Is the Chance to Turn Hotels Into Affordable Housing Slipping Away?

Soon after Covid devastated the New York hotel industry in the spring of 2020, politicians, developers and homeless services groups arrived at a rare consensus: This was a once-in-a-generation chance to convert struggling hotels into affordable housing.

In California, which faced a similar situation during the pandemic, government agencies have helped to convert 120 sites, most of them hotels, into 5,911 housing units, the majority permanent housing for the homeless and other low-income renters, according to an April report from the California Department of Housing and Community Development.

The grand total of hotels converted into permanent affordable housing in New York City during the pandemic? Zero.

“The opportunity is kind of slipping away,” said Eric Rosenbaum, the president and chief executive of Project Renewal, a New York-based homeless services group that has tried to facilitate hotel conversions.

It’s not from lack of trying. Nonprofit developers’ plans to buy and convert some of the city’s more than 700 hotels into housing have been thwarted by a mix of regulatory and zoning hurdles that will likely only intensify once the tourism industry recovers and more speculative investors re-enter the market. In many cases, hotels that were candidates for permanent housing have instead been converted into transient shelters, because of regulations that were onerous or made the alternative cost-prohibitive, several nonprofit groups said.

In part, the situation reflects a wariness of single-room occupancy, or S.R.O., units, which can conjure memories of flophouses in the 1970s and ’80s, although a 2008 study of 123 supportive housing developments in New York by the Furman Center at New York University found no evidence that they negatively affected nearby property values. And supporters say that a different approach to the S.R.O. model could help alleviate the affordable housing crisis at a pivotal moment, when these conversions can still be done at scale.

The window of opportunity has not closed completely. Bargains may be disappearing, but the hotel industry hasn’t yet recovered, and more projects could become feasible for nonprofit developers with the right mix of regulatory relief and funding. Promised support from Mayor-elect Eric Adams could also jump-start several projects, although much of that progress will depend on how — and when — the city and state act.

The Opportunity

The hotel industry was already soft when Covid-19 effectively shut down the city in March of 2020. By the end of that month, just 14 percent of hotel rooms were occupied, compared with about 84 percent during the same week in the prior year, according to the hospitality research company STR.

From May 2020 to June 2021, nearly 200 hotels were shuttered, according to the Hotel Association of New York City, a large trade group. As of mid-November, almost 100 remained closed, including some for renovation, although “almost all of them” are struggling with debt, said Vijay Dandapani, the group’s president and chief executive.

At the same time, homelessness is hovering near a record high. An estimated 78,000 people were homeless in New York City when an annual estimate was done in 2020, the latest year data were available, compared with about 53,000 in 2010, according to the U.S. Department of Housing and Urban Development. And those numbers are likely an undercount, according to the Coalition for the Homeless, an advocacy group.

Converting underused hotels into affordable housing has long been recognized as an option, because of the similar floor plates and plumbing, but the asking prices were often too high for nonprofit developers. In 2020, with some hotel owners considering discounts of up to 40 percent below pre-Covid prices, the math finally seemed to pencil out, said Ted Houghton, the president of Gateway Housing, a nonprofit that advises affordable housing developers.

“You were seeing projects that conceivably could have been 50 percent cheaper than what we normally spend,” Mr. Houghton said, comparing hotel conversions to ground-up construction that costs an average of $500,000 to $600,000 for each unit. “And, more than that, we could have done it in a year, rather than the five years it typically takes.”

The conversions could also be a cost saver for the city, which spends an annual average of $56,000 for each person in the shelter system, Mr. Rosenbaum said, whereas it costs an annual average of $36,000 to place the same person in supportive housing, a rent-subsidized form of housing with on-site health and job services available to residents.

Supportive housing can take the form of single-room units with shared kitchens, but it more commonly refers to studio or multi-bedroom apartments for individuals and families. In one popular model, a majority of the units are reserved for homeless people recovering from mental health or substance abuse issues, with tenants paying no more than 30 percent of their income on rent. Other occupants could include low-income families, young adults leaving foster care and survivors of domestic violence, among others. The balance of units would be reserved for renters making around 60 percent of the area median income — in New York City, about $64,440 a year for a family of three.

The city has around 35,000 supportive housing units, said Laura D. Mascuch, the executive director of the Supportive Housing Network of New York. In 2016, the city and state committed to creating an additional 35,000 units over 15 years, a portion of which will go to the city. But the resources can’t come soon enough, she said, noting that for every five applicants approved for supportive housing, there is only one vacancy.

For someone like Kane Balser, 31, who struggles with bipolar disorder and lives with family in Brooklyn, the wait for a supportive housing unit could take more than a year. Mr. Balser is a member of Fountain House, a mental-health services group, and works part-time in construction. He is fortunate to have family support, he said, because many applicants are either already in the shelter system or on the verge of eviction.

“Homelessness is a very real possibility,” he said.

The Challenges

The biggest obstacles facing nonprofit developers trying to convert hotels into affordable housing are zoning restrictions and building code requirements that make construction too costly.

