Office buildings turned into hotels

30 April 2015

Developers change their plans to meet demand for mid-range rooms

Take a glut of office space in a real estate market prone to speculative development. Now add a resilient hospitality sector sustained by the Gulf’s role as a leisure and trading hub, with Expo 2020 and the 2022 World Cup on the horizon.

As these two trends coincide, property investors are increasingly tempted to consider converting new office projects – sometimes into residential buildings, often into hotels.

Particularly evident in Dubai, this phenomenon could also spread more widely across the region, to Saudi Arabia, Egypt and other countries likely to see a growth in middle-market or budget travel.

Office oversupply

A fundamental economic driver behind the trend is the uncertain state of demand and supply for office accommodation. Gulf cities such as Abu Dhabi, Dubai and Manama have long ago shaken off the impact of the 2008-10 global crisis, returning to a path of steady growth and investment. But real estate investors have sometimes over-estimated the pace and scale of the resurgence in demand for office space that recovery will bring. In any case, this is never an easy factor to forecast in an era when the nature of work and business is constantly reshaped by the development of new technologies.

The result has been a surplus of new office developments, particularly in primarily commercial locations such as Dubai’s Business Bay. Projects have been launched for ambitious new schemes, only to see demand fall well short, with the risk that new towers will stand empty for years.

Moreover, even where demand remains strong, the fast-changing geography of cities such as Dubai, Riyadh and Doha can alter local patterns of demand for building usage. New office space may still be needed, but not in the areas where planners had expected or where business activity was most heavily concentrated in previous years.

More travellers… are coming to regard the Gulf, and Dubai in particular, as a ‘normal’, non-luxury destination

In contrast to such uncertainties in the pattern of demand for office space, the market for residential and hospitality accommodation has remained more resilient and stable. And this has persuaded a number of developers to convert projects once destined for use as office towers into new housing schemes or hotels.

The option of converting to hotel use has particular attractions. Residential projects still have to be sold or rented, home-by-home, and remain dependent on the overall level of economic activity and employment. By contrast, hotel demand is driven largely by the leisure and holiday travel business – which does not always depend on local economic conditions in Middle Eastern countries. This is particularly true in Dubai, but increasingly so in Doha too.

Meanwhile, Saudi Arabia has seen growth in domestic travel by the kingdom’s fast expanding middle class. Much of this increasing demand comes from consumers who have adequate incomes but cannot afford to be lavish. They need mid-range or budget accommodation.

Fortunately for developers, this is the type of hotel that can most easily be created in what was originally planned as an office building; luxury hotels require facilities that are much less easily accommodated.

In European cities such as London and Paris, the conversion of historic landmarks into hotels is increasingly commonplace. It is often seen as a means of preserving structures no longer suitable for 21st century economic activity. And one could imagine similar exercises being engineered in historic Middle Eastern cities such as Cairo.

But such big budget conversions are long-term projects that can take several years to complete. Moreover, in the major business hubs of the Gulf, there are few old buildings that would lend themselves to luxury conversion.

There are exceptions, of course. A former seaside palace at Ghantoot, that used to belong to Abu Dhabi’s ruling Al-Nahyan family, has now been converted into a hotel, operated by the Swiss-Belhotel International group. With its coastal location and grandiose architecture, it offered the perfect opportunity to create a distinctive resort property out of an existing structure.

Business strategy

However, more typically it is standard office developments that are converted into mid-range hotels. This is a relatively new business strategy, but it seems to be working, reflecting the growth in this sector of the market. More and more travellers – from Europe, the Indian Subcontinent, Africa and further afield – are coming to regard the Gulf, and Dubai in particular, as a ‘normal’, non-luxury destination for holidays or business. Hotel chains that cater for such customers, including Ibis, Holiday Inn Express and Premier Inn, have been expanding their presence.

As airlines such as Emirates, Etihad and Qatar Airways extend their route networks, they are bringing increasing numbers of such middle-budget travellers to the cities of the GCC.

The 2020 Expo and the football World Cup in 2022 will give a further fillip to the business. Meanwhile, in Saudi Arabia, there is the continuing growth of pilgrimage-related activity.

As a measure of this demand pressure, Dubai Properties Group, part of Dubai Holding, last year revealed that it had received more than 20 applications for the conversion of office schemes into serviced apartments, three- and four-star hotels.

Engineering issues

The economics of converting a potential office tower into hotel accommodation are becoming more favourable. In September 2013, the Dubai Department of Tourism and Commerce announced that new three- and four-star hotel investments would benefit from a four-year exemption from the standard 10 per cent municipality fee that is otherwise levied on hotel room nights.

