The multifamily industry’s perception of short-term rentals has evolved over the years. Before the pandemic, short-term rentals were first seen as a threat, then a benefit.
Now, the recent volatile market has induced a new layer of short-term rental skepticism after several providers operating under master lease agreements failed on a national scale.
Because of the impact of the pandemic, short-term rental platforms have pivoted in a very short period of time, resulting in modified business models that are more financially sustainable and flexible for owners/operators. Their resiliency in the most difficult financial environment in over a decade shows that short-term rentals are here to stay.
In fact, the demand for flexible living options is accelerating even faster now and is projected to continue on that growth trajectory well beyond the end of the pandemic. Operators should adapt to meet this demand with short-term rental options, but not without a complete understanding of how short-term rentals have changed, which models survived the pandemic so far and the importance of utilizing a third party to manage the complexities of short-term rental inventory.
Revenue share models
First and foremost, we learned that master lease models carried some unforeseen risk. The master lease structure provided the mirage of long-term proforma income, but when every market simultaneously reduced demand and revenue, master leases proved to be a detriment to owners/operators.
As the master lease providers lost occupancy, they could not meet their long-term obligations and subsequently handed in keys to owners/operators resulting in lost occupancy and revenue. The structure also ignored one of the distinguishing features of short-term rentals: cash flow upside to property owners.
Understandably, master lease failures have given short-term rentals a bit of a “black eye” and could be creating some additional hesitancy to incorporate short-term rental inventory into a broader operating plan.
However, not all short-term rental providers created the illusion of simplicity and stability with master leases. Some either created or adjusted their models to a revenue share structure. Flexible living inventory operating on a revenue-share model can generate an immediate revenue stream and produce above-market cash flows on already vacant units without tying them up in a master lease. That means an operator can choose to cease offering a unit for short-term rent and lease it instead, without any headaches or red tape.
Owners/operators must also consider the cost to turn units, the carry and marketing costs required to find the next resident, the vacancy cost from the downtime required to find the right long-term resident to sign a lease, and the concessions and incentives required to attract new residents.
This is especially true in an environment where market-rate apartment development continues unabated and Millennial renters are transitioning to larger format housing.
Adding an ancillary revenue stream
Short-term rentals operating under a revenue-share model can boost the value of units and under-utilized assets, while ensuring the overall success of the community. The revenue stream from short-term rental inventory can backfill vacancy loss and help owners/operators enhance an asset’s financial performance.
Revenue-share models can generate income on vacant units, as well as new development lease-ups and underserved suburban hotel markets, and provide an ancillary revenue stream that complements long-term inventory.
If occupancy at a building dips, owners/operators with a revenue-share based short-term rental model can backfill new and pending vacancy and create a floor for NOI.
This is especially beneficial to new development communities trying to generate lease-up revenue or communities in cities that expect to experience significant new supply or demand volatility, because it creates an extra layer of financial protection.
Conventional wisdom is to offer significant renter concessions to lease-up a newly developed apartment community. These concessions are often difficult to burn and create challenges in stabilizing a property. Short-term rentals can alleviate this burden by instead offering above-market cash flow until a community attracts a long-term resident.
With demand accelerating for flexible living options, the short-term rental booking pipeline has been robust at multifamily communities, allowing owners/operators to rely on short-term rentals as an ancillary revenue stream.
Renter demand for flexibility increases
Demand for short-term rentals is increasing and a new generation of renters wants more than a hotel experience. This trend became even more apparent during the pandemic. Short-term rental demand outpaced hotel demand during the pandemic and isn’t slowing down. Some short-term rentals even doubled the Revenue Per Available Room of hotels during the pandemic.
Modern renter preferences are shifting due to a new remote working environment and the desire for amenities that hotels don’t offer, like a kitchen and washer and dryer. With travel poised to increase after the pandemic, owner/operators should note that renters’ needs for flexible living spaces are increasingly changing because people can work remotely.
The new generation of renters has created a demand for furnished spaces with flexible terms and operators have to adapt to accommodate this. Operators should recognize that the operational burden of truly flexible accommodations is different than traditional multifamily operations, so using a third party to help manage short-term rental units alleviates a lot of those challenges.
Remote work shifted the landscape of lodging preferences, and renters increasingly want a flexible lifestyle now that the pandemic has untethered people from needing to live close to their jobs. Workplaces have already indicated remote work will continue after the pandemic. By continuing remote work, the need for flexible inventory is only going to increase.
The state of short-term rentals today looks and feels different from the short-term rentals before and during the pandemic. A revenue-share model is a source of reliable, sustainable income for owners/operators.
Even in the midst of a volatile market, short-term rentals provide financial upside, generate income and create an ancillary revenue stream. New sustainable revenue-share models provide ripe opportunities to implement short-term rentals with relatively low risk and high rewards.
Girish Gehani is COO for Trilogy, where his responsibilities include implementing asset strategy, acquisition due diligence, construction management and maximizing property value. Gehani also oversees Trilogy Residential Management LLC, Trilogy’s affiliated property management company, where he develops and implements portfolio-wide initiatives.