In uncertain times, flexibility and agility are more important than ever. This is true now and will remain true post-pandemic. This flexibility means that we can expect to see short term rental operators traverse the hotel-multifamily spectrum of operation.
Short term rentals (STRs) have straddled between the hotel and real estate leasing operating models. Pre-pandemic, STRs mostly have been more hotel-like. STRs, and by default Airbnb as the face of the industry, grew rapidly and became a threat to the hotel industry. As the sector grew, it attracted professional operators backed by VC money that leased multi-family units in urban areas to rent them as short term rentals. This arbitrage model proved to be lucrative in an upmarket.
The current global health pandemic and the resulting economic downturn exposed vulnerabilities in the sector. The arbitrage model is laden with risk. In a downturn, many of these professional operators are stuck holding master leases (fixed costs) with fluctuating or declining revenues. Furthermore, the hotel model has proven to be challenging for STRs with increased regulations, calls for standardization, a formidable hotel lobby, and hostility from local communities. The hotel model is less tenable in an environment of declining demand and losses.
What does this mean for the industry going forward? The operating model will change. The best STR operators will find the sweet spot on the hotel-multifamily spectrum with an improved supply cost structure.
Frontdesk co-founder Jesse DePinto made some insightful observations on the multi-family short term rental predicament in a series of Linkedin articles. Two of his predictions on how the industry will change post-pandemic makes a strong case for why there will be greater integration of multi-family properties into the STR operating model.
Revenue-Sharing Agreements will outnumber Master-Lease Agreements with Urban STRs
Many STR operators saw the writing on the wall post-WeWork but pre-COVID. We, as an industry, recognized the inherent risk associated with guaranteed rent payments. Coworking startups like Industrious came out during the WeWork struggles, signing the praises of their revenue-sharing/management-model agreements, as they are more resilient in any future expected economic downturn. Venture Capital will likely now flow more to the sustainable and resilient startups, and therefore the multifamily industry will likely have more pressure to move away from master-lease agreements. After all, the multifamily property owners are already sharing in the downside with the onslaught of STR lease rent abatements and deferments happening now anyway, so why not share in the upside as well?
Flex Rentals will be the new Short Term Rentals
As with any Darwinian environment, the STR operators who can best adapt to the post-COVID world will have the highest chance of survival. Furnished apartments can easily be advertised as weekly or monthly rentals just as easily as nightly rentals. We are already seeing an incredible amount of STR units that are now hitting the market as medium-term rentals and, as such, tenants will form new apartment-hunting habits. Not only will they add Airbnb to their search along with Zillow and Apartments.com, but they will also come to understand that there are financially-viable options other than signing a BYOF (Bring your own furniture) 12-month apartment lease. Given the uncertainty in the world, they may pay a higher rate to have the flexibility of a month-to-month lease. Once they experience the low friction and instantaneous nature of booking an Airbnb monthly rental, the pressure for multifamily property managers to up their technology game will continue to increase. Airbnb and Zillow will also compete for this emerging market between hospitality and real estate, advertising more aggressively for mid-term rentals.
Airbnb’s next big competitor…..Zillow.