By Joe Gose (MultiFamilyExecutive.com Article) —
Up until Airbnb launched its home sharing technology platform in 2008, a few units reserved for corporate users here and there were typically the only type of short-term rental apartments available. But since then, numerous Airbnb alternatives have shaken up the multifamily and hospitality industries with these startups renting units directly from apartment landlords and re-leasing them to travelers for a premium. It’s a transformation that’s far from over.
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A growing preference for lodging choices and changes in how people view housing are fueling demand for short-term rental apartments. Meanwhile, the promise of steady rental income and lucrative investment returns for apartment owners and venture capitalists, respectively, are the driving supply of Airbnb alternatives. In 2018, short-term rental homes and apartments captured $23 billion in lodging revenues, or about 8.6 percent of the market, according to travel industry researcher Skift.
Also known as flexible leasing, the concept is far more palatable to multifamily property owners than the Airbnb model. Many have fought Airbnb and similar platforms for years, arguing that they enable residents to unlawfully rent their units to unknown vacationers or business travelers, often resulting in the disruption of the lives of other community residents and lost tax revenue.
“There are a handful of unique business models that have evolved to help multifamily owners participate in the revenue generated from short-term rentals instead of playing whack-a-mole to see who’s renting in your building through Airbnb,” said Scott Shatford, co-founder and CEO of AirDNA, a Denver-based provider of short-term rental data and analytics. “And the way people think about living is changing–they don’t really want to own homes but would rather be nimble and nomads of a sort.”
The flexible leasing expansion is only in the first inning, suggested Shatford, who got his start in the industry by renting a handful of Santa Monica, Calif., apartments and re-leasing them through Airbnb. Mike Wilson, senior vice president of real estate for global short-term rental operator Stay Alfred, agrees. The eight-year-old Spokane Valley, Wash., company typically leases units for five to seven years at market rates with annual rent increases of around 2 to 3 percent, he said. It controls nearly 3,000 units in the U.S. alone and is close to adding 1,000 more.
“There are several players emerging,” Wilson said, “and we think there’s room for more operators to be successful in this space.”
Flexible leasing’s growth expectations are far from guaranteed. Among other challenges sure to test the model are the facts that hotels feel the immediate effect of recessions due to a drop in travel, Shatford said, and how short-term rental apartments will perform during a downturn is still a question mark.
Nevertheless, Airbnb alternatives have raised hundreds of millions of dollars and amassed thousands of units as they employ varying operating strategies. In addition to Stay Alfred, operators like Sonder, Lyric and Domio sign master leases for several years. WhyHotel has a different take: It partners with landlords in a profit sharing arrangement to operate pop-up hotels in new buildings during the lease-up phase.
Most of these companies lease out the units on a nightly basis, depending on the location. Others, like Blueground, are focused on corporate travelers for stays of at least a month, while Roam offers co-living and co-working units for a minimum of a week.
Meanwhile, some companies are trying to make Airbnb more agreeable to apartment landlords. Niido is joining with developers to create Airbnb-branded properties, which encourage residents to lease out their units, and Pillow is providing landlords with more control over Airbnb users staying in their buildings.
For apartment owners who chafe at residents sharing their units on Airbnb, these Airbnb alternative concepts are convincing some to leave their options open. Apartment developer and manager Bozzuto has traditionally incorporated corporate housing providers in its properties, and it now leases some 200 units to Lyric, Sonder, Mint House and other short-term rental operators.
But Bozzuto actively prevents residents from listing their units on Airbnb because of the operational risks that it presents to its long-term residents, said Khushbu Sikaria, vice president of innovation and product development for the Greenbelt, Md.-based company. “However, as these platforms become more compliant by setting controls for operators in their system, we may shift this viewpoint,” she said. “This is an evolving space, and we need to stay flexible to meet the changing needs of our customers.”
Similarly, in 2017 Denver-based apartment owner and operator Aimco sued Airbnb to stop it from listing the units of its residents in violation of their leases. While a settlement late last year reiterated Aimco’s intent to prohibit Airbnb-type rental programs, the parties agreed to discuss future opportunities.
The nimble approach illustrates how fluid the short-term rental space is. Among other developments, Airbnb recently announced its intention to pursue a public offering and acquired Urbandoor, a flexible leasing platform incubated by apartment owner and operator Greystar.
Plus, earlier this year, WhyHotel established Hospitality Living to pursue ground-up development. The division is still scouting locations and mulling how to financially structure deals, but it hopes to open a property in 2022, said Will Hu, senior vice president of acquisitions and development with WhyHotel. The company currently operates about 225 pop-up hotel units in Arlington, Va., and Seattle.
“We’re going to design these buildings to be able to toggle between hospitality and multifamily,” said Hu, who is in charge of the endeavor. “If we do our job right, we’ll be able to operate 100 percent of the property as multifamily, 100 percent as a hotel, or 50/50 or 63/67–any type of mix imaginable.”
SUPPLY VS. DEMAND
New construction could significantly increase the supply of short-term rental units, said Susan Tjarksen, a managing director of capital markets for Cushman & Wakefield. But it’s unknown how much debt lenders will provide these developers. The short-term rental fallback position in reaction to a glut or soft economy is to lease the units as conventional apartments for 12 months.
“Are the debt markets going to underwrite projects as traditional multifamily buildings?” asked Tjarksen, who in a recent report contended that short-term rentals are an asset class in the making. “Or do they give the operators credit for a business a model that brings in two to three-and-a-half times more rent?”
Beyond a downturn, regulations are also a concern for short-term rental operators as many cities, counties and states are reevaluating laws governing the business. New Orleans, for example, passed short-term rental rules last spring that include requiring rental owners to live on the premises they rent and limiting short-term rental properties to 12 guests. Additionally, U.S. Rep. Ed Case of Hawaii recently introduced legislation aimed at making Airbnb and other platforms accountable for listing units that are restricted from such use by laws or leases. Currently, the platforms claim that the federal Communications Decency Act preempts local efforts to stop them from listing and booking illegal rentals.
Short-term rental operators are adjusting their business models to be in compliance and in good favor with the communities they operate in. Stay Alfred, for example, now requires a minimum stay of 30 days instead of offering nightly stays at its flexible-leasing units in Boston and Washington, D.C.
“This is a very interesting time,” noted Patti Shwayder, senior vice president of government relations and communications for Aimco. “The industry is really picking up, but we need to make sure that resident and property rights are honored.”