👑 Meet the new king of conversions

👋Hello, Best Ever Community! President Joe Biden proposed a 5% rent cap for apartment owners this week. We’ll talk about it.

Also in this week’s newsletter, hotels get converted, evictions surge, and LOIs get drafted.

Today’s edition is brought to you by Viking Capital,a multifamily boutique firm with nimble investment sourcing, structuring, execution, and asset management capabilities.Learn more about Viking Capital here.

Let’s get to it!

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CRE HEADLINES

📈Evictions Surge: Eviction filings in multiple U.S. cities remain 35% or more above pre-pandemic levels, with Phoenix hitting a record 8,000-plus notices in January, showing no sign of returning to pre-2020 norms.

💸REITs Rising: Real estate stocks are rebounding strongly after two years of negative sentiment, with the S&P 500 real estate sector up 4.41% and Nareit's REIT index up 4.62% last week, followed by a 1.1% REIT index gain on Tuesday.

🆘Distress Triples: Apartment deals marked delinquent or in special servicing that are financed with commercial mortgage-backed securities loans jumped 185% in late June from January, according to a report by CRED iQ.

💳 Conversion Credit: A new bill called the Revitalizing Downtowns and Main Streets Act proposes a 20% tax credit to convert 20-plus-year-old vacant commercial properties into affordable housing, requiring conversion costs over $100K or 50% of the building's adjusted basis.

🌤️ Better Days: Real estate investor sentiment rose 16% from the previous quarter, with 60% viewing the market positively and 61% expecting future improvement, according to a new RCN Investor Sentiment Survey.

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HOTELS: THE NEW KING OF CONVERSIONS

Multifamily conversions are all the rage. Distressed offices, old warehouses, factories, even a defunct baseball stadium — it’s all being converted into multifamily. Now, there’s a new frontrunner in the category: hotels.

Hotel conversions are at an all-time high in the wake of the pandemic. As travel has slowed and travelers have emphasized quality, owners of outdated, underperforming hotels have offloaded their properties, creating an opportunity for developers like Alex Cartwright, managing principal at HotelSHIFT. 

Cartwright pivoted from multifamily syndication to focusing solely on hotel conversions in 2022 (we’ll break down his first deal later in the newsletter), helping pioneer a category that has exploded since. 

• The Momentum: A total of 4,556 apartments were created from repurposed hotels in 2023, a 38.8% increase over 2022 and almost double the volume of 2021.
  

• The Leader: Hotel conversations now account for more than one-third of adaptive reuse projects in the U.S., overtaking the office sector as the leader in conversions.

Cartwright saw opportunity in the hotel conversion space largely due to:

• The Upside: Buying opportunities at a fraction of stabilized multifamily prices — as low as $25,000 to $35,000 per door, according to Cartwright. Buying distressed hotels at cap rates in the mid-to-upper teens and refinancing at multifamily cap rates presents high upside with limited downside protection.
  

• The Opportunity: Almost nobody is building new C-class apartments, while value-add investors seek B- and C-class to level up into A- and B-class. “As those apartments get upgraded,” Cartwright said, “that supply of C-class housing is squeezed, and that's where we see the strongest rent growth in a lot of markets. So I wanted to be able to play in that space.”

Challenges: Converting hotels to multifamily is not for the faint-hearted. From revamping crime-ridden, high-vacancy properties with complex renovations (compared to the traditional value-add) to navigating zoning restrictions and working with municipalities to change zoning, Cartwright immediately saw the opportunity to focus solely on this niche to become an expert in the space.

Cartwright said this week on the Best Ever Show:

“You need to have some kind of niche,” Cartwright said. “You've got to have some kind of edge to be able to unlock returns that other people can't unlock. And I take very seriously the idea that … if you're gonna get off your butt and get out there and spend your time doing an active investing strategy, you gotta make sure you have got an edge — you need to define what that edge is, and then stick to that edge.”

👉 To learn more about Alex and HotelSHIFT and to discover opportunities for accredited investors to capitalize on this hot market, click the button below.

_{💻 VIKING CAPITAL}
AVONDALE HILLS

Viking Capital presents Avondale Hills, a luxurious 240-unit, Class A asset surrounded by vibrant development and economic growth in the Atlanta, GA, MSA.

