Overview of Short-Term Rentals
Short-term rentals, otherwise known as vacation rentals, are typically furnished lodgings that are rented for short periods. These rentals can be more appealing than hotels because of the prices, furnishings, and space. Various companies, such as Airbnb and VRBO, serve as the “middle-man” between the renter and the host. The market for short-term rentals has reached all housing subsets, from single-family homes to condominiums to apartments. While the listing party typically has an ownership interest in the property being rented, that hasn’t always been the case. Many developers, owners, managers, renters, homeowners, and even homeowner associations have all joined the short-term marketplace to take advantage of the ever-growing “shared economy.”
This has many questioning what impact the COVID-19 pandemic has had on short-term rentals. Unsurprisingly, short-term rentals currently rule the lodging sector as travelers demand clean, well-lit places with private space away from other people that provide location-based experiences. Other demands include kitchens, additional space, and unique accommodations and amenities.
Although the first couple of months of the pandemic presented some challenges across the board as businesses were forced to shut down, there have been spikes in bookings from July 2020 to the present, and recovery is not far behind. In fact, with COVID-19 as a constant backdrop, rentals in remote or rural areas have been highly sought-after as individuals seek vacations, weekend getaways, and new locations to work remotely. In 2020, the market share of total short-term travel lodging reached as high as 41 percent. This has helped Airbnb’s market cap surge to $130 billion, almost as much as the top five global hotel chains combined.
Multifamily has quickly evolved into a diversified sector with niche asset classes like student housing, senior housing, co-living, micro-units, and now, short-term rentals. These multifamily sub-sectors garner significant interest from private and institutional investors alike while driving change within the market and creating additional investment opportunities. The following article dives into the explosive growth in short-term rentals and how multifamily properties can leverage this business model to its benefit.
Are Short-Term Rentals the Next Multifamily Niche?
With the emergence and increased popularity of Airbnb, multifamily owners have begun to embrace the short-term rental model. As it turns out, many long-term tenants are renting out their apartments to short-term guests, whether the landlord knows about it or not. Therefore, as these platforms take over the hospitality sector, new players have scaled the concept from private to institutional investment-grade multifamily assets. This moves the income away from the residents to the owners.
Roughly 65% of Airbnb rentals are in multifmily buildings. (Source: NMHC)
There are numerous young companies built around the short-term business model, with many catering to multifamily properties. These companies include Sonder, a professional accommodations provider,
as well as WhyHotel, Stay Alfred, and HomeAway. A representative from Sonder says in a Propmodo article that it has primary leases, partnerships, and agreements with all of its landlords of their properties, both apartment-style and hotel-style, for short and long-term guests. Despite Airbnb’s success, some predict that these master-lease communities will struggle post-pandemic. Either way, short-term rentals ultimately shift revenue from the hospitality industry to the multifamily asset class.
In recent news, RealPage announced their partnership with Airbnb to launch an apartment home-sharing app called Migo. Migo is designed to make it easier for residents and apartment owners to share their space on Airbnb and benefit from home-sharing. The platform allows residents to recoup a portion of their monthly rent, while apartment landlords can differentiate their apartment offerings and share the financial benefit of home-sharing. The app will be available industry-wide in Q3 2021.
As short-term rentals draw more investor interest and the rising demand for them increases, many predict these rentals could be the next niche for multifamily.
Unlike traditional multifamily units, short-term rentals are leased to guests on a nightly, weekly, or monthly basis. Recently, Equity Residential indicated that a potential revenue-sharing deal with Airbnb might be on the horizon. Such a transaction would provide for a cut of rentals from Airbnb in exchange for the use of unoccupied units. Reportedly, AvalonBay Communities and Camden Property Trust have discussed similar potential deals.
Several factors have prepped the U.S. market for an influx of short-term rentals, including changes in travelers’ lodging expectations and business-related travels. This trend is most popular amongst millennials. In fact, seven out of ten millennial business travelers prefer to stay in local rentals for reasons including staying in a unique place, feeling at home, and having access to a local neighborhood. Short-term rentals were also generally deemed safer than traditional accommodations by pandemic travelers.
Multifamily Benefits from Short-Term Rentals:
- Reduced Vacancies
- Diversified Revenue Stream
- Increased Demand
It is important to note that despite Airbnb gobbling up market share, short-term multifamily rentals are still down compared to standard numbers. According to AirDNA, a short-term rental analytics firm, the demand for short-term rentals in the U.S. is still significantly lower than 2019 levels. In December 2020, overall demand was down 21 percent, and multifamily demand was down by 30 percent. However, with 40 percent of multifamily units in urban areas, it doesn’t come as a shock. It is anticipated that once travelers stop avoiding major cities for leisure and business travel, demand will come back at a relatively rapid rate. Experts expect demand to return by 2022, especially with half of the population having received at least one dose of the vaccine as of June and travel already beginning to recover.
Markets Poised to Benefit
Geography plays a vital role in determining if short-term rentals will succeed. According to AirDNA, short-term rentals in urban areas are down 15 percent compared to 2019, but there is an increase in destination markets and small cities throughout the U.S. The most popular cities for short-term multifamily rentals include Fort Worth, Texas, and Jacksonville, Florida. These cities have seen robust recovery for multifamily units, and demand is 20 to 25 percent more than it was in 2019, according to AirDNA data.
Other popular markets for short-term multifamily rentals include Westchester and the Hamptons in New York, Greenwich, Connecticut, and warm-weather cities like Phoenix, Arizona, Las Vegas, Nevada, Charlotte, North Carolina, and states like Florida and Texas.
Next Steps for Short-Term Apartment Rentals
The number of short-term rentals absorbed by real estate investors and owners will depend on how the rentals are managed. Building owners can utilize Airbnb’s interface to independently manage listings or plenty of startups in the space have created management tools for multifamily rentals. As short-term multifamily rentals slowly come to fruition, owners should carefully weigh both the risks and benefits of these types of rentals and organize well-drafted contracts and regulations to absorb the significant benefits.
Please reach out to a Matthews™ specialized agent for more information.