Is your property’s vacancy rate too high? Increasingly, developers of multifamily properties are partnering with third-party short-term rental companies like Stay Alfred or WhyHotel. This was once a last resort for developers when units failed to lease out as rapidly as expected. But, as the “sharing economy” becomes more mainstream, it’s turning into a potentially profitable alternative to — or a way to supplement — traditional long-term leasing approaches.

Disrupting the Residential Real Estate Market

Just as Uber brought seismic change to the transportation industry, the emergence of Airbnb as a lodging option has prompted dramatic shifts in the travel industry. Business travelers and tourists who wouldn’t dream of staying in someone’s home only five or 10 years ago increasingly seek options with hotel-like amenities (such as gyms, pools and concierge services) in accommodations that also feel like a home.

While many people think of Airbnb as renting out guest houses, extra rooms, basement apartments and unused vacation homes, the National Multifamily Housing Council estimates that almost 65% of Airbnb rentals are in multifamily buildings. In fact, many long-term tenants are already leasing out their units to short-term guests, with or without permission from their landlords.

Breathing New Life into Multifamily Projects

Savvy multifamily developers are finding ways to take advantage of these trends. By leasing out blocks of units to short-term real estate operators, these developers can expedite lease-up, reducing or even eliminating vacancy loss and supplying much-needed cash flow.

In turn, developers can pay off their high-interest loans more quickly, return equity to investors and refinance at lower rates. The arrangements also reduce tenant churn and lighten the load — and reduce the need — for leasing agents.

Currently, these deals tend to be concentrated in urban markets with an oversupply of multifamily housing and/or an undersupply of hotel rooms. As demand for nontraditional short-term accommodations continues to grow, though, developers in other markets are beginning to get on board.

How do these arrangements work? Typically, short-term rental operators sign 15-year master leases for dozens of rooms in upscale multifamily buildings and convert them into furnished apartments. It’s best for developers that want to go this route to involve the operator early on so it can be a true partner through a building’s life cycle, from pre-construction to lease-up and after.

Partnering with Operators

At the outset, operators can provide developers with valuable input on design (including layouts, materials and amenities), marketing and other critical issues that might not occur to developers accustomed to targeting longer-term tenants.

For example, short-term tenants who are just passing through generally require less space than someone who will live in a unit. Experienced operators can help you hit the sweet spot in square footage, between the size of a standard hotel room and a full apartment.

Short-term guests also tend to need more signage and assistance navigating the building, and operators will have data on how to best fill this gap. Operators might suggest you construct separate entrances and space for luggage storage for short-term guests, too.

New short-term rental operators seem to be popping up regularly, so it’s important for developers to conduct due diligence before entering leasing agreements. Look for the following characteristics when choosing a partner:

• A proven track record and reputation,
• A solid balance sheet that shows the ability to satisfy long-term financial obligations, and
• A clear breakdown of liability between the developer and the operator.

Also consider how the operator will service and manage its short-term guests. Will guests have access to a representative 24/7? Will the operator have an onsite manager? How will the operator screen guests?

Right for You?

As developers look to the future, they should consider shaking off their historical approaches to leasing multifamily properties. By working with short-term rental operators, rather than relying solely on long-term leases, they can increase net operating income, reduce vacancy losses and improve cash flow while also achieving greater stability and cutting costs. Contact us to discuss whether this is a viable option for your multifamily project.