The conversion of properties from other commercial uses into hotels is a topic that’s gaining a lot of traction at the moment due to factors such as ESG concerns and the prohibitively high cost of ground-up development.
Kate Wallin, director, development UK & Ireland at Marriott, explains that the cost of construction, layered in with the cost of debt, means it’s a challenging marketplace to make any new-build project stack up, noting that 60 percent of Marriott’s UK and Ireland pipeline is focused on conversions and adaptive re-use.
Retail spaces and office spaces are ideal assets when considering conversion into hotels, said James Twomey, director at Reardon Smith Architects. “The plight of retail has been well-documented with shopping centers and department stores, and the plight of the office market is well-documented in terms of older buildings not meeting ESG standards.”
In addition, the trend of more and more people working from home means there’s opportunity to take these office blocks—some of which are lagging behind in terms of sustainability—and turn them into hotels as tourism continues to boom post-pandemic.
Assessing Conversion and Re-use
But what are the considerations when assessing these conversion and adaptive re-use projects?
At the top of the list is financial viability, experts stress, noting that this can depend heavily on the location of the asset.
Experts advise that early collaboration and communication between all parties can expedite processes, reduce timescales and help a project be more financially viable.
Wallin says another key issue is how the lending community is responding to conversion and adaptive re-use projects, as she notes some nervousness due to the uncertainty associated with such projects.
“Where the challenge comes in on adaptive re,use with lenders is that they don't know what's going to be uncovered," she said. “Obviously, each project has their own merits and more historical assets come with more cost and less certainty. But lenders are looking for large contingencies as part of their underwriting. And then if we look at conversions, it's equally a difficult story if you're taking a hotel with a poor historical performance and you're saying you want to throw a load of capex at it, re-badge and reposition.”
However, Twomey notes that although older assets come with their own sets of challenges, the heritage element can be turned into a positive as strong heritage narratives lends worth to the building story.
“People love to stay in hotels with a rich history and if you have a building with a rich history, turning it into a hotel means you're enhancing and extending the story about that building. There are fantastic examples of buildings with huge historical character and diverse variety of use that make fantastic hotel buildings. So each case needs to be considered on its own merits,” said Ian Duncombe, board director at chapmanbdsp.
The next challenge on the list is planning, with experts noting that while local authorities are adopting more of a commercial mindset and being more proactive when looking at adaptive re-use projects, getting through the planning process can still be a bit onerous.
This article originally appeared on our sister site, Hospitality Investor. To read the article in its entirety, click here.