Communities are desperate for more affordable housing, but the cost for developers is just too high. Land, labor, and materials were expensive before the coronavirus pandemic, and they are even more so now.
Because of this, some creative developers are now turning to hotels – and it seems like a match made in real estate heaven.
The home culture of the pandemic hit the hotel industry hard. The proportion of hotels lagging behind on their mortgages rose to just over 18% in December, from less than 2% a year earlier, according to Fitch Ratings. Hotels suffer even more than retail properties.
However, this creates an opportunity for investors like David Peters in Minneapolis, who is buying distressed hotels at low basement prices and converting them into affordable housing.
“You could pay $ 120,000 per door in the apartments here, and we can probably buy these hotels $ 30,000 to $ 40,000 per door and maybe put $ 10,000 per door into renovations,” Peters said.
Suite hotels are cheaper to remodel because they already have kitchens. Standard rooms don’t require too much work either. The demand for these affordable units continues to grow.
“What we saw when the pandemic broke out was an even greater demand for the micro-apartment style of affordable housing,” Peters said.
Peters bought a hotel on the outskirts of Minneapolis just before the pandemic. He converted it into small residential units. He left some rooms as hotel units so he didn’t have to worry about changing zones.
“When we bought this hotel, we were sitting very underutilized, and within a few months of renovating units, and even some of the units before we were renovating them, we were able to get people into them,” Peters said.
The lack of affordable housing is now critical. According to RealPage, a real estate management software company, the so-called Class C housing stock is now 96% occupied nationally and 99% in the Midwest. More expensive, so-called Class A apartments, are more numerous.
“Land and construction costs virtually preclude building a new marketable product at this Class C price. New development is simply not financially feasible,” said Greg Willett, chief economist at RealPage. “All Class C products are made up of older properties where rents are simply below prices for newer communities.”
The C-class housing stock continues to decline as investors buy and upgrade older buildings to get higher rents. The difference in monthly rent between a Class A and C property averages $ 600, according to Willett.
That price difference is crucial for renters like Michelle Wickstrom who recently moved into Peters’ Minneapolis apartment. Wickstrom said she was relieved to find it.
“It’s hard to find something that’s affordable or in my price range,” said Wickstrom. “There aren’t a lot of low-income housing or anything like that in this area.”
The zoning is different for hotels and multi-family apartments, so the offers can sometimes be difficult. However, Peters says that if developers work closely with local communities, they can close the deals.
“I think it’s really community for community and opportunity for opportunity, but I know they are very excited because the last thing they want is a 120-unit building and it’s empty,” he said.
Peters has two other deals in the works, one in Minnesota and one in Sioux Falls, South Dakota. The South Dakota property was valued at approximately $ 6 million in 2017. Peters expects to purchase it for $ 3.2 million as the owners defaulted on their loan.
It is not difficult to find capital for the projects as investors are looking for real estate in today’s low interest rate environment in order to generate higher returns.
“We can provide better value to potential residents and we can provide investors with good solid returns, so I’ve actually seen quite a lot of interest in it,” Peters said.