The US 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 explains. “This leaves ample opportunity for conversions to hold steady in today’s market.”
Fuelling 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 says.
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 adds.
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 continues. “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 says. “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 says.
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 adds. “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 says. “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 explains. “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.”
When conversions get complicated
Oversaturation is a distinct challenge that can bog down even the most appealing conversion opportunity – but it’s far from the only one.
“People are recognizing there is a significant cost associated with converting, especially under current market conditions with tariffs in place and the cost of materials rising,” Bhakta says.
This is dampening demand for unflagged and select-service assets, he notes, as they often require significant investment to meet brand standards. Smith has observed a similar pullback when it comes to older full-service branded properties, particularly in the Midwest, where the cost of property improvement plans (PIPs) can outweigh the projected revenue gains.
“We see investors too aggressive when trying to upbrand a hotel into a traditional full-service hotel (non-lifestyle) franchise,” he explains.
Aggressiveness can be a problem in other areas as well. Office-to-hotel conversions, for example.
“They are appealing on paper because of their perceived cost advantages and sustainability benefits,” Knott says. “However, they often run into serious issues.”
These include large floor plates that limit natural light, prohibitively expensive plumbing and HVAC retrofits, and bringing the building up to fire safety and ADA compliance standards.
And the challenges don’t end there.
“Another misstep is what I call ‘brand-chasing without fundamentals,’” Knott continues. “Investors sometimes pursue conversions simply because a desirable brand is available, without considering whether the building’s infrastructure or the local market can support the brand. This can lead to overcapitalization and disappointing performance.”
Investors can sidestep this issue by evaluating core fundamentals. They should understand what’s driving tourism or business demand, the comp set’s average daily rate, and how supportive a brand is in terms of infrastructure flexibility and long-term viability.
That support is essential, Knott notes, as a common disconnect can exist between brand expectations and reality.
“Brand compliance and PIPs pose challenges,” he adds. “There's often a tension between what a brand demands and what the building can realistically support. Successful projects require smart negotiations with brand partners to ensure the scope remains feasible without sacrificing long-term value.”
Disappointment can also result if a conversion hits a hard stop. It’s something Gallagher sees often.
“The two most common issues for conversion projects are zoning categorization and parking,” she says. “The biggest red flag is if the site is significantly under-parked. If there’s not enough parking for the converted use, creative solutions like shared parking agreements are possible, but they usually won’t correct a significantly under-parked site.”
Other common hurdles include the risk of losing grandfathered zoning status and triggering discretionary approvals that can delay or derail a project. Gallagher advises investors to review zoning codes carefully, assess the jurisdiction’s political climate and determine whether the property has a historic designation, all of which can add significant time, cost or limitations to a conversion. Insurance is another issue as conversions often carry unique risk profiles.
Still, for all the hurdles, the conversion trend doesn’t show many signs of slowing down. Not with ground-up costs and demand being what they are.
“The conversion cycle will absolutely continue to accelerate in the near future,” Smith says.
Whether projects, investors or brands succeed will hinge on a blend of design creativity, brand flexibility and infrastructure expertise, all backed by strong asset management.
“Done right, conversions should be a high-impact strategy integrated with thoughtful placemaking, a sustainability mindset and a clear understanding of how the project will create long-term value for the neighborhood as well as investors,” Knott says.