Housing Developers See New Opportunities With Old Motels
Join Starwood Capital Chairman and CEO Barry Sternlicht and Greystar Chairman and CEO Bob Faith at Multifamily East!
Legend has it in the mid-1970s two young computer programmers, Bill Gates and Paul Allen, stayed at a New Mexico motel where they came up with a little-known computer program called Microsoft that would later change the world.
The two men would move out and eventually become multibillionaires, but The Sundowner Motel along Albuquerque's Historic Route 66 fell into disrepair. In the coming decades, the motel attracted vagrants, crime and prostitution until another visionary turned the property around.
In 2014, New Life Homes CEO John Bloomfield turned the dilapidated 110-room motel into a 71-unit mixed-use affordable housing development with 3,400 SF of commercial space.
“When we came in, it was a big mess,” Bloomfield said. “Now, it’s one of our success stories.”
The Sundowner is one of many motels nationwide that has been converted into affordable housing over the years, and the trend is gaining momentum.
In Orange County, Newport Beach-based affordable housing builder Community Development Partners recently opened The Orchard, a 72-unit development for chronic homeless individuals in Santa Ana.
Other cities nationwide are continuing to either look into converting or creating pilot programs to test the water. Lake Tahoe is converting a motel into workforce housing; Salt Lake City wants to tear down a motel for affordable housing; and in Orlando, a developer is buying up old motels and converting them into affordable workforce housing.
As the homeless population grows nationwide and the housing affordability gap continues to widen, especially in large metros, cities across the country are grappling with how to provide shelter for homeless and lower-income residents.
A 2017 report by the National Low Income Housing Coalition reported the U.S. has a shortage of 7.4 million affordable and available rental homes for extreme-low-income renter households. These households, known as ELI households, have income at or below the national poverty guidelines or 30% of the area’s median family income. For example in high-cost Orange County, a family of four with a combined annual income of $84,450 or less qualifies as low-income.
With housing labor and land costs skyrocketing, new ground-up affordable housing projects are harder to come by, experts say.
This is where the conversion of motels could help with the nationwide affordable housing crisis, Atlas Hospitality President Alan Reay said.
Once a staple of American lodging, many roadside motels have become aged, dilapidated and have been supplanted by other forms of lodging such as three-star hotels, Airbnb or some other form of short-term rentals.
From its peak in 1964 to 2012, the number of operating motels nationwide fell 73% from 61,000 to 16,000, according to the Smithsonian. That number continues to decline.
Reay said some motels can be easily converted to affordable housing units because the infrastructure is already in place. However, in the past, when affordable housing developers approached him about buying motels or hotels and converting them into affordable housing, his company was reluctant to engage in that type of business.
“You have to go in and change the zoning and the cities were reluctant to allow it because they would lose transient occupancy tax,” Reay said. “But because of all the stories that we are reading tied into low-income wages and not enough wages, affordability and the homeless situation … we are now seeing cities are a lot more receptive of this."
Over the past several years, the city of Anaheim has been purchasing old rundown industrial warehouses and motels and partnering with nonprofits and developers to build affordable housing.
Anaheim has one of the largest homeless populations in Orange County. City staff has said previously that more than 25,000 people are on a six- to eight-year waitlist for Section 8 affordable housing. The city stopped issuing vouchers in 2017.
In 2016, the city opened Rockwood Apartments, a former warehouse, and developed it into a 70-unit affordable housing apartment building for homeless families and for people living with disabilities and mental illness.
The following year, the city spent $3.5M to purchase the Sandman Motel — described by staff as a troubled motel with a history of police service calls — to build affordable housing for seniors.
“Some motels have outlived [their] use and turning them into affordable housing is a good solution,” Anaheim city spokesman Mike Lyster said.
Lyster said the city is planning to build 12 affordable housing communities in the coming years.
In Los Angeles, motel conversion is a hot topic. The city in 2016 approved a deal to allow nonprofits and developers to convert problem motels into supportive housing for homeless veterans. The city is now looking into creating an ordinance to convert more motels into affordable housing.
'This Isn't For The Faint-Hearted'
"It’s a viable model that works," said Community Development Partners President Kyle Paine, whose company with help from the city of Santa Ana and nonprofit Mercy House converted an old motel into The Orchard, a permanent supportive housing project for the homeless. "It can be operationally functional and could help build a sustainable community.
"The impact is plentiful," he said. "You’re cleaning up the property and helping the community. This will have a positive impact and reduce the homeless population."
There are plenty of obstacles developers face when trying to convert a motel. First, motel owners are sometimes reluctant to give up a profitable and at times all-cash business.
Second, cities have to change local zoning to adapt to the conversion, Reay said.
Third, neighborhood associations — fearing a decrease in property values and an increase in crime — complain to the city about having an affordable housing project next to their neighborhood.
The biggest challenges are financing and time, said Bloomfield, the New Mexico affordable housing developer. It could take years to line up multiple grants, financing, tax credits and city approvals, assess the quality of the motel and receive an environmental impact report, he said.
"This isn't for the faint-hearted," Bloomfield said. "You have to be comfortable with risk and persevere. You can't do this if you want to make a quick buck."
But the human payoff at the end is worth it, Bloomfield said.
In New Mexico, Bloomfield builds affordable housing for the neediest segment — those with special needs, the mentally ill and the homeless. His projects have won national awards. He repurposed a historic motel site, Luna Lodge, and transformed it into an award-winning affordable housing solution.
"A lot of these people have nowhere to go or even family," he said. "Most tenants stay and die here and we'll have a service for them on [the] property."
Reay, the hospitality expert, said the biggest challenge is facing the neighborhood opposition.
"I think as a resident, do I want to live next to a motel that brings in transients or people who do criminal activities or residents who are basically working and doing everything they can to get out of their situation?" he said.
Bloomfield said he makes it a point to hold as many community events and outreach sessions so residents understand the project.
"We need to dispel the myth that affordable housing is a blight and reduces property values or brings in crime," Bloomfield said. "Affordable housing is good for the neighborhood. These are quality developments."