targeting a potential investment, what makes a hotel a good candidate for a residential conversion? What factors do you take into consideration?
O’Brien: To fully exploit the opportunity, we don’t necessarily take a one-size-fits-all approach to the space. We assess each community based on a thorough, bottom-up approach, on a one-off basis. Target opportunities are based on a confluence of factors—demographics, size considerations, physical footprint, a pathway to entitlement and competition in the housing landscape, among many others.
Ideally, however, we are always focusing on assets in great infill locations where our housing solution can be delivered well under the prevailing pricing environment of the competitive set. That focus on attainable rent structures remains the paramount focus.
Please tell us about your most recent hotel acquisition that will be retrofitted into apartments.
O’Brien: A great example of the strategy is a community in the University submarket of Charlotte, N.C., called The Spoke at McCullough Station. It is a 124-unit community comprising studio and one-bedroom units with on-site amenities and is also located directly across the street from the McCullough Station stop on the light rail.
We closed on the former hotel asset in February of this year and were nearly 50 percent preleased by the time the first units were delivered, with residents coming in from all over, not just the immediate submarket. The demand we are seeing really points to the need for more attainable rent structures.
We have a sizable pipeline behind this in various stages throughout the Southeast and are excited about several upcoming announcements in that regard.
What do you think is next for this trend? How widespread do you expect the movement to become?
O’Brien: So long as housing affordability is an issue and there remains a supply of underutilized real estate assets, we believe there will be opportunity to creatively repurpose housing. There is no reason this shouldn’t also include certain retail assets, regional malls and other areas. In fact, we are actively exploring several longer-term opportunities in this arena.