When is a conversion the right choice for your property?
Whether it’s an under-performing hotel being transformed into a condominium or retirement home, a hotel being torn down and rebuilt, or a unique building being converted into a hotel property, hotel conversions are becoming de rigueur. But, ultimately, hoteliers looking to convert have to determine whether it’s the right choice and the best option available. In a recovering economy when most hoteliers are juggling many balls, how does one decide what kind of conversion makes the most sense?
“When you’re looking at doing anything with a hotel, especially when you’re going to invest a lot of money, it’s important to look at market demand and competition,” says Eric Malcolmson, director at Toronto-based HLT Advisory. He says identifying the changing demographics and what’s happening on a macro- and micro-economic level, is key to his team, which offers consulting services for the hospitality, leisure and tourism industries. For a hotel property that may be struggling, it’s important to ask yourself, “Do I invest and bring the hotel up to the market?, or does it make more sense to convert that hotel, either to a different use, or demolish and rebuild?”
A few factors can lead a hotelier to conclude a property just doesn’t work well as a hotel anymore. Often, it’s because the neighbourhood and surroundings have evolved. “Remember, neighbourhoods change,” says Linas Saplys, senior development consultant at Architecture and Planning Initiatives in Oakville, Ont. “You could be located in the best business neighbourhood and then all of a sudden everyone’s converting all the offices into residential buildings,” he asserts. “And you find yourself in the middle of a downtown residential neighbourhood that doesn’t necessarily lend itself to a hotel environment. In this case, a conversion can really make sense.”
When changing a property’s purpose, however, it typically makes the most sense to convert a hotel into something a hotel structure already lends itself to. A condominium complex, in high demand in many cities across Canada, or even a retirement home, are good examples. Malcolmson points to the River Garden Inn in Stratford, Ont., as a model to follow. The 115-room hotel was successfully converted into a retirement home, called River Gardens Retirement Residence, last year. “They kept the room configuration within the hotel the same, and then converted some of the larger public spaces into uses for the retirement home,” explains Malcolmson. “The lobby became the fireside lounge, the restaurant became the dining room … the nice thing is if you get the right hotel, the right location and the right zoning, certain hotels have the same sort of configuration and parts you’re looking for in retirement homes.”
As for converting other types of properties into hotels, Malcolmson says it’s not a pervasive trend at the moment. “But I think you’re going to see more of this because building costs are high. If you took an existing building, and just did an interior gut and retro-fit, that might offset the cost to return on investment deficit,” he concludes.
When it comes to conversions, some hoteliers wear their imaginative stripes with pride. A fascinating conversion was recently undertaken in Boston by Massachusetts-based, Carpenter and Company, Inc. The Charles Street Jail — first built in 1851 — was converted into a luxury hotel. The Liberty Hotel, completed in 2007, to the tune of $150 million, plays unabashedly on its history. Guests can imbibe in a bar, cleverly called Alibi, built in the jail’s old drunk tank. Clink, the on-site restaurant, serves fare much more appetizing than bread and water, and an outdoor summer patio called The Yard is the perfect spot where would-be miscreants can chill out. The transformation demonstrates the benefits of what can happen when converting an interesting historic property into a hotel. “It has great architecture, a lot of character, a great back story,” says the property consultant. “If you get creative and assemble the right team to put it all together, you get something that’s very different from any new-build hotel,” says Malcolmson. “It becomes competitively viable just based on its uniqueness, as long as you get the right location and the right product,” he stresses.
Philippe Gadbois, senior VP of Sales and Marketing for Toronto-based Atlific Hotels, agrees. His company has experience in adapting properties. In fact, Atlific converted the long-standing Montreal Gazette newspaper buildings into the new Le Westin Montréal in 2009.
He believes the main advantage to the conversion is the unique, historic feel of the property. “Ultimately, you end up with a project that’s really interesting and certainly more appealing to most people than the standard box,” says Gadbois. While he has no hard stats to prove the property’s historic significance attracts customers, “We believe the project has ramped up faster than the norm, and is being well accepted by its target customer.” Similar to Boston’s Liberty, Le Westin Montréal draws attention to its past with a restaurant called Gazette and a bar called Reporter. Three buildings comprise the Gazette property — one dating to the 1890s, another to the 1910s and a third to the 1950s. The trio were protected by the city’s heritage preservation policy, which recognize a building’s age and significance. Gadbois says renovating the building, which is governed by heritage restrictions, presented challenges, but it wasn’t overly difficult to work within the guidelines.
Other challenges included remediation issues such as dealing with asbestos and fixing structural flaws. “Typically, especially with buildings with some age, there are a lot of quirks in the building,” says Gadbois, who refutes the notion that a conversion is cheaper than a new build. “Everybody likes to think it’s cheaper or more efficient to convert, but I can tell you, I’ve done this for a long time, and it always ends up being more expensive,” he says.
Just how much more expensive the Westin Montréal conversion cost turned out to be, he won’t say. However, he does admit a conversion is less efficient. “From a sizing standpoint, nothing fits. So you’ve got to adapt a lot of things, as opposed to a pure purpose-built structure where everything fits.” That said, “If the project ends up being more appealing to the customer, you should end up doing proportionally better and make a little bit more money.”
Both Malcolmson and Saplys warn hoteliers considering a conversion to do their homework and do it well. Figure out the exact conversion costs and project the return on investment. If you’re converting from one type of hotel to a different type, how much more will you be able to charge per room? And there are always hidden costs one might forget to consider. “You have to look at all the contractual agreements you might have with the existing building,” says Malcolmson. In the case of conversions that involve an existing hotel, “What’s the cost of terminating the management agreement, the franchise agreement or the union contracts of the existing hotel? What’s the cost of getting a zoning or bylaw amendment? What are the retro-fit costs? There are many things that need to be factored into it.”
Saplys adds, in any kind of conversion, surprises frequently crop up in the interior of the property that grossly raise the building and renovation costs: issues such as asbestos, bad plumbing and generally unwise building methods from the past. “In one instance we found wall safes that were cemented in. [We] couldn’t even get them out with a sledgehammer,” says Saplys. He recommends first taking a few rooms out of commission, opening up a few walls and doing a full analysis of what’s behind those walls to get a better picture of possible hidden costs.
“It’s important that it’s fully vetted, and you’re sure it’s viable and also fin-anceable,” adds Malcolmson. “The worst thing to do is to start spending lots of money without checking with your lender and your lawyer and your architect and your business advisor. It has to make sense.” Saplys agrees, noting you can’t be averse to spending money up front to make sure a conversion is the best option. “Analysis in the front-end before you start spending major money is key,” he says. “So that $20,000 on professionals may be the best $20,000 you ever spent, before jumping into $3 million in renovations.”