When the United States witnessed the pandemic outbreak, it resulted in stay-in-place orders and acute travel limitations says Maxwell Drever. There was a decline in hotel stays. Hence, several hotel rooms remained empty in 2020. However, on the other hand, according to the National Association of Realtors, there was a sharp undersupply of housing as renting became highly unaffordable.
Also, in every state, low-income households, i.e., earning much less than about 80% of the median household salary. Usually spend over 30% of their earnings on their rent. According to reports, in 2020. About 23% of the multifamily rental units got rented for more than $2,000 compared to 12% in 2017. Hence, Maxwell Drever says that establishing new reasonably priced housing can bring significant challenges.
Materials, labor, and land were all costly before the pandemic and are still the same. It is why the creative developers are switching to hotels, and it seems to be a perfect match in the real estate domain.
Maxwell Drever says that several hotels had to struggle during the COVID-19 pandemic.
The pandemic outbreak affected the hotel industry much more than retail real estate. The total hotel shares beneath the mortgages increased to more than 18% in December 2020. Also, in April 2020, right after the pandemic outbreak in the United, about 25% of the hotel rooms got occupied. Even though the occupancy gradually came back as the year passed by. About 44% of the hotel rooms remained full in 2020.
However, in 2021, hotel occupancy is anticipated to go up to 53%, which is still much below the pre-pandemic levels. According to the latest research and reports, the industry wouldn’t completely recover till 2024.
Transforming distressed hotels to housing units
Several developers have found scope in the industry’s suffering. According to Maxwell Drever, all the buyers are trying to leverage the crisis of the hospitality domain. Just by taking over the foreclosed and struggling properties at a bargain cost. Additionally, they are also searching for profit from the increasing demand for cheap housing units. From the households compelled to downsize because of the recession. The little but increasing amount of hotel conversions. Is it a sign of trouble in the hotel sector because of the pandemic? Several properties are running steep or are shut down owing to a decrease in travel.
Multiple hotel-to-housing conversions generate reasonably priced housing. About 65% of the motels and hotels got transformed into multifamily housing. Had rent that was either a mix of market and below-market-rate or just below market rate.
Converting the hotels into apartments turns out excellent in markets. Where the cost of the studios in the new buildings has gone past $1,000 in a month. The hotel rooms that got transformed into studio apartments can compete by providing about 20% rent discount. Furthermore, the extended-stay hotels work best as they might be lesser than the average apartment. Most have kitchenettes and bathrooms in-built.
Simply put, the conversion of vacant motels and hotels is a profitable solution for addressing the underutilization of motels and hotels. And removing the housing shortage.