Apartment Developers Scout Adaptive Reuse Possibilities

That math will become easier for developers if more distressed properties become available at a steep discount.

It’s too soon for most developers to sign a contract to buy a failed hotel—but apartment developers are watching and waiting for prices to drop to buy other property types damaged by the economic crisis to redevelop into multifamily buildings.

Even before the crisis, apartment developers were eager to buy well-located properties like old office towers and empty malls that they could transform into apartments. The chaos of the pandemic caused most of these developers to pause and wait for new opportunities, such as distressed hotels available at a discount.

“There is just little interest on the part of developers to jump into anything like that at the moment,” says Jim Costello, senior vice president for data firm Real Capital Analytics, based in New York City. “Assets are not being sold at substantial discounts … yet.”

Hotels may be the fastest conversions to apartment

However, at least a few redevelopers have leapt to buy hotel properties—6 percent of hotel assets bought in the second quarter of 2020 were acquired with the intent to redevelop or convert the properties to a new asset class, according to Real Capital. This rate of purchase for redevelopment was twice the average rate seen in a second quarter between 2014 and 2019.

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