Although March 2020 placed a screeching halt on travel and the short-term rental (STR) industry, what has blossomed post-pandemic for multifamily owners and operators is the opportunity to gain a healthy extra revenue stream and offload a little cash flow risk.
Remote and hybrid work continues to flourish, making the option of renting for the short term doable for many Americans. Yet, how this ability and its growing group of “subscribers” are harnessed through STR providers and hosts can make all the difference.
“With apartment vacancies on the rise, multifamily operators and owners need to be creative and innovative when looking for opportunities to maximize asset value,” says Jason Fudin, CEO and co-founder of Placemakr, which offers nightly, short-term, and long-term stays in apartment settings either owned or powered by the company.
“The good news is that there is a very clear way to bring cash flow back to—or better yet above—previous levels. The most effective way to do this is to tap into other customers where there is plenty of demand. Our recommendation? Furnishing vacant units to support short-term rental customers,” Fudin adds.
Flex rental operator Kasa continues to see a growing demand for various lengths of stays in apartment settings as travelers prioritize flexibility with a little more space. Roman Pedan, founder and CEO of Kasa, says millennial and Gen Zers are especially choosing experiences over things, which fuels the need for furnished rentals for the “self-directed, digital native, modern traveler.”
Pedan shares, “Properties that lack furnished rentals are invisible to this large and growing segment of housing/living demand. Over time, we believe that catering solely to long-term unfurnished and long-term furnished demand and ignoring flexible any-length-of stay rentals will be as unheard of to a property as not allowing pets [and, indeed, until consumer demand proved too strong, not too long ago, pets were banned from most properties]. Long-term properties need to serve the needs of their consumers, and that means providing a form of housing that is more dynamic than the 12-month unfurnished lease.”
At Kasa, the most common guests are business travelers, families traveling with children or with other families, and people living on the road for extended periods of time. Whether through Kasa-powered properties or partnerships with multifamily owners or operators, like AMLI Residential and Greystar, Kasa has found that the average length of stay is roughly six nights, and over 30% of nights are from people staying 30-plus days. Pedan says the average age of a Kasa guest is older than some might guess at 40, with an average income over $100,000, matching the income of residents in Kasa-powered properties.
This pool of short-term renters is an ideal target for multifamily owners and operators who are looking to fill vacancies as record new supply comes online this year. Whether through units set aside and managed by a STR provider or by the operator itself, a once-vacant apartment can become an additional revenue source with minimal investment.
“With lower-than-average deal volume and stagnant rents in many markets, operators increasingly seek opportunities to grow ancillary revenue while vigorously defending occupancy. Enter short-term rental as an amenity, representing operators’ competitive advantage,” says Jesse Stein, Airbnb’s head of real estate. The company collaborates with operators and renters alike through its Airbnb-friendly apartment program.
The program gives prospective renters the ability to stay at more than 400 Airbnb-friendly apartment buildings with more than 125,000 units on the platform across over 40 markets, including 127 cities and 17 states. Stein says, “When primary residents can host their apartments, rent becomes more affordable. Since its launch in November 2022, the median income generated per resident in the Airbnb-friendly apartment program has been $3,500, with the typical host hosting for 30 nights.”
Sentral president Lisa Yeh shares, “Multifamily owners are slowly coming around to the fact that, when done right, STRs can be a valuable piece of their overall strategy. At the same time, we’re seeing the STR industry begin to embrace partnerships with multifamily properties.” STRs are approximately 15% of Sentral’s 10,000 units under management, but Yeh says of those properties that do offer STRs, they consistently see net operating income rise an average of 20%.
Resident Perks
In addition to boosting revenue for multi-family owners and operators, the ability to offset high rental costs can also be appealing to residents, especially if they are already away traveling for business or pleasure. Yeh says, “In today’s uncertain economy, adding another revenue stream is almost all upside—provided, of course, you manage the mix correctly. One surprising benefit is that many residents enjoy engaging and connecting with people who are there for a shorter period of time, so it actually bolsters our sense of community.”
