Converting different asset classes into hotels continues to prove attractive to the hospitality market, for example in destinations where new construction is limited.
Although hotel conversion activity remains muted in the US, office to hotel redevelopments accounted for a fifth of the £2.4 billion invested in the UK hospitality sector in 2023 and conversions represented around half of IHG Hotels & Resorts’ global signings in 2024.
But what are the key considerations for investors, what metrics should you look at when deciding whether to convert, what are the benefits of conversion – and what are the potential pitfalls?
Why Convert?
“If you’re searching for a destination within the Italian cities for super luxury hotels, it has to be in the city centre. And in the Italian city centres, you cannot build anything new (with exceptions), so you are forced to do a renovation,” explained Valeriano Antonioli, CEO of the Ferragamo family-owned Lungarno Collection.
The group’s Portrait Milano hotel was a conversion of Europe’s oldest seminary, a €60-70 million investment that last year saw earnings before interest, tax, depreciation and amortization (EBITDA) of €13 million.
María Zarraluqui, global development VP at Meliá Hotels International, meanwhile highlights the potential for a speedier return on investment (ROI). “It’s an opportunity and we will see a lot of that, and we are seeing a lot of that,” she said. “Nowadays, the market is moving to a more flexible approach on the use of buildings just to get more liquidity from them.”
Although Meliá has mostly been converting “hotels to better hotels,” the group has also converted offices, for example in Germany, into Innside-branded hotels. The group has also converted a former cake factory in Milan into a Meliá, and the historic Palazzo Cordusio in Milan, the former headquarters of Generali Group, which reopened as a Gran Meliá in 2023.
“We have been doing conversions for a little bit of everything – repositioning assets that are very well located but not in the right fit,” said Zarraluqui.
However, she adds there are times when conversion is not the right choice: “maybe you have to do everything new – so at the end of the day, why convert?”
To convert or not to convert?
Detailed analysis is key to assessing the feasibility of a conversion project, from investment to operations, and the internal rate of return. “The feasibility is key – if it works, then it’s easy to find people to finance it. If it doesn’t work, you leave it alone,” said Antonioli, although he added that the financial projection is itself “at the end of a long path”.
He said: “To arrive at a financial feasibility, you’ve got to study the building, understand what you can do, create a first draft layout, and then from the layout you do the financial projection.”
Oliver Winter, CEO of a&o, Europe’s largest privately owned hostel chain, adds that planning is the most critical aspect. “90 percent of your risk is in planning and time of planning,” he said, such as when it comes to fire safety – if the bed density is being expanded, can staircases be added or widened? Of the approximately 300,000 square meters a&o operates, about 250,000 are conversions, for example former police stations, schools and offices, or undermanaged or distressed three-to-four-star hotels.
Location is also key. a&o will look at how existing hotels in an area are rated for location, while Lungarno Collection looks at the food and beverage available in a neighborhood. If options are limited, those will need to be provided inside the hotel, said Antonioli – 30 percent of Lungarno Collection’s annual income is from its nine restaurants and bars.
Choosing your conversion partners
When moving forward with a project, Antonioli stressed the importance of having the support of local stakeholders, particularly when converting historic buildings. He said Lungarno Collection was successful in its bid because “we wanted to build something good for the people in Milano, for the neighborhood, where everyone could have access to it, and we were the only brand offering it.”
Choice of partners is also important, he added: “Managing a hotel is just like a long bus ride and we want to be with nice people.”
All those quoted in this article appeared on stage at IHIF EMEA, held in Berlin, between March 31– April 2, 2025, in a session called: From blueprint to bed: Adaptive reuse and the surge in hotel conversions.
This article originally appeared on our sister site, Hospitality Investor.