Denver Spent Big For Hotels To Shelter The Unhoused As City Copes With Crisis

Denver Mayor Mike Johnston delivered on a campaign promise by sheltering 1,100 people by the end of 2023, a feat that required the city to put its money where its mouth is.

The new mayor’s most useful tool for housing people experiencing homelessness, a population that has ballooned in recent years, has been purchasing hotels and converting them into shelters or permanent supportive housing. Johnston was inaugurated in July.

Altogether, the city of Denver and the Denver Housing Authority have spent roughly $55M to acquire three hotel properties, totaling more than 500 rooms, for those purposes.

The prospect of sheltering the unhoused while keeping a key campaign promise made the city a motivated buyer. Some say that this helped push the price Denver paid to levels beyond a typical market transaction.

However, these transactions weren’t typical due to the nontraditional usage planned for them after the acquisitions. The value of each hotel is much different in this context than it would be for traditional hotel use, Denver-based HVS Director Ryan Mark told Bisnow. 

“When you’re valuing a commercial property, typically the building use is staying the same. But in this case, the hotels are becoming more residential, and that really changes the way ‘value’ is determined,” Mark said. 

In a market transaction, Mark said a hotel appraiser will typically look at factors such as a building’s age, condition, location and revenue per available room, and then perform a discounted cash flow analysis to determine a property’s financial value. But that equation vastly changes once a residential component is added to the mix, he said.

There were also no banks involved in the purchases since the hotels were bought with a blend of federal and state grant dollars, which Mark said could influence the purchase price.

Denver purchased the 95-room Stay Inn at 3805 Peoria St. with $9M from two Community Development Block Grants, funds from the American Rescue Plan Act and a $2M grant from the U.S. Department of Housing and Urban Development, according to city council documents. Johnston also plans to open a 54-unit micro-community on the Stay Inn grounds, whereas a typical hotel investor would save most of their land for parking. 

Generally, appraisers have an incentive to keep their appraisal low in order to make sure a bank will approve the necessary financing for a purchase, he added. Both the City of Denver and the Denver Housing Authority likely paid above-market prices for the hotels because of these nontraditional factors. Mark said HVS won’t use these hotel transactions in future valuation scenarios. 

“It's a little more complex than whether they got a good deal on the purchases because they have different intentions for those properties than what a typical hotel operator would have,” Mark said. 

The $21M purchase of the 205-unit Embassy Suites at 7525 E. Hampden Ave. is one example of how Denver’s intentions differ from traditional hotel investors. The city is leasing the hotel for roughly $83K per month, or $134 per room, and intends to continue leasing the building for three to five years until it can find an affordable housing partner to convert the property into permanent supportive housing. The city expects to consider executing the purchase agreement in February. 

Johnston Press Secretary Jordan Fuja told Bisnow via email that the city focused on buying hotels that included things like commercial kitchens and laundry space, as well as proximity to businesses and shopping, to allow people to live at the properties for several months more comfortably. Lot size has also become an important factor as Mayor Johnston continues his push to add micro-communities around Denver. 

The number of unhoused people in Denver has reached a crisis point, and alleviating it has been a priority of the city and its mayors for years. 

The latest federal snapshot data, also known as the Point in Time Count, shows there are more than 5,800 people experiencing homelessness in Denver County alone, and over 9,000 people experiencing homelessness across the seven-county metro area. The total represents a 21% year-over-year increase in Denver and a 24% increase across the metro area. 

This crisis could motivate Denver to purchase the 300-room DoubleTree at 4040 Quebec St. for between $130K and $143K per key, depending on the final purchase price. That price is well above other upper-midscale hotels in the area, like the Best Western Plus at 9231 E. Arapahoe Road, which was bought for about $77K per key in 2022. If the city does decide to purchase the hotel, that would bring its total spending up to roughly $98M for the properties. 

“They are absolutely overpaying traditional position prices, but they’re doing it because they’re dealing with a crisis,” Chris Kilcullen, senior hotel broker at Avison Young in Denver told Bisnow. 

The purchases also shed some light on Denver’s plan to provide affordable housing options for people exiting homelessness. For instance, the Best Western hotel has been rebranded as New Directions as the city revamps the property into permanent supportive housing.

The DoubleTree at 4040 Quebec St. has also been rebranded as the Denver Navigation Campus as the city works to create a coordinated entry system for people experiencing homelessness to find services and shelter more efficiently. 

“Mayor Johnston and the city have moved with urgency to help 1,147 people get out of the cold and into safe, stable units, and these hotels were critical to helping change those lives,” Fuja said in an emailed statement.