On our latest episide of CREInsights, I got the opportunity to chat with Ryan Sudeck, CEO of Sage Investment Group. Sage is tackling America’s housing crisis by converting hotels into long-term multifamily housing. Sage has been redeveloping underperforming real estate assets since 2020, when they launched their evergreen fund, now run by a team of 17 full-time employees and dozens of partners.
Before joining Sage as CEO in 2023, Ryan was a corporate development leader at tech and real estate firms, having closed and integrated deals worth up to $14 billion.
Listen to the full episode below or keep reading for Ryan’s best real estate investment insights.
How did Ryan become CEO of Sage Investment Group?
While Ryan wasn’t a founder of Sage, he was a founding LP and has been involved since the beginning. He and his wife are the second-largest investors behind the founders.
Ryan’s interest in real estate began in childhood, growing up in New Jersey. His dad worked as a pilot, but he also built a small real estate portfolio. That portfolio became a financial lifeline for his family after 9/11 when airlines went bankrupt and his income became unreliable.
Wanting to create this insurance policy for his own family, Ryan started his real estate portfolio while working in corporate development for big tech companies like Samsung, Amazon, Whole Foods, and Redfin. Over time, managing his growing portfolio became too much for a side project, so he moved his properties into Sage and invested capital as a passive LP. In 2023, he formally joined Sage as CEO to help lead the business.
What are the benefits of real estate redevelopment?
While most GPs are focused on acquisitions or development, Sage has carved out a niche in redevelopment—specifically converting hotels into apartment complexes.
This model works well for Sage because of the fundamental difference in how hospitality is valued compared to residences. On average, hotels are worth 3-5 times the revenue they generate in a year, while apartments are worth 7-12 times. This is because hotels have high operating costs and lower occupancy rates.
Sage capitalizes on this difference by buying lower-value hotel properties and converting them into higher-value apartments.
Ryan’s first light bulb moment came in 2019 while working on a hotel conversion in Tucson, AZ. Despite initial plans to convert the building into student housing, they had to pivot to general population rentals in 2020 due to the pandemic, yet still consistently achieved a 98% occupancy rate.
The numbers further highlight their success. They acquired their first project for $8.5M, completed $2.7M in renovations, increased rent value by 44%, and sold the building for $18.9M, driving a 69% value increase per year.
This success highlighted the demand for this type of naturally affordable housing and opened their eyes to the potential of real estate redevelopment vs. traditional development.
What are the biggest challenges in real estate redevelopment?
Converting hotels to apartments involves changing the properties’ use, which requires proper zoning laws and residential code compliance. This includes working with local government and making significant renovations.
Sage spends an average of $37,000 per room on renovations in Washington state, where it is headquartered, and approximately $40-50,000 per room out of state.
Sage has streamlined its process over time. Now, into its nineteenth conversion project, Sage is able to keep its renovation costs lower than the average due to the scale of the operation and having the right contractor relationships in place.
Initially, they would renovate sections of hotels while still occupied to help offset costs, but this led to challenges such as issues with guests asserting tenancy. Now, Sage ensures buildings are delivered vacant to start construction immediately, significantly reducing the timeline for renovations.
What types of hotels are best for redevelopment?
Sage targets hotels with exterior corridors, such as roadside inns, for their efficiency and privacy. These are typically hotels in employment centers rather than tourist spots. These are the types of hotels previously frequented by traveling salespeople and business professionals. A major driver for this is that corporate travel has not bounced back since the pandemic, and the owners are looking to sell because revenue is down.
Sage also prefers stick-built wood structures rather than cinderblock. To avoid market saturation with studio units, they typically target hotels with 100-200 units.
Amenities like pools, fitness centers, and business centers are highly desirable for redevelopment, as they can be repurposed to build community and improve tenant retention.
Conversion projects are on the rise, with 17.6% more apartments converted from outdated buildings in 2023 compared to 2022. Of those conversions, 36% were hotels, 28% were office buildings, 15% were factories, 9% were warehouses, and 12% were other properties. There has been a lot of distress in commercial real estate since Covid, especially office buildings, and some have been traded for up to 90% less than they sold for.
However, Sage only targets hotels and avoids other types of properties, such as office buildings, because their layouts are less suitable and lack the infrastructure hotels offer. Most often, it is more affordable to demolish office buildings and build apartments from the ground up rather than convert them, they say.
How has Sage navigated rising interest rates and the current market?
Despite rising interest rates, Sage continues to find value in hotel conversions, especially with the large inventory of suitable properties and the high demand for workforce housing. They estimate there are 70,000 hotels and motels that fit their acquisition criteria in the markets they’re interested in. The massive need for affordable workforce housing is not expected to decline.
Many sellers bought hotels at their peak and didn’t expect interest rates to go up as they did, so they are now eager to sell. Also, Sage has been able to buy partially finished conversion projects that other companies were not able to finish.
How does redevelopment combat the affordable housing crisis?
It is reported that 28% of people in the US are single and live alone, but only 0.8% of the US housing stock is studio apartments. This means that many people are overpaying for more housing than they need. So, there is a significant demand for affordable studio apartments.
Politicians have proposed rent control caps to help combat the affordability issue. However, these laws don’t address one of the cores of the issue: the housing stock.
Since conversion projects cost less than new construction, Sage’s model naturally creates affordable housing and adds more supply to the market. However, their biggest challenge is government red tape with local zoning and permitting offices.
“If we can streamline developers’ ability to pick up the shovels, we are going to see rents naturally drop,” says Ryan, “because they’re going to add more inventory in these markets that desperately need it. We need zoning changes to allow denser areas.”
What does the day-to-day look like for the CEO of a real estate private equity firm?
On the day-to-day, Ryan oversees a team of 17. He focuses on strategic tasks like talking to investors, identifying opportunities, optimizing the portfolio, managing growth, and adopting the best systems and technology.
For example, he recently helped the team save on insurance costs by switching to a portfolio insurance plan. This enabled him to reduce costs by 25% overnight while increasing coverage by 30%.
He also recently brought zoning and permitting in-house as a full-time role.
Most importantly, his core goal is to produce a great risk-adjusted return for investors.
How does Sage raise capital for real estate deals?
Sage started with investments from friends and family and their extended networks, growing through word of mouth and referrals. As an SEC-registered security under Regulation D 506(b), they can’t mass advertise, so they establish strong relationships with investors and build trust through their track record. They report that 63% of investors reinvested in the past year.
Furthermore, Sage benefits from being a mission-driven company that offers investors non-financial benefits. For example, investors see a lot of social value in Sage’s sustainability practices by reusing old buildings. Furthermore, crime rates naturally decrease when a hotel is turned into a stable apartment building. These things are niche assets for investors who care about the social impact of their money.
What are the benefits of an evergreen fund for real estate?
Sage operates an evergreen fund, allowing for continuous investment and growth, unlike open-and-close funds with set timelines.
This structure aligns with Sage’s long-term investment goals and allows for a more patient approach, so they do not have to be forced sellers or buyers. They are currently asking investors for a minimum 5-year commitment, and some investors have committed to the fund until 2032. The goal is to continue operating well into the future.
What is the fee structure for a 506(b) fund?
Sage aligns its fee structure with investors’ interests.
Instead of taking an annual percentage of raised capital, they take a one-time 4% acquisition fee and a 2% property management fee once properties generate income. Most deals are sourced off-market to avoid broker fees and minimize acquisition costs.
Profits are shared 70% to LPs and 30% to GPs.
