Housing is in high demand in most markets across the US, but supply is hard to come by. Unless, of course, there is a pandemic that completely changes the real estate game, leaving once very active properties now vacant.
Developers and investors are starting to tease out those opportunities, finding healthy profit levels and, at the same time, showing how to love the environment.
One developer found just that opportunity in Branson, MO.
This small town in the middle of the country has a population that hovers around 11,000, according to the multifamily advisory group at Meyers Research, a real estate research group. There are 5,026 households in Branson, the poverty rate is 20% and the main economic driver is hospitality, which has been negatively impacted by the pandemic.
And, the housing situation is grim. At the end of June 2020, closings were only at 36% of what they were in 2019, according to Jonathan Dienhart, the director of custom services and published research at Metrostudy, a housing market information provider. Plus, total permits in the first six months of 2020 are only at 62, a far cry from the total of 216 last year.
Branson has only five permits for properties with more than five units through June 2020, 9% of what the US Census reported as a total in 2019.
All of this leads to the perfect opportunity for Richard Rubin, the CEO at Repvblik, a development company based in Los Angeles. As a transplant from South Africa, Rubin has been focused on adaptive reuse in the US since 2015. He claims to be operating the only company that converts properties to affordable housing without any government assistance.
Which brings us back to Branson, MO, where Rubin seized an opportunity to convert a Days Inn Hotel to affordable housing. The project, called Plato’s Cave, was completed in December 2019. It was a complete conversion of 423 hotel rooms to 341 affordable multifamily units, adding much needed inventory to Branson’s housing supply.
The conversion called for combining some of the hotel rooms for the right unit mix and redesigning some of the spaces to offer a full menu of amenities that now includes a gym, beach volleyball court, free-to-use bicycles, coworking spaces, board rooms, meeting rooms, and a communal kitchen and dining area for special functions.
Rubin also is running magic numbers, which he says he sometimes has to dumb down to make them look believable.
“When we submit to funders, we have a cap rate of 11 or 12%, but, in reality, it would be more like 12 to 13%,” Rubin says.
That’s not the only magic. Reuse is not only economical; it also offers huge benefits to the environment. In 2016, the National Trust’s Research and Policy Lab published a report showing that new commercial development costs about $92 per square foot, in contrast to the $37 per square foot estimated for reuse of an existing building.
The Days Inn that was converted to Plato’s Cave is a total of six buildings with 167,000 square feet (160,000 residential and 7,000 club house), and using the reports numbers, you can see the difference in the cost of this particular property.
New property at $92 per square foot $15,364,000
Converted property at $37 per square foot $6,179,000
Since the Days Inn was already in place, most of the utilities and services were already connected and very little demolition was needed. These types of adaptive reuse projects ultimately reduce the amount of new building materials that are needed and therefore that are produced.
This 2017 research paper on adaptive reuse says that buildings’ contributions to greenhouse gas emissions also come from the energy needed to manufacture the various parts of the buildings. Construction consumes 60% of raw materials used in the US economy annually, and razing a single two-story masonry building would actually negate the benefits of recycling 1.5 million aluminum cans.
The EPA estimates that waste derived from new construction, demolition and renovation accounts for 160 million tons of solid waste each year in the US, about one-third of the country’s total waste.
Other Case Studies
Eric Silverman is the managing partner at Eastham Capital and he pays particular attention to the unit mix—the number and size of the units.
“We are buying a property in Maryland in an office park that is only 93 units, but the units are all two bedrooms,” Silverman said. “The property is super convenient for local jobs.”
Silverman adds that hotels will always have enough amenities, but they may have too many. Years ago, he published a white paper that shows that the variety of services that a hotel provides, from food and beverages to housekeeping and 24-hour maintenance, can easily outpace the value of the income from reservations. Another contribution to hotels demise during the pandemic.
Andrew Gordon, the chief operating officer at real estate investment company Strata Equity Group, says the firm is converting 103 hotel suites in Jacksonville, Florida to 103 housing units. Strata saw this as an ideal property to convert because all the hotel rooms had an outdoor space that either went to a patio or balcony.