She adds, “Most Sentral communities with short-term units are ranked in [J Turner’s] Elite 1% for customer service scores. For example, our Chicago asset with 25% STR units is ranked as one of the best multifamily buildings for customer satisfaction—while driving 15% higher revenues thanks to the STR mix.”
Offering a mix of various lengths of stay can also give potential renters the opportunity to “try out” a community. “Flex rentals can be used as a zero-cost leasing channel for the property. After booking, about 4% of Kasa guests self-report that they are visiting the property because they are ‘considering a move,’” Pedan notes. “Kasa shares both offline and online leasing materials about the property with these guests to increase the odds that they lease at the property. This becomes a very targeted channel for owners to accelerate leasing and let prospective residents ‘try before they buy.’”
Building on residents’ boosted sense of community that Yeh mentions, Pedan adds that STRs within multifamily communities can also create a landing place for family or friends of residents who may not have the space to accommodate visitors themselves.
“Not only do flex rentals not detract from the rest of the community but—when done right—they can create an amenity for the rest of the property’s residents. This is because flex rentals can be used by visiting family and friends as inexpensive accommodations,” Pedan says. “Residents of a Kasa property can host traveling friends or family in the fully furnished and professionally designed Kasa units at their property, offering a more convenient, cost-effective, and comfortable alternative to a pullout couch or a downtown hotel.”
Greystar, who partners with Kasa but also Airbnb for resident hosting, has seen the advantages of allowing its residents to host their spaces through STR programs. Young Hill, managing director, flexible living strategic services, at Greystar, says, “The benefits of hosting include program parameters, oversight for community teams, a revenue share for owners, and responsible hosting in collaboration with Airbnb to deactivate ‘bad actors.’ Additionally, there is a new demand for long-term unfurnished leases from renters seeking affordability by hosting their homes.”
Greystar also has its own network of branded short-term units, ShortStay by Greystar, which ensures the company’s residents convenient access and exclusive perks as they explore the United States. The units range in availability from one night to 30-plus nights, are fully furnished, and professionally serviced in Greystar-managed communities, Hill notes.
Now a little over one year into its collaboration with the Airbnb-friendly marketplace, Hill anticipates that over 300 Greystar properties will become available this year in terms of resident hosting.
Like Greystar, Sentral also offers a mix of STRs and units listed on Airbnb by its residents. Yeh says, “It’s a natural fit for our company, since one of our main differentiators in the multifamily space is our inclusion of high customer service combined with hospitality-inspired amenities like valet parking, concierge services, rooftop pools, high-end fitness centers with group classes, curated resident events on-site and off-site, Tesla shares, and complementary food and beverage offerings.”
Placemakr’s Fudin adds, “Because this mixed-use approach has proven to help owners weatherproof their assets’ income through various headwinds (think COVID), it is likely that this blended approach of furnished and unfurnished units will become the industry standard. Many of us affectionately refer to this blended asset as flex living.”
Operator Concerns
Of course, the horror stories of nonapproved resident hosting still ring in some multifamily owners’ and operators’ ears when considering the idea of allowing residents to rent out their spaces—and guests having access to the community’s often high-end amenities. Before regulations were set, some residents took it upon themselves to rent out their spaces without permission, causing not only trouble for residents, but also their neighbors.
And while the concerns of short-term guests who do not follow community rules are valid, providers like Airbnb and Kasa have set processes to not only maintain the quality of the communities but transparency between the community and its full-time residents.
“Contrary to belief, guests are screened through Airbnb’s platform. Concerns about a constant flow of short-term guests disrupting community dynamics are mitigated by limits on the percentage of residents allowed to host and night limits. A key factor in the Airbnb Resident Host program is that hosts are primary residents hosting their unit ‘part time,’” Hill says.
Airbnb’s Stein adds, “We’ve certainly heard operators’ concerns about safety, overall building sentiment, and STR activity happening in buildings without permission, and we have successfully built a program to alleviate these concerns.”
