When renovation isn’t the answer
By Jigar (Jay) Desai
Every hotel owner facing a major PIP eventually asks the same question: Is this the investment that finally gets the returns where they need to be. Or, is it the investment that keeps the property treading water under a brand that no longer fits the market? For a growing number of owners, the honest answer is neither, and that realization is reshaping how the industry treats underperforming assets.
Rising PIP costs, years of deferred maintenance, and shifting demand patterns have pushed conversion from a fringe strategy to a mainstream one. Owners are no longer asking whether their hotel can be renovated. They are asking what the highest and best use of that real estate actually is, and increasingly, the answer isn’t a hotel at all.
The Renovation Math Doesn’t Always Add Up
There is no single dollar figure or occupancy level that flips a decision from renovate to convert. The real test is return on investment. When a property requires a PIP in the $10,000 to $25,000 per key range on top of deferred maintenance, and the projected lift in ADR, occupancy, or RevPAR under the existing brand doesn’t cover that spend, it is time to put conversion on the table.
That calculation rarely stands alone. A competitive set that has shifted toward newer upper midscale or luxury products can make an older flag a losing proposition no matter how well it’s operated. Franchise economics play a role too, since royalty fees, marketing fees, and a restrictive PIP scope can tilt the math toward a different brand or use entirely. And exit strategy matters as much as operations – in some cases, converting a property increases both its value and its buyer pool more than a renovation would under the existing flag.
Three Factors That Decide Conversion Potential
Evaluating a hotel for conversion isn’t about whether another brand would accept the property. It’s about whether repositioning the asset creates more value than staying put, and that comes down to market demand, capital versus return, and physical fit.
Local demand generators and where the property sits on ADR, occupancy, and RevPAR penetration will tell you whether the product aligns with a stronger performing segment such as extended stay, upper midscale, or boutique.
From there, it’s important to weigh the cost of the current brand’s PIP against what a conversion would take. Often the two land close enough that the option with better long-term upside becomes the obvious choice.
Finally, room sizes, corridor type, building layout, and mechanical systems determine which brands or uses are realistic. A property that already resembles another prototype converts far more cost effectively than one that needs structural surgery to get there.
Where the Transaction Volume Is Going
Multifamily and workforce housing lead by a wide margin right now, driven by housing shortages that touch nearly every market – provided the layout can accommodate kitchens and residential code requirements. Senior living is the strongest niche from an investor demand standpoint, backed by long-term demographic tailwinds, though it requires specialized operators and isn’t a fit for every asset.
Behavioral health has become increasingly attractive but stays highly selective, since buyers there are underwriting a healthcare business rather than a
lodging operation and can pay accordingly when the market and zoning support it.
Student housing rounds out the list, performing well next to a major university with enrollment growth and tight supply, but falling off quickly outside those markets.
A Deal That Changed the Conversation
One property that stands out involved a 277-room, full-service hotel on more than 11 acres in downtown Tucson, facing a significant PIP and years of deferred maintenance. Ownership’s original plan was to renovate and stay independent or reflag.
Three scenarios were underwritten side by side: Renovating and remaining independent, converting to a different hotel brand, and evaluating alternative uses for the real estate.
Even a fully renovated hotel wasn’t projected to generate the gains needed to justify the capital, while multifamily housing stood out given residential demand tied to the location. Ownership ultimately chose to sell rather than reinvest, and repositioning the marketing around redevelopment potential widened the buyer pool considerably.
The buyer purchased the property as a hotel and converted it into much-needed market rate apartments. Once complete, the asset’s value quadrupled. The lesson here is that renovating, converting, and selling all deserve an honest look before committing capital to any one path.
Cost, Timeline, and the Real Question
A hotel-to-hotel brand conversion is generally the fastest and least expensive path, typically six to 12 months depending on PIP scope, franchise approvals, and permitting. Adaptive reuse projects such as multifamily, senior housing, or behavioral health take longer, usually 12 to 24 months or more, given zoning approvals, code changes, and life safety upgrades.
Cost and timeline shouldn’t be the deciding factors on their own. Some owners spend $2 million to $3 million dollars on a required PIP just to maintain the status quo, while another owner invests a similar amount in a conversion that meaningfully increases NOI and long-term value.
Modeling the capital required, the projected performance lift, and the owner’s investment horizon side by side is what actually points to the right answer.
The Red Flags That Rule a Conversion Out
A handful of factors will quickly eliminate a property from consideration. Physical layout tops the list, since room sizes, corridor configuration, and structural design that require extensive modification can push costs past the point of justification. Zoning and entitlement risk is another, as even a compelling underwriting model falls apart if local zoning won’t permit the proposed use.
Market demand matters just as much. A well-suited building in the wrong market is still a poor investment. The capital stack also has to work. Rising construction costs and higher interest rates make that one of the harder pieces to solve today.
Sometimes, after running the numbers, the answer is still a hotel. A strong location and healthy operating fundamentals can make a renovation or rebrand the better play, and forcing a conversion in that scenario destroys value rather than creating it.
The Question Owners Should Be Asking
Every assignment starts by asking what use will maximize the property’s value. If the numbers say the answer is still a hotel, the strongest branding strategy is the right recommendation. If another use clearly creates more value, that’s the path worth pursuing instead.
Jigar (Jay) Desai is SVP at NewGen Advisory, a hospitality consulting firm advising hotel owners and investors on repositioning, brand conversions, and adaptive reuse strategy.
Image: hanohiki/stock.adobe.com
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