Office buildings represent the lion's share of conversion opportunities in Latin America Smart conversions fast-track Latin American hotel developmentBy Mary Scoviak | June 1, 2023Share Hospitality development insiders speaking at the 2023 CHRIS/HOLA conference offer a master class in pinpointing the potential and pitfalls of regional assets ripe for repurposing. Conversion opportunities dominated discussions about Latin American hotel development both in formal presentations and informal chats at the 2023 CHRIS/HOLA conference held May 23 – 25, 2023 in Miami.Asset classes from vacant office towers fossilizing on prime city-center real estate to decommissioned monasteries and convents tucked away in secluded enclaves are currently the low-hanging fruit for hospitality investors who want to enter or expand in the region. As Quinn noted, Latin America’s “legacy of independent hotels” affords lower-risk and reduced complexity for first-time developers who may be looking for opportunities to move a property up market or horizontally to affiliate with a global brand.“But, as panelists on the “Build vs. Buy vs. Convert” session during the HOLA conference pointed out, the fact that these properties are “obvious” targets for reuse as hotels or resorts doesn’t mean they’re going to be easy deals to get done.Outlining best practices for going beyond standard due diligence to identify the subtler go/no-go factors in optimizing conversions were panelists Osvaldo Marcelo Chudnobsky, managing partner, Horwath International; Carlos Crovato, vice president, Development & Acquisitions LATAM, Standard International; Patricio del Portillo, vice president of development, LATAM, Aimbridge Hospitality; Dan Freed, principal, Arcadis | CRTKL and Brian Quinn, chief development officer, Sonesta International Hotels.They detailed these tips for separating out money makers from money pits.Why mastery of conversions is a mustThe consensus of the panelists was that conversion may not only be the most accessible point of entry to the hospitality market, it may be the only feasible way to play many key Latin American markets.Brian Quinn“New development frequently is cheaper than or equal to conversion but, at the end of day, newbuilds may not even be possible,” said Chudnobsky. For example, investors who think they can simply demolish the hulk of a 20-story office building and develop a new high-rise hotel on the site may have to think again, he added. New construction has to adhere to the most recent permitting and environmental regulations. So, instead of the soaring decades-old tower currently on the site, developers working in 2023 might be limited to a seven- or 10-story structure which does not obstruct views from neighboring buildings or shadow the nearby landscape. “Investors could be looking at a substantial reduction in total square meters, and that definitely can impact how the project pencils,” said Chudnobsky.Conversions can offer a way around those challenges provided developers are willing to burn a tanker of midnight oil on homework and thoroughly weigh the risk-reward ratio. Quinn cautioned developers to exert discipline to buy at the “right price,” especially since inherent costs in conversion can claw back savings from the decision to retrofit.The panelists stressed that buyers need to be aware of the regulatory, structural and design issues that might leave them bleeding capital over the hold period for the project. Carlos Crovato“Before developers even start the process, they need to look at the layout of the building. Office layouts are very different from those of hotels. So, being honest with yourself, is that building even suitable for conversion? And, if due diligence confirms that it is, can your financing package cover the hidden costs that may arise, including structural problems, and will that total cover compliance with international brand standards not only for design but also for safety?” said del Portillo.Just the requirement for access to a stairway to exit the hotel in case of fire (even though some safety protocols recommend guests on higher floors remain in their rooms) can change the buy/pass equation. “Adding that stairwell could take out an entire column of rooms without enhancing guest safety,” said del Portillo. “But it’s case by case depending on the local government, the building and, if one is involved, the brand."Panelists noted that some of the newer brands eyeing growth in Latin America insist on adherence to local codes rather than U.S. mandates. However, as Quinn said, compliance with U.S. life safety codes could be a plus for big brands’ loyal international customers.There’s a lot more to know before green-lighting a conversion“Frankly, I find it kind of shocking that some major, major clients don’t do the necessary front-end research for conversions,” said Freed. “First off, what’s their business reason for wanting to be in that market? Will the zoning laws allow