Courting conversions: Looking beyond the obvious

Note: In a series of articles, Hotel Investment Today dives into what conversion experts see trending. Here is Part 1 with an overview on the U.S. conversion market and Part 2 on funding opportunities and challenges.

NATIONAL REPORT – Standing inside a 150-year-old building with arms folded and eyes sweeping the interior, an observer was once quizzed by an eager, if anxious, seller: “What do you see?” The one-word answer perhaps said it all: “Potential.”

Indeed, it is potential, for those in the industry who can see beyond what exists right now to what could be in time when the conversion path includes adaptive reuse.

Reinventing interesting and unique real estate via adaptive reuse remains an intriguing conversion play, one that allows owners and investors to secure largely one-of-a-kind opportunities in a given market.

Next-level conversions

“Adaptive-reuse projects are absolutely part of our hotel conversion considerations,” said Denver-based Sage Hospitality Group’s President Daniel del Olmo, noting they represent “a small but growing” portion of the company’s 65-hotel portfolio.

Del Olmo cited two projects that show the range of sites that can embrace or morph into hotels.

“The first one that comes to mind is The Crawford, a luxury independent hotel in Denver’s Union Station. We recently completed a multimillion-dollar renovation, working closely with preservationists and designers to honor the building’s historic architecture. Every detail tells a story, and it has since become a symbol of Denver and a stunning showcase of adaptive reuse,” he said.

Another Sage project is the 241-key Hotel Per La, Autograph Collection in downtown Los Angeles. Housed in the former Bank of Italy building, del Olmo said the dramatic architecture and design details were carefully preserved, creating a distinct sense of place and style.

“These buildings have a 'wow factor’ that we are committed to maintaining through design and storytelling —not just for our guests, but for the surrounding communities as well,” he said.

TMGOC's Ritz-Carlton Savannah, Georgia

Charleston, South Carolina-based Real estate and development private equity firm TMGOC Ventures will be in the heart of the Savannah, Georgia, community when it brings the Ritz-Carlton brand to the city via adaptive reuse of office space in an historic building.

CIO Krystal England cited the Ritz-Carlton, Savannah project, currently in pre-development, as a “great example of how we are using conversions strategically as a lower-risk approach for high-barrier markets. It also highlights how developers can maintain the historic charm of iconic cities like Savannah, while giving a landmark new life, in this case, bringing the iconic Ritz-Carlton brand to one of the country’s most sought-after cities for the first time.”

Even here, the initial project underwent a “conversion” of sorts. Originally slated to house a 104-room Ritz-Carlton at 2 East Bryan St. with 20 Residences occupying 14 East Bryant St., the adaptive reuse is now focused solely on the hotel, which will offer 168 rooms across the adjacent locations.

“TMGOC pivoted away from the permanent residences in favor of more guestrooms to meet the market’s strong leisure and business travel demand,” said England, adding the investment firm’s current pipeline contains a number of rebranding and management conversion opportunities.

Most buildings aren’t a good fit for conversion, but the opportunity set is more interesting than it’s been in a decade. In fact, the first deal in our latest fund is an adaptive reuse conversion of the Johnston Building in Charlotte, North Carolina.

Ben Rowe

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For Grapevine, Texas-based NewcrestImage, the trend toward adaptive-reuse projects aligns with its strategies, particularly in high-barrier, urban markets. “Our NYLO Providence Warwick [Rhode Island] acquisition, a former textile mill, was converted into a Hilton Tapestry hotel,” said Managing Partner and CEO Mehul Patel, adding such projects currently represent about 10% to 15% of the company’s pipeline.

Matt Welch, managing director, investments at Columbus, Ohio-based Rockbridge, said the firm has done a variety of adaptive-reuse projects over its history, but noted the cost of capital and cost of executing the renovation have become a large obstacle to execute on these types of large projects. “However, incentives can often help bridge the gap on economics,” he said.

The industry’s move toward sustainability also plays a major role in such projects, observed del Olmo.

“Repurposing an existing building significantly reduces construction waste and carbon footprint [and] also allows for a quicker turnaround compared to ground-up development, making it a more-efficient way to bring a new hospitality experience to market,” he said. “Additionally, many of these projects are in prime, historic locations, allowing us to preserve architectural character while revitalizing key urban areas.”

An example for Sage is the Nines, a Luxury Collection Hotel in Portland, Oregon, that was converted from the former Meier & Frank department store and is now LEED Silver Certified. “A testament to the sustainable benefits of keeping and adapting a building rather than demolishing and rebuilding,” del Olmo said.

Adaptive reuse is one of the three primary investment strategies for San Francisco-based KHP Capital Partners pursues and across its past four funds, approximately 15% of deals have fallen into this category.

“Given the severe distress in office today, we’re seeing more opportunity to acquire these buildings and take advantage of historic tax credits and other incentives to create like-new product at a deep discount to what it would cost to actually build new,” said KHP Founder and Managing Partner Ben Rowe. “Most buildings aren’t a good fit for conversion, but the opportunity set is more interesting than it’s been in a decade. In fact, the first deal in our latest fund is an adaptive reuse conversion of the Johnston Building in Charlotte, North Carolina.”

Lobby at NewcrestImage's Beeman in Dallas Park Cities

KHP is converting the distressed historic office building into a 240-key soft-branded lifestyle hotel that will feature 10,000 square feet of meeting space, a destination restaurant and a coffee shop on the first floor, a second-floor parlor bar and a rooftop bar. It’s slated to open in 2026.

Finessing Distress

Owners and investors also are trending toward a range of distressed assets when looking for conversions.

“Absolutely,” said Welch. “Distress can come in various forms, whether that be asset-level distress (brand related, asset needs capital, etc.), market distress (market softened or changed, too much new supply, etc.), or capital-structure distress (over leveraged, loan maturity, partnership issues, etc.). All of these may lead to needs for capital infusions and re-orienting the business plan, which may include conversions.”

In some cases, added TMGOC’s England, the distress is driven by the selection of the wrong brand or management by the seller.

NewcrestImage actively seeks well-located distressed properties with strong repositioning potential with Patel noting that key factors include location, structural viability and brand flexibility.

One property meeting the criteria was The Beeman Hotel in Dallas Park Cities, which NewcrestImage acquired and repositioned into a 296-key boutique destination in the Mockingbird Station neighborhood that highlights the local art and music scene.

Distressed assets offer some of the best opportunities, according to Rowe, citing the “lingering distress” tied to the impact of COVID now amplified by higher borrowing costs and more-restrictive lending terms.

“There are many individual owners with underperforming assets that are over-leveraged and are facing loan maturities where they have few good options. Many of the assets also are in need of renovation, which is further weighing on performance and valuation. These are exactly the kind of value-add opportunities we’re looking for,” he said.