The Waldorf Astoria hotel in Manhattan is in the process of being purchased by China’s Anbang Insurance Company (same company that backed out of a $14 billion bid for Starwood (NYSE: HOT)). Like many hotels before it, the hotel is slated to undergo a transformation into residential units, which frequently offers a better return on investment. The purchase price is expected to come in around $2 billion, followed by $1 billion in renovation costs and severance for existing Waldorf Astoria employees. During the transformation process, the hotel would close from early-2017 until sometime in 2020. Some luxury suites would remain available (21%-35% of the hotel’s available units), with the majority converted into apartments. The residential units would provide up to $4 billion in revenue, with the luxury suites providing rental cash flow. If you run the basic numbers, the return isn’t overly attractive. A return of $4 billion off $3 billion in investment costs gives a 33.3% return; if we assume that this is a 3.5-year project, that delivers an IRR of just 8.56%. Illiquid investments of this type normally demand in excess of 15%. This of course is all projected. Nobody truly knows what the market will look like in three years.Part of the issue is that the Manhattan real estate market has cooled off due to a supply glut. Many investors have sought to do the same thing Anbang is doing in forfeiting the hoteling business model in favor of selling off residential real estate. In turn, this has become a crowded investment opportunity with greater supply producing lower prices. While there is some value to be squeezed out of converting the Waldorf Astoria into residential units, it’s not the opportunity it would have been fifteen years ago.