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How to convert offices into hotels

The rise of remote work, even after the Covid crisis has passed, has significantly reduced office building occupancy, especially in cities like Madrid and Barcelona. At the same time, in Spain, the office assets yields very rarely surpasses that of hotel assets. The recent trend in office yields reflects a discouraging outlook and hotels become the perfect solution.

These new working habits, when analysed in the context of Spain’s consolidation as a leading global tourism power, increasingly position the conversion of offices as a compelling opportunity to create long-term value for office owners.

Very strong value generation potential

The potential volume of office-to-hotel conversions could reach a much higher level than what we are currently seeing. However, two main factors are currently slowing down this trend:

  • – The typical office investor seeks minimal exposure to risk and is accustomed exclusively to fixed-rent lease agreements.
  • – Converting an office building into a hotel requires an additional  investment and represents a long-term change in the nature of the asset, with no realistic possibility of reverting back, once it has been adapted for hotel use.

To overcome these challenges, office owners should rely on external hotel experts who can provide a detailed analysis of the required investment, a realistic projection of expected returns, and a clear valuation of the asset’s liquidity under its new use.

Challenges and solutions

Moreover, from an architectural and functional perspective, office-to-hotel conversions face 3 common challenges:

  • – Limited ground floor space: Office buildings often have smaller ground floor areas, which are optimised for other uses such as retail, making them insufficient for a conventional hotel layout (though they may be suitable for newer, more flexible hospitality models).
  • – Elevator core configuration: Office buildings are structurally designed with elevator cores sized for higher vertical traffic than what is typically needed in a hotel.
  • – Natural light distribution: The compartmentalisation of office spaces does not always support optimal natural lighting, which can affect the layout of guest rooms in a future hotel.

Solutions to these challenges go beyond architecture and require a business strategy aligned with the property:

  • – Prioritising the quality of the hotel product over the number of stars granted by the regional tourism classification system, which implies a shift in mindset for traditional long-term asset owners (as well as for other players such as appraisers and banks).
  • – Partnering with more modern hotel operators that offer flexible accommodation models, including studios, apartments, private rooms with bunk beds, or group rooms. Some operators even combine different room types within the same building, thereby maximising operational efficiency.
A unique opportunity for office owners

In conclusion, the growth of tourism and the evolution of the labor market have created an unprecedented opportunity for office-to-hotel conversions in Spain and other tourism-driven markets. However, this type of transformation requires a deep knowledge of the hotel sector and a well-planned strategy.

New business models in hospitality allow now for office owners to achieve higher returns with controlled risk, making this option a highly attractive alternative in certain office-to-hotel conversion scenarios.

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