Safety and security systems echo throughout other STR providers’ protocols as well. Pedan says, “The most sophisticated operators have made significant progress in trust and safety systems, creating value for the rest of the community and in reputation management, and revenue generation systems.”
When selecting a STR provider, Pedan recommends that multifamily owners and operators ask a series of questions regarding trust and safety systems. He shares, “In addition to doing background checks and utilizing decibel meters and ID verifications, ask, ‘Does the flex rental operator also have cigarette and marijuana sensors, predictive risk scoring, and motion and Wi-Fi overusage detection? Does the operator track incident rates, and, if so, how does their incident rate benchmark to others?’”
Outside of direct concerns related to short-term guests, he says it is important to look at how a particular program typically impacts the lease-up and value to long-term residents for the rest of a property as well as the online reputation of a STR provider’s properties. To look at guest review scores, a quick Google search of properties and checking TripAdvisor can paint a clear picture.
Navigating Local Regulations
However, before even approaching the possibility of offering STR units or resident hosting, city regulations can pose some obstacles. Pedan says, in some instances, a regulatory approval process to operate a flex rental is necessary. “These processes can be as straightforward as an over-the-counter license obtainable in a week or a few weeks to a longer process. The longer processes, while more difficult upfront, serve as a deterrent for competing buildings from activating the same program and serve to distinguish a property that activates flex rentals from competing properties in the same city,” Pedan says. “At the same time, cities benefit from the added tax revenue from the occupancy taxes that flex rentals generate.”
He notes that STR or flex rentals can also add to city housing supply because they can help be the difference between a property that is able to access construction debt and equity capital to be developed versus a property that is not financeable. From his experience, he says, “In such a case, allowing a portion of a property to operate as flex rentals adds to the housing stock of a city since a portion of the property operated as furnished rentals allows for the whole property to get built.”
For developers, Pedan says Kasa units typically begin generating cash flow much earlier during lease-up and can generate cash flow in excess of a market rent at property stabilization.
Amid the country’s dire housing shortage, to finance more development through this additional channel is an opportunity that could rise in popularity. However, the newer STR industry has evolved—and will continue to evolve—in its brief time of operation. Stein says, “The pandemic caused a lifestyle shift for millions of people, and suddenly people could travel and work simultaneously. With many still working from home or in a hybrid model, this flexibility is a key part of the Airbnb-friendly apartment offering, allowing renters to take advantage of their flexibility from a monetary standpoint.”
In the near future, Greystar’s Hill says, “The STR or flexible living industry is expected to see consolidation among ‘branded short-term home managers’ due to funding challenges, regulatory restraints around ‘professional hosting,’ and lending requirements. Despite this, the demand for flexible living is not expected to slow down.”
She continues, “Resident hosting is poised to fill a portion of the gap resulting from a lack of supply of STR providers in certain markets. The sharing economy and the rise of digital nomads will continue to influence how the multifamily sector views alternative accommodations.”
While the addition of STR or flexible living options can present various challenges, according to all five professionals in the industry, the benefits of increased income and reduced cash flow risk can heavily outweigh the risks, especially in a time where market uncertainty is prevalent.
Pedan shares, “Flex rentals give owners or buildings access to a growing and not correlated demand segment. Take how they can be used to protect against future new supply in a market, as an example. As new supply gets built, a property without flex rentals will lose occupancy and thus cash flow.”
Yet, STRs and flex living options can provide added protection that is also easily removable if needed. He concludes, “A property with flex rentals can increase the percentage of furnished flex rentals [when a property loses occupancy] and increase exposure to the uncorrelated demand segment. This staves off a reduction in cash flow. Of course, if the flex rentals are not producing enough income, owners can always convert them back to unfurnished rentals. The impact of this is that a property with furnished rentals will have fewer volatile cash flows mathematically, which conceptually means the cash flows are less risky.”
