Manhattan’s office market broke a record in March – and it wasn’t a good one. The city had 86.3 million square feet of vacant office space, an all-time high, according to CoStar. Seeing as the work-from-home or, at least, hybrid work environment is here to stay, other industries are considering what they can do with that space.

One solution: converting empty offices into hotels.

“Office-to-hotel conversion is the next frontier,” says Steve Ruggiero, vice president of Project Management Advisors. “New York City has long been a compelling tourism destination due to the significant hospitality experience offerings in the city. The increased activity around office-to-hotel conversions in New York makes it clear that travel is back in full force post-pandemic – and hoteliers are responding accordingly.”

Forging the frontier

Hoteliers are indeed responding accordingly. This includes Aspen Hospitality, which has plans to open the 130-room Little Nell luxury boutique hotel inside 10 vacant office floors at 10 Rockefeller Plaza inside Rockefeller Center. The hotel would be situated just above NBC Studios.

Ruggiero can see the appeal this iconic address may hold for the hospitality industry.

“Rockefeller Center, in particular, provides experiences that other locations in New York don't necessarily have,” he says. “Guests at the hotel can attend the page tours through NBC studios, take photos at the Christmas tree and ice rink, go to the Today Show or the concerts on the street by simply stepping outside of their rooms.”

Actium Development Company is also planning to turn the 13-story office building at 88 Wall Street in the Financial District (FiDi) into a 181-room luxury hotel. Then there’s SL Green and Caesars Entertainment, which partnered in 2022 to propose turning 1515 Broadway in Times Square into a casino resort. The nearly 1.9-million-square-foot office building would be converted into 950 hotel rooms atop eight levels of casino/gaming floor space. It would also refurbish the existing Broadway theater, which would be home to The Lion King.

Proof of demand

Zach Demuth, global head of hotels research at JLL, thinks office conversions can be a smart move as demand for hotel rooms is on the rise, while office supply is abundant. He notes New York City’s RevPAR exceeded 2019 levels by 15 percent in 2023, driven by the highest ADR in the market’s history at $390.18. New York City’s ADR has increased by 12.8 percent from 2020 to 2023, notes a market report from PricewaterhouseCoopers. 

“Hotels have emerged as a preferred asset class for some investors, given their strong operating performance and inherent hedge against inflation,” Demuth says. “NYC has also benefitted from unique supply and demand dynamics, in which broader lodging supply has meaningfully contracted over the past two years.”

Demuth notes that nearly 17,000 NYC hotel rooms have been converted into migrant housing over the past two years. There’s also the Airbnb “de facto ban,” which only allows those registered with the city to operate. Demuth says this ban is akin to the closure of 107 hotels. Lastly, he points to new zoning laws, which he believes will “significantly constrict” the development of new hotels within Manhattan.

“Simultaneously, lodging demand has soared, underpinned by strong leisure travel and the return of group, business and international demand,” he adds. “JLL expects RevPAR to strengthen even further in 2024 as international travel continues its recovery and supply remains constrained.”

The increase in lodging demand combined with the slashed supply will create a hotel room deficit, according to Vijay Dandapani, president and CEO of the Hotel Association of New York City.

“It is our expectation that the city will be under-hoteled within two to three years,” he says. “Investors need to be aware that developing new hotels has become considerably harder – and, in some cases, impossible.”

This is due to the introduction of the Citywide Special Permit in 2022, a process that he says requires extensive city planning and community board approvals, in addition to going through the Uniform Land Use Review Procedure (ULURP) process, which can take one to two years.  

Add all of these factors up, and some investors are finding the perfect recipe for conversion.

“We expect to see a continued growth in conversion to hotels as construction costs remain elevated and development financing is both challenging to obtain and generally expensive,” Demuth says. “As lodging supply has declined and remains constricted in NYC specifically, conversions have emerged as a potential opportunity for investors to enter an otherwise extremely high-barrier-to-entry market.”

Conversion considerations

When it comes to actually converting an office space into a hotel, some assets are better suited than others.

“About 25 percent of Manhattan’s vacant office space has the potential for office-to-hotel conversion,” Ruggiero says. “This is mostly in Class B and C buildings, which are more conducive to conversion due to their smaller floor plates.”

He notes floor plates are a critical consideration when assessing office conversion projects. That’s because larger floor plates don’t allow light to penetrate the interior. Older Class B and C buildings, on the other hand, tend to have smaller footprints, which mitigate this issue. They also generally have lower ceilings heights, a desirable feature for hotel rooms. 

Properties will also require structural modifications, Ruggiero adds, such as new MEP (mechanical, electrical, plumbing) systems and risers, renovated air distribution, and oftentimes exterior renovations like replacing facades. Then there are the new laws that put carbon caps on buildings, which may require energy renovations, in addition to EV charging station installations.  

Lastly, there’s that age-old real estate adage: location, location, location.

“Location is a critical consideration,” Ruggiero continues. “These Class B and C buildings need to be in geographically touristy areas to be attractive for conversion to hotel use.”

Ruggiero believes the three aforementioned conversion projects have that going for them, with Rockefeller Plaza, Wall Street and Broadway addresses. It is worth noting, though, that these projects are converting Class A office space.

It’s further worth noting that not all of them are turning the entire structure into a hotel.

“As is the case with the Rockefeller Center conversion, many of these renovations aren’t taking over the whole building,” Ruggiero says. “This requires additional thought around amenities and services.”

Fitness centers, swimming pools and activated rooftops are all common hotel amenities, but when the space is shared, these things will need to be thought through upfront. This also occurs when a certain hotel brand requires a specific number of food and beverage outlets.

There are also customer and operational considerations. These include valet logistics, luggage service and waste management operations if the hotel isn’t based on the ground floor. Maintaining a seamless operation between the front of the house and the back of the house can also be challenging when you’re sharing infrastructure with other users.

Still, the convenience and cost savings can be worth it for some investors.

“Even if there are some heavier lifts on the capital side, you're not building infrastructure, you're not building on the foundations, you're not building the parking – all of that is already baked in, making these types of conversions a much more palatable project than new ground-up construction,” Ruggiero adds. “Saving money on the structural components of the foundation, which are high risk and account for over 30 percent of the overall cost, is a compelling opportunity for developers and investors.”

And repurposing vacant, unused space is always a compelling opportunity for the current landlord, city and surrounding neighbors.