Despite the Impact of COVID-19, Short-Term Rentals Have a Promising Future
Before COVID-19, short-term rentals had emerged as one of the apartment industry’s most exciting growth opportunities. Even though the coronavirus pandemic has brought travel in the U.S. to an abrupt halt, the future of short-term rentals in multifamily is still quite bright.
That was the main message of “Flexible Rentals in Multifamily - What Comes Next?”, a recent webinar from the Apartment Innovation and Marketing Conference (AIM).
“Landlords and owners love the bump in revenue short-term rentals give them. They’re not going to give that up,” said Susan Tjarksen, a senior managing director at Cushman & Wakefield. “They’re going to find a way to make this work, and operators are going to find a way to make this work. This is certainly an asset class that’s here to stay.”
By the time the pandemic hit the U.S., the short-term rental sub-sector in multifamily had built up some real momentum, the panelists noted.
“From an overall macro picture, the industry was thriving. On the supply side, professional STR had grown significantly from a few thousand units a couple of years ago to 10,000 to 20,000 units as of January,” said Roman Pedan, CEO of Kasa, an operator of short-term rental apartments. “On the demand side, travelers were increasingly seeking out short-term rental supply that was professionally managed. And then on the ownership side, owners were increasingly underwriting and getting the benefit of increased NOI on their properties. And the unit economics for operators were, for the most part, positive and strong.”
Operators in the webinar noted that business already has started to increase after bottoming out shortly after the pandemic began. Pedan noted that Kasa has focused on renters who might need longer-term stays, such as university students who suddenly find themselves without homes after their campuses have closed, international travelers who can’t get back home and people who are looking to lease a new apartment but are not willing to sign a traditional one-year lease until the economy improves.
Erik Eccles, director at Airbnb, agreed that those seeking rentals of more than a few days are a vital source of demand for the flexible rental market. “We’ve always seen flexible rentals as both short-term and monthly stays,” he said. “We have been incredibly bullish on that. In 2019, one in every seven nights booked was for a longer-term stay.”
In the meantime, short-term operators that need to adjust their master leases because of the recession generally have found their landlords to be receptive, said Aryn Self, a lawyer and shareholder at Munsch Hardt Kopf & Harr, a Texas-based law firm.
“My experience on the workout side has been that several of the STR companies were looking for rent deferment, some rent abatement and really changing a lot of the economics of their master leases,” Self said. “From what I’ve seen, the property owners were very willing to work with STR companies. No one wanted to do rent abatement but rent deferment gave me a positive sign that they at least thought [the sector] was going to come back.”
Moving forward, smaller property owners will be more willing to implement revenue-sharing agreements with their operators instead of master leases, according to Jesse DePinto, co-founder and chief product officer at Frontdesk. Frontdesk is a short-term rental operator that secured nearly $7 million in Series A funding in late April.
“I think they’ve realized master leases give you a mirage of low risk, but in reality, they don’t protect you from the downside, and they don’t give you the upside of a [revenue share],” DePinto said. “So, they are the worst of both worlds.”
In the future, DePinto added, short-term rentals will simply be a part of the management function of apartment operators. The short-term rental providers will focus on providing the technology and back-of-house operations that will enable the operators to offer short-term rentals. .
“I think Frontdesk certainly sees ourselves as more of a white-labeled rather than a branded short-term-rental management company,” DePinto said. “Our goal is to help these management companies and owners on their journey in terms of accommodating flexible short-term rentals in their communities. So today that looks a lot like a management agreement. In the future, it may look more RealPage-like in nature, where there's a platform and add-on services that happen more remotely.”
Regardless of the model that emerges post COVID-19, the speakers remained optimistic about the market for short-term rentals in the long run.
Referring to a survey recently conducted by Rent Responsibly, David Krauss, CEO of the short-term rental advocacy organization, said, “The one stat that really stood out was that 55% of short-term rental businesses were temporarily closed and only 2% said they were permanently closed. If you just think about that in terms of “Where is this going?”, I think we have a bright future. The comeback may be slow, but I think many people are in it for the long-haul.”