COVID-19 has been an inflection point, a watershed moment we’ll certainly look back on when we trace the changing investor landscape in the real estate market. But in many sectors, like multifamily, change was already taking place. The COVID-19 impact, then, is best understood when all of the counteracting forces of market conditions are taken into consideration. Focusing on the multifamily sector, a study of this kind shows the conditions that have brought the next once-in-a-lifetime niche into being: the short-term rental strategy.
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In the decade preceding that fateful March of 2020, the multifamily sector was far from static. Diversifying quickly, niche asset classes appeared across the market: student housing, co-living, senior accommodations, micro-units, and—slowly but surely—short-term rentals.
During that same decade, the industry titan we now understand as Airbnb laid the foundation for the short-term rental model. Surprisingly, the average traveler was more than comfortable with local hosts and home-share accommodations. By 2018, when the company was logging roughly 500,000 average stays per night, about 65% of those bookings were in multifamily buildings.
What happened next? The COVID-19 pandemic changed the way we relate to location, both in our personal and professional lives. The ‘office’ became Zoom, Slack, and cloud sharing platforms, and no longer limited early-career professionals and families to a commutable radius. On the concept of ‘home,’ new demands were placed. Rather than a respite from the office, home had to be a place where children could be schooled, work could get done, and people could stay safe.
Quickly, the market showed signs of COVID-era migrations. Families travelled to secondary markets with more favorable conditions of living, seeking temporary, drive-to properties with more outdoor space just outside of city centers. By mid-year, Airbnb reported that the number of reviews mentioning ‘remote working’ had tripled, and by the beginning of 2021, 24% of their stays were being booked for 28 days or longer.
Most important is the ‘where’ element of this mass-migration. As home prices continue to climb out of reach, short-term rentals are becoming the popular strategy for more than travel. Some of the best returns, in fact, have come from multifamily buildings with 40 doors or less. People want to travel with their family units by car—the demand for short-term rentals is distributed far beyond choice destination markets.
Growth will stay constrained in the multifamily sector. By recognizing the short-term rental strategy as a key pillar of portfolio strength, multifamily investors can diversify their income streams and the risk in their post-COVID strategy. That recognition can take on many forms; below are a few areas of focus.
Is A Hybrid Approach on Investor's Horizons?
What would have been unimaginable a short three years ago is now entirely possible: many smaller multifamily buildings, with 50 keys or less, can support a full-fledged, short-term rental strategy without offering any long-term rentals. But now investors who currently hold space in larger multifamily buildings will come upon an important choice. Those investors and landlords who have long-term tenants understand the value of those relationships, especially having suffered through the hard economic times of the pandemic. And due to the astronomical housing prices, a key demographic will likely extend their renting period and delay homeownership, meaning there will be some sustained demand for traditional, long-term tenants.
But in the meantime, investors have a lot to lose by missing out on the short-term boom. Short-term rentals have shown higher nightly price strengths, more sustained demand, and offer the added benefit of more frequent payments. New to market short-term rental analytics tools are equipping investors with real-time insights regarding the earning potential of their property as compared to the seasonally adjusted revenue of nearby rentals. With a good workflow in place, the headaches of tenant turnover are diminished, and short-term properties quickly become one of the best performing aspects of an investor’s portfolio.
Luckily, multifamily investors that consider a hybrid approach might have the opportunity to capture the best of both worlds. Devoting some units within a portfolio to a short-term strategy, investors and landlords can capitalize on the boom without losing long-term relationships. A balanced approach, the costs of tenant turnover will be limited, as will the missed revenue of the climbing short-term rental prices. With their short-term rental properties, landlords and investors can use concurrent listings to adjust dynamically to market demand, ensuring the property is always listed at the ideal price and stay length. By focusing some of their units on the short-term rental niche, investors will quickly have a more diversified portfolio, realizing better margins with little to no cost of ‘entry.’
Behind The Red Tape: A New Multifamily Niche
Lenders, too, have the opportunity to act on the new short-term rental niche. By recognizing the power of the short-term rental strategy, multifamily lenders can put the necessary policy in place in order to avail owners and landlords of capitalizing on the market boom. For many, this could make all the difference toward recovering the lost, COVID-era revenue, and empowering strength in the sector moving forward.
Policy has been quick to change in this arena, and it’s been an important part of the growing strength of the sector. Years ago, Airbnb put in place the Friendly Building program, encouraging multifamily owners to allow their tenants to sub-lease their spaces on Airbnb. The program allowed landlords ultimate control over which units were able to be listed and for how many nights. It also offered landlords a 5%-15% revenue on rentals within the program.
Markets are delicate ecosystems, and partnerships like this only last if they’re beneficial to both sides. With the recent market changes, there’s all the more reason for multifamily lenders to lean further into the short-term rental strategy. By allowing owners and investors to capitalize on the short-term rental income stream, they’ll see the benefits quickly: increased yield, diversified risk, enhanced portfolio resilience. Considering the underlying market factors, the demand for short-term rentals is strong and here to stay; it is to the benefit of investors, lenders, and guests alike to see the future of real estate where it stands.
About the Author
Emir Dukic is the CEO of Rabbu, a frontier flexible rental asset management company that helps real estate investors see the potential for short-term rental income. With proprietary technology, Rabbu automates all aspects of asset management and helps property managers supercharge their operations, eradicate contact and manage their assets across major rental platforms.