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A return to the big cities in 2021?

Will there be a return to cities in 2021
by Brad Cartier, posted in Newsletter

As mass vaccinations roll out, the exodus from expensive real estate markets like New York City appears to be reversing. According to a new white paper from Uncast, combined January and February 2021 data shows that New York County gained 21,000 in population and over $2 billion in employment income. Meanwhile, Bronx County gained 2,100 new residents and $590 million in income.

As Natasha Dailey of Business Insider reports, WeWork CEO Sandeep Mathrani commented that his co-working company is seeing people return to work “in droves” in Texas and Florida markets.

Indeed, large financial institutions are already telling employees they need to prepare to return to the office, including Goldman Sachs, Blackstone, Wells Fargo, and JPMorgan Chase, to name a few.

That said, Erica K. Brockmeier of Penn Today released an article last week highlighting this issue, using GIS data to study mobility in the largest metros in the U.S. The researchers found “a stark story of how little we are doing compared to before the pandemic…The visuals show a huge drop [in mobility], and it probably will take a long time for things to get back to normal.” The study also found evidence of segregation patterns in major urban metros, meaning homogeneity in neighborhoods is becoming more pronounced.

Earlier this month, Business Insider reported on Bank of America data, noting that “while the pandemic accelerated preexisting migration out of cities like New York City and San Francisco, those two are the only true examples of anything resembling an exodus, and reopening will spark a return to both cities.”

An urban revival seems to be happening in other countries as well. Olivia Konotey-Ahulu of Bloomberg (subscription required) reports that in London, “viewings for central London properties soared 46% in April compared with the same month two years earlier as residents rushed to take advantage of rock bottom prices.”

Hotel to multifamily conversions

The hard-hit hotel industry has faced some serious headwinds over the past year. The National Association of Realtors (NAR) reported that hotel occupancy rates sat at only 37% in 2020, highlighting the need to repurpose certain properties to affordable multifamily housing. In a new report, NAR found that:

  • 82% of hotels converted into multifamily housing were located outside of city centers.
  • 47% of hotels were acquired at $25,001 to $50,000/room, and 53% at less than $25,000/room.
  • Average rent after hotel/multifamily conversion was $1,090.
  • 55% of hotel conversions required rezoning.

The cost of a multifamily conversion from a hotel

Source: NAR

Even at a ~$50,000/unit price tag, hotel conversions become much more economically viable as a multifamily development strategy given the current high cost of construction materials.

Sellers of distressed hotel assets also see value in multifamily conversion. John Hart of the Wisconsin State Journal reports on HotelRed, a 48-unit hotel that opened in 2011 but is now up for sale. In the listing, the seller advocates for a potential conversion to multifamily units. According to the listing, “this offering presents prospective buyers with an exceptional multifamily conversion investment opportunity in an iconic downtown Madison location with exceptional demographics.”

Indeed, last month JLL noted that despite the pain being felt in the hotel industry, sellers of these underperforming properties have plenty of buyer interest. Buyers are mostly seeking to convert these assets into new high-demand uses, like apartments. JLL goes on to note:

“Interest in conversions has grown during the pandemic, sometimes leaving traditional hotel investors outbid. In the U.S., alternate-use investors are pushing pricing between 25 percent and 35 percent above traditional levels. Recent activity suggests the total market value of hotels sold for conversion over the next five years will range between $25 and $30 billion, according to JLL research.”

Les Shaver of Globe St (subscription required) joins the conversation, reporting that 60% of the total 187 hotel or motel conversions in the past year were for “multifamily housing, workforce housing, housing for veterans, or housing for healthcare workers.”

Short-term rental (STR) update

It was a big week for Airbnb, beginning with their Q1 earnings rising 5% despite ongoing restrictions. According to Paul Stevens of Short Term Rentalz, gross booking value in Q1 jumped 52% to over $10 billion, with 64 million nights and experiences booked on the platform. This is a 13% increase from the same time last year.

In a teaser at the end of the earnings call that has many in the industry asking questions, Airbnb CEO Brian Chesky stated:

“Now I want to wrap by highlighting a major announcement that we have coming up in less than two weeks. On May 24, we will announce the most comprehensive update to the Airbnb service in 12 years. As part of this special announcement, we’re going to share insights on how travel is fundamentally changing, along with updates we’ve made to prepare for what’s ahead. We’re going to unveil a simpler and more inspiring guest experience. And we are going to show you upgrades that make it even easier to be a host on Airbnb. So watch the announcement with the on Monday, May 24.”

STRs are certainly seeing a bounceback. Last week, AirDNA released their April market data, showing demand for STRs in the U.S. has recovered to 2019 levels. In April 2021, demand increased 66% over 2020 levels. More interestingly, demand also increased 5% over 2019 pre-pandemic levels. Despite this, global demand is still 31% lower than in 2019, a trend running counter to the U.S. STR market.

STR occupancy in the US is picking up steam

Source: AirDNA

And, U.S. STR occupancy rates are hitting record levels.

STR Occupancy in the US it hitting seasonal highs

Source: AirDNA

Jamie Lane, AirDNA VP of Research, stated in the report that “the search for new hosts is heating up and in April the combined supply of Airbnb and Vrbo reached 1.5 million in the United States—even surpassing pre-pandemic peaks.”

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