Hotel conversions race against the clock

As calls to turn distressed hotels to affordable housing grow louder, advocates fear time is running out

National /
Oct.October 11, 2021 03:30 PM

90 Sands Street

On a nondescript corner in Brooklyn, sandwiched between on-ramps for the Brooklyn and Manhattan bridges, a long-vacant hotel formerly run by the Jehovah’s Witnesses is starting a new chapter.

Aby Rosen’s RFR Realty acquired the 29-story building at 90 Sands Street for $135 million in 2017, intending to create, as his partner Ian Schrager described it to the New York Post, “the No. 1 hotel in Brooklyn.”

Those plans never came to fruition, and a year later Rosen flipped the building to the nonprofit Breaking Ground, which is transforming the 30-year-old property into affordable and supportive housing. Of the building’s 491 units, 305 will house the formerly homeless, while the remaining 185 will be preserved for extremely low to moderate-income tenants. The first permanent residents are expected to move in next year.

The hotel is an example of a trend that’s become a popular talking point. Nineteen months into a pandemic that continues to render many of the city’s hotel rooms vacant, politicians and advocacy groups alike increasingly wonder whether underutilized hotels would be better off converted into affordable housing.

But despite newfound interest and support at both the state and city level, such conversions are more difficult to pull off than they seem. And with the city’s hotel occupancy rates slowly creeping upward, those championing the conversions fear that the clock is ticking.

“In order to make a difference for homeless individuals and families, we need to act fast,” said Breaking Ground CEO Brenda Rosen.

Hotels in distress

Standing outside the vacant Phoenix Hotel in Sunset Park on Sept. 20, Eric Adams, the Democratic nominee for mayor, announced that his administration will strive to convert many of the city’s emptied hotel rooms into 25,000 units of affordable housing.

“The combination of Covid-19, the economic downturn and the problems we’re having with housing is presenting us with a once-in-a-lifetime opportunity,” Adams said. “We can use this moment and find one solution to solve a multitude of problems.”

For more than a year after the onset of the pandemic, the majority of the city’s hotel rooms sat empty, according to data from the Hotel Association of New York City. As of August, the citywide occupancy rate stood at 61 percent. Revenue per available room, a barometer for the health of the lodging industry, is half what it was before the pandemic.

Looking forward, there’s little hope for an imminent recovery. An April study by commercial brokerage CBRE predicted that revenues will not recover to 2019 levels until 2024. Dark hotels mean more than just empty beds. They mean economic distress.

Hotels in the New York metropolitan area that are backing CMBS loans have been increasingly under strain, according to data from Trepp. As of August, nearly 41 percent of those hotels — representing about $1.4 billion of loans — are on a watchlist designed to warn investors of impending trouble before a mortgage is transferred to special servicing. That’s up from about 38 percent in January.

HONDA hurdles

On Aug. 13, former Gov. Andrew Cuomo signed into law the Housing Our Neighbors with Dignity Act (HONDA), which unlocks government funds to convert distressed hotels and office properties into affordable housing.

But qualifying for HONDA’s $100 million pool of funding — which some advocates view as not enough to have a meaningful impact on the housing shortage — requires jumping through several hoops.

Half of the units of a converted property must be rented to low-income residents, while the other half must be for homeless or previously homeless households. Units must contain a kitchenette with a 24-inch refrigerator, sink, cooktop, microwave oven and outlets for countertop appliances, raising costs for developers.

“Renovating hotels, and putting a full kitchenette into each unit is time- consuming and will be costly,” said Rosen, noting it may be an issue for future Breaking Ground projects.

HONDA also does not offer concessions on zoning limitations, meaning that the numerous hotels located in manufacturing districts cannot apply for the funding.

“The HONDA bill is hopefully gonna create permanent affordable housing,” said Valerie Campbell, a partner at Kramer Levin. “But I think that’s the overriding goal of that bill, not so much to sort of alleviate the distress of hotel owners.”

At 117 West 79th Street on the Upper West Side, developer Fairstead is converting the Park 79 hotel into affordable housing for seniors. Fairstead purchased the seven-story hotel, steps from the Museum of Natural History, in 2016 for $22.5 million, and it’s partnered with Project FIND for the redevelopment.

However, when it comes to funding such conversions, “it’s not always easy to make the numbers work,” Fairstead’s Brett Meringoff said.

“There is no magic bullet to fix the affordable housing crisis,” he said. “HONDA takes a big step in giving the development community and the affordable housing advocacy community a big tool in the toolbox.”

Developers could also see pushback from local residents. The city’s attempt to convert the Holiday Inn Express at 59-40 55th Road in Maspeth into a 115-bed homeless shelter was derailed in 2016 after local residents demonstrated outside the property for days. Republican mayoral nominee Curtis Sliwa returned to the site in August for a rally commemorating the five-year anniversary of the successful protests.

Running out of time

Between limitations on who receives HONDA and an anticipated revival of New York City’s hospitality industry, some believe the window for hotel conversions is closing.

Advocates point to California as a leader when it comes to conversions. The state has distributed $800 million to local governments to purchase hotels and motels. Ninety-four properties have already been acquired, paving the way for about 6,000 housing units.

“If you compare us to California, which really acts quite aggressive in this space, New York’s definitely acting late,” said Noah Kazis, a legal fellow at New York University’s Furman Center for Real Estate and Urban Policy.

As time goes on, advocates are likely to have fewer distressed hotels to target. Occupancy rates are higher than they were a year ago, and the city appears determined to incentivize its shuttered hotels to reopen.

On Sept. 23, the City Council passed legislation forcing closed hotels to pay severance to their out-of-work service employees. The key to exemption from this requirement: reopening by Nov. 1.

“We can take advantage of what I think is very time-limited,” said Rosen. “We are going to get through Covid and we are going to bring back tourism and people are going to come back to work.”


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