When converting a hotel to residential makes sense

Editor’s note: This is part two of a conversation with Leonard Ross, partner at Hawkins Way Capital. In part one, he discussed the company’s recent deal to convert five of its properties to the Series by Marriott soft brand.

BEVERLY HILLS, California — When would you convert a hotel to residential, especially in a market like New York City?

Hawkins Way Capital did just that this summer when the Beverly Hills, California-based private equity firm acquired the shuttered 492-key Holiday Inn by IHG in Manhattan’s Financial District in New York City for $154.5 million. The company is repositioning the asset, which paused its hotel operations during COVID and most recently served as a migrant shelter, into what it calls residential use (in this case, student housing).

Leonard Ross, partner at Hawkins Way, said that when his company considers acquiring a value-add asset, it considers the best use across hospitality, residential or student housing.

“When we seek a new investment, we consider the highest and best use for that asset within all of our core competencies. This includes converting an out-of-favor hotel to residential use,” he said. “This works primarily in urban locations where there’s an imbalance of housing inventory and high barriers to entry.”

Ross said the Holiday Inn acquisition is a good reflection of that thinking and is a strategy Hawkins Way will continue to consider.

Leonard Ross

“It’s a strategy that we are continuing to have a massive appetite for and look forward to deploying alongside our standard hotel value-add strategy,” he said.

Ross said the factors for when to convert a hospitality asset out of hotel use are both micro and macro.

“It has to have some dislocation within the actual asset as well as the fundamentals of the location around it that make it worthwhile,” he said. “The asset itself has to have some sort of impairment for the arbitrage to work between the residential and the hospitality… If the hospitality asset is already performing well and has been maximized for its own use, then it doesn’t really make sense to take that asset and convert it to something else.”

Shuttered hotels are good examples where the math may work, Ross said.

“In many cases, the hotels that we’ve acquired, many of which have been in New York, have been shuttered hotels… and it just didn’t make sense, given an outdated box, or given a number of factors of that underlying property, to bring it back and have it operationally cash-flow positive as a hotel,” he said. “In those unique cases, we can create a higher value for the sellers, given our own particular use where it’s beneficial to the owners to work with us, and we can increase the value beyond what a traditional owner-operator would be able to do.”

Hawkins Way Capital has $3 billion in assets under management across approximately 27 properties, comprising both hospitality (through the Found Hotels brand) and residential assets. Hawkins Way recently announced a deal with Marriott International for the launch of its latest soft brand, Series by Marriott, in the U.S. Over the course of the next year, Hawkins Way will convert five of its Found-branded properties in Miami, Santa Monica, San Francisco, Chicago and San Diego.

All Found Hotels are owned by Hawkins Way, which is funded primarily through institutional, family office and high-net-worth investors. The private equity firm has a series of funds it is deploying and Hawkins Way is planning additional funds to further grow the platform.

Hawkins Way also owns FCL Management, which manages all of its properties, including both hospitality and residential sectors. FCL also does third-party management through multiple disciplines.

Ross said that a multi-disciplinary approach makes FCL unique.

“If you’re a property management company and you’re focused exclusively on hotels, you can be boxed in on sort of the capabilities and strategies that you employ,” he said. "Similarly, on the multifamily side, if you exclusively manage multifamily assets, you won’t see the unique, proprietary strategies that reflect the guest experience. In the more holistic approach that hotels typically have, student housing is generally right in the middle between hospitality in terms of the reliance on experience.”

Ross spoke with Hotel Investment Today about the current deal environment, the state of the bid-ask spread, and where Hawkins Way would like to expand its Found Hotels brand.

We are now seeing, with the rate cuts that are happening and the underperformance of some of these assets, a bit more movement in liquidity in the market. We think it’s the appropriate time to be buyers in the space, if you have dry powder.

Leonard Ross

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Hotel Investment Today: Where do you see the deal environment right now?

Leonard Ross: The pipeline of opportunities has certainly grown increasingly robust, particularly in the last couple of months. In target urban markets and drivable leisure markets, which are primarily where we focus, we’ve seen an increase in receivership and lender-driven sales, as well as a marketing of assets that haven’t been able to recover to the pre-COVID or immediate post-COVID business plans.

Owners are now increasingly willing to part ways with assets, either because the assets have had sufficient time and, frankly, have failed to perform, or because lenders have stopped offering more flexibility. We remain very active in targeting these sorts of independent boxes that are well-suited for (Found and the Marriott soft brand), as well as select-service branded assets that have physical operational upside.

We are now seeing, with the rate cuts that are happening and the underperformance of some of these assets, a bit more movement in liquidity in the market. We think it’s the appropriate time to be buyers in the space, if you have dry powder.

HIT: What is the state of the bid-ask spread in 2025?

Ross: We actually saw it widening at the beginning of this year, and since then, it’s compressed. After years of unrealistic expectations, sellers are finally beginning to capitulate on pricing, and simultaneously, we’ve seen increasing liquidity in the capital markets. This has allowed investors to size their stabilized cap-rate expectations, or to reduce their stabilized cap-rate expectations while maintaining their overall target return profiles… You’re generally seeing a cheaper cost of capital for buyers and more realistic seller expectations. The two are beginning to meet in the middle. So we finally anticipate more deal volume.

HIT: Where would you like to expand the Found Hotels brand?

Ross: It’s absolutely our goal is to have Found Hotels in the majority of major gateway cities nationwide. We currently have hotels in Boston, Miami, San Diego, San Francisco, and Santa Monica, as well as here in Los Angeles; however, we’re missing a few key cities. So, we’d love to target additional hotels in New York, Seattle and in Texas and Oregon. There are several areas that we believe are ripe for growth and ripe for this sort of product.