Compared with hotels, many of which are grandfathered in under older regulations, new housing is governed by stricter rules on accessibility, unit size and density, energy requirements and safety considerations that can blow up a developer’s budget.

These rules are important, but have disqualified many promising projects. In one hotel, the rooms averaged 140 square feet — 10 square feet shy of a city requirement for living space — and therefore would have required major renovation, said Mark Ginsberg, a partner at Curtis + Ginsberg Architects. Instead, it will likely become a homeless shelter, an outcome few would prefer, because that usage does not trigger the stricter rules.

Outdated hallways and elevator shafts, sometimes just a few inches too narrow, might have to be completely rebuilt to meet new standards, said David Schwartz, the principal of Slate Property Group, which has looked into hotel conversions. In other cases, a requirement for deeper rear-yard space could force a developer to needlessly shave off part of a building.

“Perfectly good places that are moving-in condition, you have to rip it all out” — or wait for a regulatory exception that may never come, said Rachel Fee, the executive director of the New York Housing Conference, a policy and advocacy group.

A large number of newer hotels, most in the boroughs outside of Manhattan, could be candidates for conversion, but many are in light-manufacturing districts that cannot have permanent housing under current rules.

The governor’s office and state legislators had considered allowing many such hotels to be exempt from zoning restrictions when they are within a few hundred feet of a residential area, but disagreements with city officials derailed the proposals.

Instead, this summer the state enacted the Housing Our Neighbors with Dignity Act, or HONDA, a bill that makes $100 million available for the conversion of hotels and commercial buildings into affordable housing, with caveats: Each unit must have its own kitchen and bathroom, and the conversion of unionized hotels — primarily in Manhattan, the core of the hotel market — will be allowed only with union consent. No regulatory relief was given for hotels adjacent to residential areas.

Some of those requirements are meant to avoid the mistakes of earlier single-room occupancy units, which became a symbol of urban decline in the 1970s and ’80s.

“I don’t think people looking back on S.R.O.s think it’s something to be emulated,” said State Senator Michael Gianaris, a sponsor of the HONDA bill. “The best way to deal with someone who needs a home is to give them a home — not to give them a dorm, or an S.R.O. or a shelter.”

While some developers see HONDA as a good first step, they also say it is insufficient.

“It’s not enough to do anything,” said Mr. Rosenbaum, of Project Renewal, because the funding could produce perhaps one or two conversions, and the number of feasible sites is limited. As of early November, none of the $100 million had been allocated. And some nonprofits worry that not enough emphasis will be placed on hotels in walkable, centrally located neighborhoods.

By contrast, California’s Project Homekey dedicated close to $850 million, including federal Covid relief money, to meet its housing goals, and is allowing developers to bypass local zoning requirements. And the state has reserved another $2.75 billion to create 14,000 units in a mix of hotels, commercial buildings and modular construction.

Possible Solutions

In September, Mayor-elect Adams proposed converting thousands of hotel rooms into supportive and affordable housing, with a focus on the boroughs outside of Manhattan.

But most of the opportunity may be in Manhattan. Before the pandemic, more than 81 percent of the city’s hotel rooms were in Manhattan, and many of the newer hotels in other boroughs are in areas that would require zoning exceptions, said Noah Kazis, an author of an industry report by the New York University Furman Center.

Evan Thies, a spokesman for Mr. Adams, did not answer questions about the proposal, but wrote in an email that Mr. Adams’s administration “will have a comprehensive plan ready for when he takes office.”

Still, there are potentially dozens of hotels, mostly in Manhattan, that could be used for permanent housing “as of right,” said James P. Colgate, a partner in land-use practice at Bryan Cave Leighton Paisner. These hotels, built before 1969, are considered rent-stabilized buildings through a quirk in city rent laws, which may mean that they would not require costly upgrades.

This approach has been used in the past at a number of large hotels, including the Times Square, a 652-unit hotel that was repurposed in 1991 to create affordable and supportive housing. Brenda Rosen, the president and chief executive of Breaking Ground, which converted the property, has been trying to use the same strategy to repurpose another large hotel in Midtown.

Mitch Schwartz, a deputy press secretary for the mayor’s office, would not say whether the city supports Breaking Ground’s approach, but said it is “working with stakeholders to find a path forward on hotel conversions.”

Of course, there are those who remain wary. Charisma White, 45, who spent three years living in homeless shelters, is skeptical, in part, because she is concerned that the units may feel more like shelters than permanent housing. But she is also fed up with the one-bedroom walk-up apartment she rents in Sunset Park, Brooklyn, where she said the landlord will not address pest and mold problems.

Before being approved for that apartment, with the use of a Section 8 housing voucher, she said she spent about a decade applying to affordable housing lotteries, and nothing ever panned out. Finding a new apartment, she worries, could take several more years. So she is guardedly open to hotel conversions, with the right mix of units.

“It doesn’t matter what building it was,” she said. “I would prefer housing over shelters any day.”

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