Straight Talk on Short-Term Rentals

This segment of the apartment business is growing up, but there is still a list of concerns from the industry to address. AvalonBay's Karen Hollinger discusses the findings of the National Multi Housing Council/Kingsley Renter Preferences Report.

Over the last handful of years, there has been a deluge of capital invested in the short-term housing market. The big players have attracted big dollars—just look at the $850 million venture capital investment Airbnb got in 2016—and many of the rising, smaller players have been gobbled up. Point in case is Expedia, which has been very active in the space, purchasing market powerhouse HomeAway for $3.9 billion in 2015 and more recently, start-ups Pillow and ApartmentJet. The venture capital supporting this market has also seen new market players emerge—Lyric, Stay Alfred, Vacasa, WhyHotel, Niido and the list goes on—each with its own spin on the model.

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Karen Hollinger.  Image courtesy of AvalonBay

This growth reflects the growth in the sharing economy and the mainstreaming of companies like Airbnb and HomeAway. These companies have a strong value proposition for their customers, which is why hotel giant Marriott is looking to stay competitive by launching its own short-term rental platform. It’s pretty sweet to have access to a variety of unique properties that can fit a variety of travel and budgetary needs. You can find everything from a cabin in the woods to a large apartment in an urban area, typically for less than the cost of a hotel. Moreover, this business model can be crucial in bridging the gap between supply and demand in cities that host large conventions, festivals or other events. (Seriously, ever try and get a room last minute in Las Vegas during the Consumer Electronics Show?)

From an apartment owner’s point of view, however, the value proposition is a little more complicated. Having a way to monetize vacant units is obviously intriguing. And with the way the short-term market has evolved over the past few years, there are now business models that are way more apartment owner-friendly. For example, it’s now possible for an apartment owner to lease a block of apartments in bulk on a long-term basis to one of the growing number of companies that specializes in this market.

Moreover, we recognize that there is a younger generation of our customer base that not only is totally okay with this type of participation in the sharing economy but also may see it as an amenity or even competitive advantage. In fact, according to the most recent NMHC/Kingsley Renter Preferences survey, 82 percent of younger renters (under 25) have a neutral or positive view of short-term rentals.

Even so, there are lingering industry concerns with the short-term rental business that are very real and will need to be addressed. Here are my top four, along with some ideas for surmounting these issues.

How Do Residents Feel About Short-Term Rentals

Source: 2017 NMHC/Kingsley Renter Preferences Report
Source: 2017 NMHC/Kingsley Renter Preferences Report

Concern #1: Bad debt pops. Travel is a luxury that is highly correlated to the health of the economy, with corporate travel cuts being a leading indicator to a recession. When a short-term housing provider implodes, it generally involves early terminations across multiple units and a non-existent corporate entity with turned out pockets.

Solution? Short-term rental companies should consider obtaining an enterprise-level surety bond or lease-level insurance to protect the apartment owner against bad debt.

Concern #2: Transient customers act differently. If a long-term resident has a kegger, hosts a wild bachelorette party or builds a skateboard ramp in the living room (don’t laugh, it’s a real example), we take punitive action. In some cases, we may pursue the resident for eviction, resulting in a long-term impact to their credit and ability to rent in the future. If a short-term rental customer does the same, he or she is basically just black-listed from a single booking site and everyone goes on their merry way—except for the property owner who then deals with the irate residents next door or the damaged apartment. In short, we worry—yes, that’s a recurring theme in multifamily—about the ability to protect our asset.

Solution? To really know their customers, short-term rental companies should utilize more stringent identification and background checking software that goes above simply measuring their ability to pay.

Concern #3: The laws and regulations are a-changing. Between the ever-changing local laws, tax laws, business licenses and fire-code policies, most apartment owners cannot also keep up on the rapidly changing short-term rental regulations. After all, this isn’t our core business. And for most companies, it goes without saying that development rights will always trump the chance for a few extra leases, so few are going to enter into the often-contentious debates around short-term rentals if it could jeopardize development.  

Solution?  We expect short-term rental companies keep in compliance and indemnify apartment owner partners from any related penalties. Take a teeny portion of that Series A and invest in a good in-house counsel to stay connected to the local jurisdictions as regulations change.

Concern #4: Staffing and customer service issues. Travelers cannot innately tell the difference between on-site leasing and management staff and customer service. I recall recently seeing a series of negative social media posts for one property that included some corporate housing. The complaints were centered around a lack of assistance with storing luggage, restaurant reservations, and early check-in.

Most apartment associates’ compensation is tied to their customer service scores and leasing performance. They have neither the time nor the ability to assist with hospitality and tourism services. In addition, things like negative online reviews damage their properties’ reputations and affect their ability to be successful.

Solution?  Communication is key here. Short-term rental companies need to make sure they provide clear channels for contact and service. For example, I recently used a short-term rental platform to stay in a competitor’s apartment during the most recent NMHC Annual Meeting (lesson learned—book the hotel now for next year). I received no fewer than three different communications that explained that I should not contact the leasing office about really anything. The experience was delightful for a variety of reasons. From a customer perspective, I enjoyed how the company set up the unit. From an apartment owner’s perspective, I appreciated the registration certificate affixed to the wall and the text message I received, asking me if I needed anything.

This experience re-affirmed for me that there are ways to make short-term rentals work within a multifamily context in certain jurisdictions. And the benefits could be real for all stakeholders. But not all industry concerns have been addressed, so the lease remains the least of the issues, in many cases. However, good dialogue between apartment owners and short-term housing providers can help bring the needs and expectations more in alignment in the future.

Young Renters Weigh In

Coming of age during the advent of the sharing economy, today’s younger renters are more open to the idea of having short-term rentals on site at their apartment communities than their older counterparts. In fact, when asked how short-term rentals would affect their opinion of an apartment community, 82 percent of those renters under 25 said they are either neutral or have a positive view of short-term rentals.

This information and more on residents’ views on short-term rentals is available from the 2017 NMHC/Kingsley Renter Preferences Report. NMHC/Kingsley will be releasing a new report with more short-term rental information in November 2019.

Karen Hollinger is the senior vice president of strategic initiatives at AvalonBay Communities. She also serves as the chair for the National Multifamily Housing Council’s Innovation Committee, which focuses on accelerating innovation in the apartment industry.

Read the June 2019 issue of MHN.