Conversions Part II
Insights
- Clay Markham
Robust Urban US Hospitality Looks to Opportunities
With US Hospitality in full swing, urban cores have an opportunity that many asset owners are considering: Converting their office buildings to hotels.
In Part I, we discussed office-to-residential conversions in the urban core areas of the US that are making a difference for the living environment in many city centers around the nation. As existing owners of office assets still see and foresee a lag in RTO (Return to Office) in these urban centers, they look to best position their assets for better returns in the long-term future. Conversion to another use is still top of mind. In Part II, we will look at the opportunities of converting under-performing office buildings to hotels.
Precedent has been Set
Precedent has been set over many years in the US with a plethora of hotel properties coming from converted office buildings. According to data from CBRE released in 2022, 45 office buildings have been converted to hotels in the US since 2016, with another 14 underway in 2023. That represents about 6% of office assets converted to hotels as opposed to 29% being converted to residential. These trends are continuing. Hospitality occupancy has grown steadily over the past three years but moreover, financial performance has improved for the hotel market during the same time as suggested through RevPAR growth in the Top 25 markets across the US. The health of the sector, especially in the luxury and upper-upscale markets led by leisure travel along with recovering group travel, has turned the heads of many investors fleeing office and retail.
Consumers are continuing to travel more, embracing opportunities to reconnect with friends and family and experience new adventures. Even when adjusted for inflation, McKinsey & Company reports that travel is one of the fastest growing spending categories year-over-year at a 6% increase as well as a 7% surge in out-of-home entertainment last year.
The trend is set to continue with pipelines across the US market growing with hospitality investment and new starts. As has been the case over the last several years, and now with interest rates at some of their highest in decades, building ground-up projects can be challenging financially and unfeasible. However, conversions of office buildings to hotels can be a solution. Yes, there are costs associated with additional plumbing, egress requirements, and fire life safety and HVAC systems, but not having to build a new asset in today’s financial environment can be the difference between starting a project and realizing its completion.
A Story to Tell
Not all existing office buildings are created equal and many are certainly not optimal candidates for conversion. As mentioned in Part I of the series, older buildings with smaller floor plates have a much better physical layout to allow for an efficient conversion. But it’s not only the layout that can create the best scenario. The architectural quality of the building, in the case of a high-quality hospitality experience, can play a very large role in the success of the conversion.
Older buildings, such as bank buildings built to display their upstanding stature, can be an ideal candidate for conversion. These built assets offer a grandeur that provides beautiful experiential spaces for lobbies, lobby bars, and restaurant spaces. With the executive offices and private banking offices on upper floors of the property being ideal for guestroom layouts.
On a recent stay in Washington D.C., our family had the pleasure of staying at the Riggs Hotel in the Chinatown District. The lobby is reminiscent of 1920s-era reception space with the old main banking hall being converted to the lobby bar and Café Riggs. The two plus story space is design in a Roman Revival style and painted completely white, creating a lofty memorable experience for breakfast, lunch and dinner or drinks. The successful conversion tells a grand story of times gone by in the great city of Washington D.C., our Nation’s capital.
Reviving the Fabric of Our Cities
Bringing patrons back to our city core to foster the community around them is equally important for residents as it is for those visiting. Office conversions to hotels alongside the residential conversions can activate and energize the very parts of our cities that once were the beating hearts of America. Newly converted hotels, providing overnight lodging, places for meeting peers and celebration, and places to dine morning to night, are becoming great neighbors to converted housing and encourage exploration of downtown cores.
More than simply lodging, hotels are essential ambassadors. They are places to meet, to dine, to celebrate – embodied symbols of a city’s hospitality and a valuable companion to permanent residential in generating district vitality.
Good news for the vast majority of cities, reengaging our downtowns as walkable urban neighborhoods – places where the number of people living there exceeds the now bygone daytime worker populations – will not only help to restore the luster of these core areas, it sets us on a better path toward more sustainable, resilient and socially cohesive cities.
The conversion of existing office buildings to mixed use assets, anchored by residential units and hotel rooms, is an essential part of this transformation.
The comprehensive conversion of central business districts to central social districts is a formidable task but one RATIO is well suited to.
