A strengthening hotel market might be opening the door to opportunities for converting office buildings to hotels.
Gus Moors, Managing Director of JLL’s Hotels & Hospitality Group said there are numerous examples of where offices have been converted to hotels in the past, such as the recently opened Capella Hotel in Sydney.
“In light of the current climate, we expect that trend to continue. Hotels are now a viable solution for office owners seeking an alternative use,” Mr Moors said.
“The hotel transactions that are occurring are showing that values are holding up well, reflecting investors’ confidence in the strong recovery profile of the sector.
“Investors are now actively seeking office buildings for conversion to hotels, as evidenced by the recent sale of 39 York Street Sydney. This indicates their belief that this pricing differential between the two sectors is likely to play out over the medium term.”
JLL’s recent white paper on the topic of office conversion to hotels, highlights a series of factors that need to be considered in determining if a building can be converted.
“The shift in hotel design to lifestyle offerings can accommodate unusual floorplates, as the stricter requirement for uniform 28sqm to 30sqm has been removed, with more of a focus on guest experience than just space, through repeats of bathroom position throughout the building maximises efficiency,” Duane Loader, JLL Project Director said.
The design should consider factors such as the placement of the elevator core, the guest arrival experience and fire safety, along with the project’s feasibility for construction in frequently congested and challenging-to-reach central business district (CBD) locations.
The most recent instance of an office being transformed into a hotel can be seen in JLL’s sale of 39 York Street, Sydney. This property was acquired for $52.58 million, offering a net lettable area (NLA) of 4,412 square meters. Invictus Developments, a Singaporean group, is the purchaser, and they have plans to convert it into a hotel, aiming for an opening in 2025.
In Sydney, similar examples include the Tank Stream Hotel on 34 Hunter Street, the BreakFree on Clarence Street, and the A by Adina on 280 George Street. Numerous heritage buildings in Sydney and Adelaide have also undergone conversions over the years, such as the GPO buildings, and most recently, the Capella Hotel Sydney, which was transformed from a Department of Education building.
Across the country, there are other examples as well. Pelligra is in the process of redeveloping 80 King William St in Adelaide into Veriu serviced apartments, while Veriu and developer Crispin continue to reposition the Tuggeranong Innovation Centre in Canberra into a 76-key Punthill Hotel.
The hotel investment market is also looking like it is heating up, drawing the interest of conventional real estate investors.
This trend coincides with a substantial inventory of over $2 billion worth of assets currently available, with 75 per cent of these listings occurring in the third quarter of 2023, as reported by Karen Wales, the Head of Hotel Transactions at Colliers.
“Hotels are emerging as a preferred property investment sector, as new market entrants are drawn to conditions of easing supply, high room rates and the return of international travel,” Ms Wales said.
“Since hotels differ from other commercial real estate assets, with many continuing to enjoy strong income growth amidst resurgent tourism markets, transaction volumes are expected to reach $2.5 billion by end of year.”
Sydney’s hotel market is leading the way in the national sector, showcasing an occupancy rate exceeding 75%, an average daily rate (ADR) surpassing $300, and revenue per available room (RevPAR) exceeding $200, as reported by STR and Colliers.