Gordon said that the biggest challenge was converting the zoning from hotel use to apartments, which took nine months. And, structurally, while they decided to make the units all-inclusive with internet and utilities so the metering didn’t need to be changed, it was still critical to update the plumbing and electric. Even though some of the updates were expensive, the conversion of the project meant more affordable housing added to local supply. The new project offers an all-in unit lease for about 10 or 15% less than other apartments in the same area, Gordon said.
Strata is interested in another suites conversion in Florida, but is currently evaluating the numbers after addressing some of the challenges such as impact window issues and fire separation.
Brent Schipper is the principal at ASK Studio, an architecture firm based in Cedar Rapids, Iowa, a firm that recently converted a small local high school into 16 affordable multifamily units. The school, built in 1888 in Clinton, Iowa, is 130 years old and Schipper expects that, after the remodel, it will last at least another 100 years.
ASK Studio also converted a bank into 38 units and broke it down into its energy savings. The Brenton Bank envelope and concrete structure embodies about 4.82 gigajoules per square meter. Parts of the building that were retained, such as the envelope, structure and site construction, accounted for 63% of the original embodied energy. Those elements, plus some of the retained interior walls, mean that the total salvaged embodied energy is about 70%. The amount of embodied energy saved equals 600 tons of coal or enough energy to power a single family home for 435 years.
Schipper believes that this one building is important, but his firm is working to provide many more successful examples that can lead other developers down the same path.
As the Strata project exemplified, zoning can be a big challenge. Rubin also has experienced that and points out that in the markets with the biggest need for affordable housing, there is the most red tape, like in Los Angeles.
“In terms of MEP and fire regulations, you are inheriting a space that is, for all intents and purposes, residential,” Rubin said. “The wall structure, windows, egress, are all part of whatever square box one is purchasing. Sometimes, you are lucky that it is built solidly and that they have the fire safety and they have sprinkling. Sometimes, it might be more like a commercial office conversion than a housing opportunity.”
Meghna Krishna Bondili, the founder of real estate development consulting firm Butterfly Voyage, agrees that hotels, whether boutique or large-scale, are almost fully-baked residential offerings. She writes that hotels are designed as spaces to live in; have a service-first mindset in place; and typically, are in located in desirable areas.
Rubin also points out the importance of the unit mix, that drives market tolerance and available comps, which is influenced by how many rooms or modules can be converted into one unit. For instance, if the cost of one hotel room is $40,000 and it takes two rooms to make one rentable studio, then there is a new basis of $80,000.
Rubin says that hands down, capital has been the biggest challenge for Repvblik so far.
“In the last five years, I have heard 10,000 nos, and that’s being conservative,” he said. “We funded almost the first 95% in cash. We couldn’t find a local lender for a construction loan for contrarian business cases like ourselves, a little off center and that have a higher return. And now, it’s easier for us to be doing certain things, because we are one of very few that have a proof of concept. Now that people are chasing yield, companies like ours become more in vogue.”
The American Hotel and Lodging Association reports that there are more than 55,900 hotel properties in the US, offering more than 5.3 million guestrooms. The recent pandemic has put many of them in danger. As many as 8,000 hotels might close by the end of September, according to the American Hotel and Lodging Association.
The Wall Street Journal reports an even higher number, saying that in New York alone, as many as 25,000 hotels might permanently close because of the pandemic. If groups like ASK Studio and Repvblik can convert these to housing, it might be a generous contribution to fixing the housing supply issue.
If each hotel had 100 rooms, that would be somewhere around 2,500,000 units, which would give the city more than eight times Mayor Bill de Blasio’s pledge to create and preserve 300,000 affordable homes by 2026.
Repvblik is now working in many of the top MSAs in the country where there is demand for workforce housing and has 10 projects in process. Rubin says that the company hopes to produce 3,000 apartments in the next 18 months; and in the next 3 to 5 years, somewhere in the range of 20,000 units solely from hotel conversions.
His plan holds a lot of promise for the future of affordable housing and for the future of the planet.