More California hotels could become housing this year as state officials explore extending last year's first-of-its-kind program amid escalating unrest over the state's growing unhoused population, which is already the nation's largest.

Gov. Gavin Newsom is proposing $1.75 billion in the 2021-2022 state budget for acquisition and rehabilitation of motels, care facilities and other housing types, Jason Elliott, senior counselor to Newsom, said in an email to CoStar News. It would represent a sequel to California’s $800 million program started during the coronavirus pandemic known as Project Homekey, which largely used federal relief funding to buy mostly older hospitality properties and turn them into permanent housing for those without shelter at less than half the cost per unit of building new housing.

Public pressure for state lawmakers to approve such funding is increasing after the high-profile clash between protesters and Los Angeles police over the removal of a homeless camp in the city's Echo Park neighborhood last month, which affordable housing advocates say shows the dire need for more of the housing that the program created.

"While it’s encouraging, it’s not moving quickly enough — the protest ... in the streets of Echo Park underscores that urgency," the United Way of Greater Los Angeles, a nonprofit group focused on housing, financial stability and education, said in a statement to CoStar News. "We join our partners and allies in demanding rapid expansion of Homekey sites using the recent federal funding so that we have enough safe places for everyone to come indoors."

Affordable housing advocates and others say hotel purchases are one effective way to boost permanent housing for the homeless or at least provide high-quality interim housing and support services while avoiding the red tape, neighborhood opposition and other issues that have stymied past housing development efforts.

Project Homekey proved to be a timely match of underused real estate during a pandemic that increased demand for low-cost housing, some say.

“It was probably a fortunate convergence of circumstances in terms of building new housing,” said Stuart Gabriel, a professor of finance who heads the Ziman Center for Real Estate at UCLA Anderson School of Management.

The program hasn't been without its critics. Neighbors of some hotels have opposed the conversions. And the jury remains out whether the properties can effectively deal with homelessness in the long run.

Over the course of seven weeks ending in late October, state officials awarded a total $835.6 million, most of it from the state’s allocation of federal pandemic relief, to 93 planned hotel conversions in 48 California jurisdictions.

State officials said the program intends to convert a total of 6,055 hotel rooms into mini apartments, at an average cost of $138,513 per unit — much lower than the $400,000 per unit that it now costs to build new housing in California, according to construction industry data.

Still, the amount of housing needed is exponentially larger. Amid a lagging pace of construction, state officials estimated that California as of 2019 was experiencing a shortage of 1.4 million homes that are affordable to most working families, with rising rents in several cities threatening to push more people into homelessness well before the pandemic.

California's estimated 150,000 people who sleep in shelters, cars or on the street already make up by far the nation’s largest homeless population — accounting for nearly a third or 27% of the national total, according to state and federal data. Los Angeles, San Diego and San Jose rank among the top five major U.S. cities for the size of their homeless contingents.

Under provisions of early federal pandemic relief programs administered by the state, funds for hotel acquisitions were required to be spent before the end of 2020. Some cities, like Los Angeles and San Diego, had already either moved families into their first Homekey projects or planned to do so well before Dec. 31, while other cities are in the process of moving in those residents after completing renovations.

In early December, Los Angeles moved its first 40 families into Parthenia Place, a former motel converted into permanent apartments for homeless residents. It is the first of 15 hotel properties that the city plans to convert into a total of 750 units for the formerly unhoused by combining Homekey funding with money from the city’s own federal pandemic relief allocation for what is now a $200 million citywide conversion program.

Los Angeles Mayor Eric Garcetti said the pandemic has added another layer of danger for those who sleep on the city’s streets, and the Homekey-funded project provides a place where they “can shed the burden of finding somewhere to rest their heads” and focus on keeping themselves healthy.

There have been some hitches, however, for Homekey, the state’s spinoff of an earlier program known as Project Roomkey, which was designed to convert hotels into temporary space for the homeless in the early days of the pandemic.

In September, for instance, San Diego County supervisors withdrew support for a developer’s proposed Homekey project that would have converted a Holiday Inn in the East County city of La Mesa into housing, after getting an earful of complaints from city officials and residents who said they were given insufficient notice of the planned conversion.