Strategically located in a hyper-connected area directly across from the MARTA transit station, Avondale Hills offers a modern living experience with premium amenities, positioning it as a best-in-class property.

Avondale Hills also offers a lower-risk strategy to add value by increasing below-market rents and stabilizing expenses and occupancy. At a 30%+ discount to replacement cost, Viking Capital is buying this property at an extremely competitive basis for a standout investment in one of Atlanta's premier submarkets.

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BIDEN PROPOSES 5% RENT CAP

President Joe Biden this week announced a plan to cap rent increases nationwide. Under the proposal, apartment owners could lose certain tax breaks if they raise rent by more than 5% annually.

• The Proposal: Biden’s plan proposes restricting depreciation write-offs for owners of 50-plus rental units unless they comply with rental caps for two years, with exceptions for new construction and substantial renovations.
  

• Why? The plan aims to address voter frustrations but faces significant challenges in Congress. It requires passage in the GOP-controlled House and a supermajority in the divided Senate, amidst lawmakers' focus on the November election.

All in Favor:

• “Rent control is sound economic policy, and it is the only solution that meets the urgency and scale of the crisis that millions of tenants endure every month,” Tara Raghuveer, director of the Tenant Union Federation, told Multifamily Dive. “The president’s monumental directive is a recognition of the federal government’s responsibility to regulate the rental market, and of tenants’ power as a political class.”
  

• “This move is historic,” National Housing Law Project Executive Director Shamus Roller said in a statement. “Tenants across the country fought for years to get the federal government to care about the rent. We applaud the organizing that led President Biden to get real about what the federal government can do to increase housing stability for tenants.”

All Opposed: 

• “Rent caps don’t work and will have a chilling effect on housing supply,” David M. Dworkin, president and CEO of the National Housing Conference, said in a statement. “Exempting new construction will do nothing to change this, making clear that long-term investments in housing can be made uneconomic retroactively.”
  

• “The White House announced a proposal to install rent control AND stimulate more housing,” housing economist Jay Parsons wrote, “which is like arguing to cap organic food prices AND produce more of them.”

WHAT IT ALL MEANS

The White House's proposal, part of a larger strategy and following years of consultations, faces steep hurdles despite previous administrative actions on evictions and rent control. Its passage requires approval from both the GOP-controlled House and a divided Senate at a time when lawmakers are largely focused on the November election. It is, however, an indication that apartment owners could be in for future legislation woes as Washington combats the affordability crisis.

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HOTEL CONVERSION ADDS $6M IN VALUE IN 14 MONTHS

Alexander Cartwright and the team at HotelShift are converting this hotel into multifamily, adding nearly $6 million in value in just 14 months. Here's how they're doing it 👇

🏢Property Details: Purchased in January of 2024, this 120-room hotel is located in Houston, Texas, and was 55% occupied at the time of purchase with extended-stay guests.

💸 Finances: The hotel was purchased for $3.4 million with 12 months of principal and interest paid at closing in addition to a $1.1 million down payment. HotelShift raised $1.8 million in equity and secured seller financing for $2.3 million, 7% interest only for 36 months.

💼 Business Plan: HotelShift plans to spend $13,500 per room on labor and materials needed to upgrade flooring, baths, add appliances, upgrade kitchenettes, and improve common areas. Luckily, the rooms do not require major demos, and the building does not require major structural changes.

The property has a whopping 170 parking spaces, a commercial kitchen, and banquet space — all of which can be monetized. Plus, the banquet spaces can easily become eight additional units.

🍾Projected Results: HotelShift plans to refinance after 14 months (once the initial business plan is complete), with a projected appraisal value of $9 million. At that time, 100% of investor capital will be returned, and HotelShift projects investors will see 3.2x equity multiple and 30% IRR on their investment.

If you have a deal you'd like us to feature,share it with us!

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FREE DOCUMENT DOWNLOAD

How to Create a Letter of Intent

A letter of intent (LOI) is a letter that represents your intent to purchase the property and defines the primary terms of your offer. From purchase price and due diligence to earnest money and closing costs, here is everything you need to include in your LOI.