for conversion from office to hotel use? IF they want to brand it, what does the room bay look like? Most office setups are usually about 130-to-160 square feet. Unless you want to develop a small room module like, say, citizenM’s, it’s going to be challenging to meet brand standards in a footprint that size."Del Portillo also urged developers to confirm that the structure of the building can sustain repurposing. “Sometimes, the weight on the slabs from the addition of guest bathrooms and other hotel design elements is a problem. At some point, you may be looking at restructuring the whole building.”Freed voiced an opposing view. “If the slab can’t support a hotel, it probably couldn’t have continued supporting the offices. That would indicate structural issues that should make you walk away from that conversion,” he noted.Patricio del Portillo The speakers also reminded prospective developers not to underestimate the cost of time involved in conversions. Some projects they’re worked on required more than a hundred public hearings before completing the approvals process. Clients had to be prepared to justify not only changes in use, but any reductions in parking that would negatively impact the surrounding business or residential community, environmentally unfriendly increases in water usage and evening-into-late night increases in traffic and noise. Hotels are a 24-hour business, whereas noise and traffic from offices takes up just a third of the day. “Developers may need to invest time in explaining the reasons for the zoning change and building the relationships that will get the community behind the project,” added Quinn. “In terms of working with local officials, it’s important to demonstrate the benefits of the projects in terms of taxes and revenue-building throughout the neighborhood. In most cases, local officials want that building to be occupied so that it can become revenue-producing.”Conversion is as much art as science“Latin America’s urban centers such as Mexico City have a huge amount of empty office space right now,” said Crovato. “The owners don’t know what to do with these assets. These buildings have been sitting empty for three years—good buildings with good bones in good locations. The cost of finding a site in a city center at these addresses would be insane even if it became available. Yes, it costs money to do a conversion. Some say those costs are the same as new construction, but I don’t think that’s the case. What Standard found in its office-to-hotel retrofit was that we had to reimagine how to maximize the available public space with programming that diversified our risk.” Dan FreedWhen walking the building, Crovato advised developers to consider how spaces could be monetized, and what would make the numbers work. “Post-Covid, we saw that most traditional hotels had huge meeting areas and huge F&B areas. At Standard, we evaluated how we could repurpose this interior real estate as a variety of small venues with appeal for targeted and cross markets,” he said. “Given the raw open space in the office’s footprint, we shelved the idea of a massive F&B outlet and subdivided it into a fine dining restaurant, a beer garden, a speakeasy and a grill. That optimized our reach and potential profits.”As Standard learned from its foray into office conversions, every decision is a piece of due diligence. “The building may have the opportunity for a rooftop bar, but will noise regulations or the possible loss of goodwill among neighbors in nearby residences justify the investment? In our case, the answer was no. Rather than alienating the local community, we shut down the rooftop bar, lost revenue for a while and relocated the venue within the hotel,” said Crovato.Like Crovato, Freed recommends that developers brace for some onsite R&D. “Some brands are lowering parking requirements, for example. That space can be reallocated to revenue-generating function, event or conference space. Or perhaps the façade can be changed to carve balconies from guest rooms that don’t require so much depth or integrate existing balconies into those that do.”Osvaldo ChudnobskyUncovering under-the-radar opportunitiesAlthough offices are at the center of Latin America’s conversion opportunities, there’s more to the market than high-rises and financial district locations. Chudnobsky suggested developers consider unfinished buildings that may have been stalled by legal or regulatory issues, sites recovering from storms that leveled existing buildings, sales by family offices that ran out of the “ego” or effort to keep hotel businesses as part of their familial wealth protection planning and ecclesiastical buildings.“There are a number of well-located decommissioned city center churches available for reuse as small hotels,” he said. “But there are also a number of decommissioned monasteries and convents set in beautiful green areas that would lend themselves to reuse as very high-end resorts."