In the Bay Area city of Milpitas, the City Council voted to sue the state over plans to convert an Extended Stay America hotel into housing for the homeless. But it ultimately backed off, after legal advisers and housing advocates counseled that such a move would be costly and futile under the state law passed in early 2020 that gave state and regional governments, along with their housing agencies, the right to finance and complete Homekey projects quickly under the pandemic’s emergency circumstances.

In the two largest Southern California cities, Los Angeles and San Diego, government leaders generally have been on board with hotel conversions from the start, though housing officials in some cases had to do some extra communication with local residents and business owners to head off concerns about potential neighborhood impacts.

A common misconception among the public, said housing advocates, is that permanent housing at these hotels will create disturbances because of transient homeless people gathering around the building. In actual practice, they say, converted permanent housing sites are well secured and generally generate no more disturbances than a traditional hotel or apartment complex.

“If there are cases where there are NIMBY issues [Not in My Back Yard], you’re never going to completely assuage concerns,” said Richard Gentry, CEO of the San Diego Housing Commission, which oversees affordable housing acquisition and development for the city. “But you can minimize concerns by vetting the properties to make sure they are right for what you’re going to use them for.”

For instance, Gentry said his agency met several times with area residents and business owners, though the hotels are in commercial rather than residential zones, before its recent purchase of two Residence Inn by Marriott properties for a total of $106.5 million, including bank financing and nearly $38 million secured from the Homekey program. In December, the agency moved in the first of nearly 400 homeless residents previously sheltered temporarily at the city’s convention center.

Gentry said his agency also made sure to select properties that would require a minimum of renovation and construction fuss to become new apartments. The two Residence Inn hotels came in at around $300,000 per unit, but since they are extended-stay properties with built-in kitchenettes among other features, they required no additional investment in upgrades to prepare them for permanent move-ins.

Real estate economist Alan Nevin said that the per-unit price paid by the San Diego agency is reasonable, since it would likely cost much more to build even a standard studio apartment complex in California. Acquiring these hotels at a low buy-in also gives cities and housing agencies access to surrounding land and parking space that can be used to add even more housing units, at a much lower cost than what that commercial land would cost on the open market.

“There are thousands of older motels in this country that could be used for something like this, though the problem is that there are many thousands more homeless people you still wouldn’t be able to reach,” said Nevin, director of economic and market research at development consulting firm Xpera Group.

Gary Painter, an economics professor and director of the Sol Price Center for Social Innovation at USC, said an argument can be made that converted hotels not only help the homeless but also improve the larger neighborhood by bringing more stability to those individuals’ lives, among other benefits that won’t be generated by an empty hotel or motel.

Painter said many smaller hotels have been owned for years by individuals or families that were probably considering selling them off before the pandemic, but are now finding limited takers among standard hospitality buyers. Housing conversion programs could give them a reasonable exit strategy without waiting for the larger tourism economy to recover.

“It was probably smart of the state to make use of this capital now, when the program funding was available and you had the chance to find properties out there at a reasonable price,” Painter said of Homekey.

Gabriel said Homekey could point to the next big wave of commercial real estate conversions nationwide, similar to the way in which retail properties have been converted to uses such as offices, apartments and industrial fulfillment centers.

“We’ve already seen that there was an excess of retail properties, and now it’s an excess of hotel properties,” he said.

The pool of willing hotel and motel sellers could remain significant for the next year or more, as hospitality owners face continuing downward pressure on revenue and urgency to pay off lenders and other creditors.

That issue could linger especially as business travel is likely to remain down for the foreseeable future, as companies keep travel costs low by using remote video-meeting technologies that are now more popular than ever.

“One potential problem that I see is that a city or county might pay too much for one of those older properties just because they need it to be available in a certain time frame,” Nevin said. He noted that paying too much for a property may not leave financial room to perform sufficient renovations to make former motel rooms habitable as apartments, and ultimately take the cost beyond what it would have cost to develop those units from scratch.

Ultimately, however, converted hotels generally have advantages that most apartment projects in California don’t have, including relatively short times to get projects approved and built.

“You’re talking about the entitlement processes, the land availability and costs for that property,” said UCLA’s Gabriel. “You’re not dealing with ground-up construction; you’re looking at a much more efficient process for getting your hands on the property and converting it to housing.”

CoStar News reporter Cara Smith-Tenta contributed to this story.