The U.S. hotel market is in the grip of a full‑blown conversion boom - and investors are here for it. Rising construction costs, tight zoning and a thirst for speed to market have pushed brand‑to‑brand and adaptive‑reuse projects to the front of deal pipelines.
Brand conversions hit a record high of 136,668 rooms in 1,421 projects in the first quarter of this year alone, according to Lodging Econometrics, representing a year-over-year increase of 13 percent. Meanwhile, combined conversion and renovation activity totaled 269,435 rooms in 2,050 projects, a 16 percent jump in room count compared to first-quarter 2024.
Suraj Bhakta, CEO of NewGen Advisory and chief legal counsel of NewGen Worldwide, understands the appeal, especially in this day and age.
“In today’s market, two things hold true: construction is expensive, and new builds have slowed down with most only happening in the upscale and upper upscale segments,” he explained. “This leaves ample opportunity for conversions to hold steady in today’s market.”
Fueling the Frenzy
Investors prize conversions for their shorter development timelines and often lower capex needs. Mark Knott, vice president and hospitality sector leader at Project Management Advisors, adds that this strategy not only provides a cost-efficient way to meet demand, but aligns with sustainability objectives while providing a creative outlet that repurposes existing assets.
“Together, these strategies help developers reduce costs, shorten speed to market, and align more closely with evolving guest expectations and local market conditions,” he said.
Investors pursuing conversion-eligible assets in today’s market tend to be more opportunistic, Bhakta notes. Unlike buyers of stabilized assets, they’re less focused on immediate cash flow and more focused on value creation.
“This is for the buyers who are okay with taking a bit more risk and putting in additional capital to improve an asset,” he added.
Bhakta believes this risk can be minimized by evaluating not just a property’s potential, but the presence of key demand drivers. These include area demographics, economic development plans and whether the asset is situated near a major freeway.
“Highway location is really important because it signals there is likely to be more transient business from construction workers, truckers, leisure travelers, etcetera,” he continued. “These types of travelers make up the largest segment of the guests who are most likely to stay at an economy or mid-scale asset.”
Knott sees lots of successful adaptive reuse projects in urban core markets where development barriers are high.
“They can showcase cultural and commercial value while transforming historic buildings into high-performing hospitality assets,” he said. “Urban cores like New York and Southern California – where land is scarce and entitlements are tough to secure – are prime targets for adaptive reuse. These locations make it more viable to transform existing structures than build new ones.”
Morgan Gallagher, partner at law firm Cox, Castle & Nicholson, is witnessing strong conversion demand in San Diego and Southern California’s desert region, among others.
“In the City of LA, due to a recent minimum wage increase, many hotels will be reducing services like restaurants, which will create opportunities to convert full-service hotels to a different model,” she said.
Rounding out metros and urban cores is Las Vegas, where Josh Smith, senior vice president of HREC Investment Advisors, sees a steady stream of conversions as evolving demand drives brand shifts and redevelopment.
“In Las Vegas, we consistently sell extended-stay properties that would not continue with the current flag,” he added. “That market has high barriers to entry but will always require workforce housing and short-term housing. It also has varying independent extended-stay models that have been built or redeveloped from an older flagged hotel.”
Not to be overlooked are secondary markets, Knott argues. Especially ones with strong demand drivers.
“Think college towns or cities anchored by health systems, such as Greenville (N.C.), Spartanburg (S.C.) or Tuscaloosa (Ala.),” he said. “In these markets, local governments are often actively encouraging redevelopment, which helps smooth the path for conversion projects.”
He notes that event-driven markets, such as Los Angeles ahead of the Olympics, are another strong bet. That’s because anticipated spikes in demand create a window for hotel conversions to come online and capture incoming business.
Bhakta agrees with most of this assessment, but issues a caution on college towns.
“University towns tend to be places that have their ups and downs,” he explained. “There’s typically oversaturation of inventory and brands in college towns. If the city or town itself is not expanding and growing more broadly, then investors in this area will have some level of difficulty.”
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