Inevitably, budget hotels have lower construction costs too. And, like all hotels, they require less parking space than office towers, because many guests arrive by plane.

Architectural and engineering considerations also encourage developers to opt for converting buildings into mid-range hotels rather than luxury properties. Office and apartment towers are inevitably supported by columns and are often constructed around a central service core that includes lifts and other key infrastructure. When such buildings are converted to hotel use, the hotel facilities have to be fitted around these features.

The economics of converting a potential office tower into [a hotel] are becoming more favourable

That poses no problem for a mid-range or budget hotel that is essentially focused on providing bedrooms and dining facilities, perhaps with a small gym and a few small meeting rooms. But unless there is surplus adjacent land available for the construction of additional buildings, these engineering realities can inhibit the conversion of an office tower into a luxury hotel.

For a prestige five-star facility, conferences and big social functions are normally a core part of the business model. To cater for such functions, a hotel needs one or several large ballrooms/conference rooms. But these cannot easily be installed within an office tower, because the function spaces would be subdivided or disrupted by columns or the central service core – visual obstacles that hinder social events and obscure speakers.

In upmarket business hotels, the ballroom and related function rooms are often accommodated in a low-rise annexe or part of the structure that is not under a high-rise tower.

In an office building, it is much easier to install a series of standard smallish rooms – such as a three- or four-star hotel requires – than the more expansive facilities that are needed for top-of-the-range properties.

No matter what section of the market a potential conversion is targeting, there will be significant engineering challenges. In an office building, toilet and kitchen facilities tend to be concentrated in distinct areas. Large sections of each floor do not need to accommodate the plumbing for running water. An apartment building needs more plumbing access points for toilets, bathrooms and kitchens. In a hotel, even more are required, because every guest room has an en-suite bathroom that must be connected to the plumbing system.

Selected hotel upgrades, refurbishments and expansions
ProjectCountryBudget ($m)StatusDue
Madinat Jumeirah expansion: phase 4UAE680Execution2016
Doha City Centre expansionQatar400Execution2015
Hilton Garden Inn Hotel at Mall of Emirates: phase 3UAE200Execution2015
Jumeirah Beach Hotel expansionUAE100Design2018
Dragon Mart HotelUAE100Execution2015
Refurbishment of Ritz Carlton HotelEgypt90Execution2015
Refurbishment of InterContinental MuscatOman80Design2018
Development of Shepheard Hotel in Garden CityEgypt69Study2017
Crowne Plaza extensionKuwait65Execution2015
Rehabilitation of Tazi PalaceMorocco55Design2017
Sharm el-Sheikh Four Seasons Hotel extensionEgypt50Execution2017
Atana Khasab expansionOman30Study2018
Le-Bristol BeirutLebanon30Execution2015
Sofitel Jeddah rehabilitationSaudi Arabia20Execution2015
Refurbishment of Asdal Hotel in SeefBahrain20Execution2015
Bright Start Hotel refurbishmentUAE20Execution2015
Source: MEED Projects

Moreover, a hotel needs to be equipped with networks that can provide much greater quantities of hot water, particularly in the morning and the evening, than would be needed for offices. They require installation of water-heating systems of much higher capacity than any office tower would need. On the other hand, use of electricity may be lower than office structures, where business tenants run large IT systems.

Sound-proofing is a further consideration. Privacy and calm are key requirements for budget hotel rooms, as much as luxury ones. By contrast, sound-proofing sub-dividers are not commonly incorporated into the open plan office spaces typical of today’s working environment.

Traditionally, hotel bedroom sound-proofing has been provided through the construction of relatively heavyweight dividers. However, a structure that was originally conceived for office use may lack sufficient floor loading capacity to support the weight of such walls, so it may be necessary to use other techniques, such as acoustic stud walls, to insulate guests from the noisy world outside.

Sometimes these different considerations can be balanced against one another. For example, many recent office tower designs do in fact provide a high level of floor-loading capacity, because of all the technology systems that will be installed. Hotel guest rooms do not need this office equipment, so the surplus capacity can be used to support the weight of bathroom fittings, beds and other heavy items.

Early decision

It is, of course, much cheaper to make all these architectural and technical adjustments at an early stage. Converting a building that is already in use as an office, or where construction is well advanced, will be much more expensive than if the decision to change its use is taken when the structure is still on the drawing board or while only a basic frame and set of floors have been erected. Dismantling or removing items will usually cost much more than avoiding their installation in the first place.

The need for an early decision is all the more important when a developer is turning the structure into a budget hotel, where the revenue flow per room may be lower than for a top-end establishment. However, given the choice between an empty office block and a bustling mid-range hotel, more and more developers in the region are prepared to change their plans to suit the market.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications