CORAL GABLES, Florida — Opportunities are ramping up for hotel industry growth across Latin America as hoteliers weigh the pros and cons of building new versus converting existing commercial real estate properties.
At the Hotel Opportunities Latin America conference, Osvaldo Marcelo Chudnobsky, managing partner at Horwath HTL, said there are downtown office spaces in locations such as Argentina, Brazil and Chile that aren’t being replaced with tenants. These buildings, he said, are suitable for hotel conversions because of their central locations.
“One driver of [conversion] opportunities are those kinds of buildings. The conversion to hotel is not very dramatic. You don’t need to make a very intensive refurbishment,” he said.
In some cases, a conversion is more costly than building ground-up, he said, but it’s also more time-friendly. To build new takes time for demolition permits and approvals for construction.
Carlos Crovato, vice president of development and acquisitions for Latin America at Standard International, said finding an available and reasonably priced lot to build new in some markets can be nearly impossible. In that case, conversions are the only option. He said Mexico City is another location with an abundance of empty office spaces.
“We’re looking in Buenos Aires [with] exactly the same strategy. And these are good locations, good buildings, good bones. We need to find the right partner to do it, but then we have the right location, right building, [and it’s] easier and faster than to do from ground-up,” he added.
Brian Quinn, chief development officer at Sonesta, said there’s potential to take over office buildings in the financial districts of Brazil, Argentina, Colombia and Peru.
Challenges to consider with office spaces are plumbing, parking and sometimes zoning laws because the building would need to transition to 24-hour use. But in some cases, it also allows an owner to enter into a Class A or B space.
“The other space that we haven’t seen as many conversions for, but I think is coming, is retail. In a lot of cases, retail is sitting on the right piece of dirt as well,” Quinn said.
Dan Freed, principal at Arcadis | CRTKL, added that parking in most locations shouldn’t be too much of a concern as people are driving to hotels less and relying more on ride-share companies.
Patricio del Portillo, vice president of development for Latin America at Aimbridge Hospitality, said city councils and governments need to give more incentives and proper zoning to owners of vacant buildings to convert.
“Sometimes, even though you’d like to convert, you can’t because of zoning,” he said.
Freed said many owners mistakenly go into new projects with little research on whether they can realistically be in a market.
“Check the zoning before you ever go to the site to see if you can get it to be zoned for hospitality,” he said. “As far as in a facility, usually egress isn’t an issue if you’re converting an office to hospitality [use] because it’s usually got two stairs and we can work a guestroom corridor to link into those properly. And usually the occupancy in a hotel is less than office, so that is typically not a concern. All you’re really saving in a conversion is structure and maybe facade; when looking at the differences of cost [in building or converting], an easier way to look at it would be ‘What don’t I need to build in a conversion?’”
It’s crucial to complete a building structure analysis when considering a conversion opportunity, too, del Portillo said.
“Sometimes the weight on the slabs are not considered to have [guestrooms] inside because they were made for some other use. People forget about that, they start construction and then at some point they realize they need to restructure the whole building,” he said.
Quinn advises any owner who is embarking on a conversion should find a local advocate on the public side of the conversation. If it is an empty building, there is a reason for the community to get behind it, he said.
“In most cases, they’d rather have a revenue-producing building that’s occupied as long as you can work through the other issues,” he said.
He said Sonesta’s master franchise arrangement with Colombia-based GHL Hotels has allowed Sonesta to lean on GHL as the experts and negotiators in local markets across Peru, Panama, Colombia, Argentina and Chile.
“That has helped us to be able to move more projects through the steps because they have the local relationships, they’re employing people in these markets. The power of having that local partner is incredible,” Quinn said.
Ultimately, the more complex a project gets, the more due diligence is needed team on the market, the municipality, the financing situation and other nuances.
In negotiations with public authorities on a project, the brand that an owner is affiliated with can be key, Chudnobsky said.
“In Latin America, even in big cities [such as] São Paulo or Buenos Aires that already have so many brands, [municipalities] want more brands. An aspect that helps you a lot in the negotiation with them is if you bring a brand that makes their eyes shine. It changes a little,” he said.
Quinn said there’s still a legacy of independent hotels across Latin America that could affiliate and reposition with a brand. Renovating existing hotel properties might be a less risky option than converting an office building to a hotel.
“Find an independent hotel to purchase that has the right bones that you could bring into the brand family that you’re considering,” he said.
Conversations about conversions can become complicated when an independent hotel owner is hesitant, Crovato said.
“There are fantastic opportunities in Latin America with these hotels. Sometimes they operate very ‘mom and pop’ and that’s where they lack their occupancy and where their ADR is too soft. That’s where brands and operators come into play and help them. ... It’s just how you present that to them,” he said.
“After lending, my biggest challenge is to tell an independent operator that someone is going to come operate their hotel and they’re going to take a piece of their pie. They don’t understand that the margin of what we’re bringing to them is significantly larger — it’s very hard to convince them, so a conversion becomes difficult when that becomes part of the conversation.”
In addition to empty office spaces and independent hotels in Latin America, empty church buildings can also present hotel developers with opportunities, Chudnobsky said.
“The monasteries, the convents have the configuration of a hotel and they have marvelous courtyards,” he said.
Freed said this opportunity is happening right now in the U.S., too.
“We have two opportunities in South Florida, where churches are trying to sell their land and it’s a great position,” he said.