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The short-term rental market pre-COVID was considered by many to be a rah-rah business, a “can’t miss” business model and one seemed destined for revenue greatness in apartment management.

Like so many industries during this pandemic environment, lately, it’s gone bust.

Third-party firms that offered white-glove service flashed dollar signs in front of small- and medium-sized owners and managers as well as REITs nationwide.

The potential was easy to identify. Urban centers, particularly during times of major events such as festivals, sporting events, or conventions were a boon to apartment buildings looking to occupy available units at a short-term (one to seven days) rent premium.

Airbnb became more than a brand, it also stood for sublets—illegal ones at that—that would often irk residents enough that they complained to on-site staff about noise, traffic, and uncomfortable feelings. Their “sense of community,” so often used to sell accommodations in so many apartment buildings, began to sour. Many of its press accounts were negative.

Now that COVID-19 has greatly reduced travel of all kinds—leisure, business, and even a weekend getaway—demand for short-term rentals has been squashed.

No one doubts that the U.S. economy—and the travel and event-planning industries as a whole—will recover at some point in the coming 12 months. And when, what could a workable model look like then? Are operators ready to jump back in and try something new?

The apartment industry generally can be counted on to hold two philosophies: a cautious one about trying something new (whether in technology or operations) and an almost-jealous bitterness when it sees its competitors succeed financially, having been rewarded for being the first to “take a shot” at a new revenue stream.

As for the former, many heels are dug in right now. Said the president of one major apartment operator, “There are a 1,000 moving parts with short-term rentals. So, we’re not taking part in that now.”

Donald Davidoff, president of D2 Demand Solutions, says that when travel returns to more-normal levels, these short-term rental-based businesses will reemerge, maybe under new names, new capitalization, or recapitalization.

“We’ll see winners and losers,” he says. “These companies that reemerge should be stronger because they will have the battle scars from the 2016-19 period. All the same debates will come back. Some apartment firms will want to offer this and others won’t.”

For those involved in short-term rentals during the past year, Davidoff says that “right now, they are finding little demand. They might be left with apartment homes that are furnished through previous deals they were involved in. But now—like with any downturn—they are unwinding from any bad deals.

“And if this downturn becomes worse than some imagine, with apartment building occupancy levels falling to the mid-80s, apartment owners will begin to scramble to find ways to get revenue, and some kind of short-term strategy could provide that. You can almost be sure that when this happens, it will be a revenue-sharing model and not a master leasing one.”

Unpacking Past Failures

Niido was the first Airbnb-friendly apartment community concept in which residents would list their units (with assistance from Niido) on Airbnb to earn additional revenue or offset their rent. The Niido model was promising and had shown successful numbers early on for its owners. However, the operating company's CEO ultimately was sued by Airbnb for mismanagement and its two concept properties are no longer in operation.

Expedia’s venture into short-term rentals in 2018 also showed promise early on, but ultimately was mothballed.

Expedia bought third-party short-term rental operators Apartment Jet and Pillow and called its program Expedia Multifamily Group and created its Flexible Living Platform software (or Flex) but struggled to get that part of its business working effectively. In May, the company announced it was “winding down” its Flex operations.

Apartment Jet’s business model was “do-it-yourself” software geared to owners and managers who wanted to operate their furnished guest suites as short-term rentals. Owners soon found out that running short-term rentals was more difficult than they thought it would be and was akin to managing a small hotel. The staff could see as many as 20 pieces of communications with one guest per booking, which taxed its on-site staff.

Pillow’s business model was an attempt to offer “home sharing as an amenity” for owners and managers to offer and allow for their residents to home-share. However, after Expedia’s acquisition of Pillow, its connection to Airbnb was disconnected and left Pillow with limited inbound short-term rental traffic from Expedia.

The largest segment of the short-term rental market in the multifamily space was the “master lease” model used by companies such as Stay Alfred and Lyric. This segment of the market had a flaw in its model that was dependent of the arbitrage between market rents and short-term rental income always being more than sufficient to cover the monthly market rent of each unit.

However, the dip in travel the nation has seen during the pandemic put most of these companies in the red since the short-term rental booking income was less than the rent and the companies didn’t have the cash on hand to float through these dips in travel.

This model has subsequently proven faulty, and owners (many of whom got burned and left with dozens of furnished units that they could not rent) will be hesitant to allow this model to sit on their books again.

That said, this leads the way for updated and enhanced models to prevail. Companies that did not master lease but instead did a revenue share with the owners took less of a hit because both the owner and short-term rental company shared in the revenue reduction. This draws out the timeline for these companies to stay afloat, but if the pandemic continues, these companies will struggle financially.

Coming Out the Other Side

There are rumors stirring that some larger players in the apartment industry space are retooling products to better accommodate short-term rentals within apartment buildings.

Regional operators—some of whom experimented with setting aside a few dozen apartment homes for short-term rentals that they either would manage on their own, or hire a third-party company to take care of them—are keeping their eyes and ears open.

Ever a front-runner in property management trends, UDR has managed short-term rentals in its portfolio in recent years, dedicating approximately 1% to 2% of all units (out of a portfolio of approximately 50,000 apartment homes) to this initiative.

Short-term rental units have been predominantly in coastal or urban markets such as San Francisco, Los Angeles, New York, Boston, and Washington, D.C. The company says it experienced good performance, with premium rents due to demand, shorter lease duration, and to offset various incremental expenses associated with its short-term rental program.

“Short-term rental activity has slowed but not stopped, and the slowing is a function of the current level of demand,” the company says. UDR says it plans to still offer short-term rentals going forward, but it will continue to limit availability to a small percentage of units at select communities and would continue to manage them itself.

Status Quo

RKW Residential’s senior vice president of operations Holly Casper says she only allows short-term rentals through third-party operators such as Sonder, in compliance with local regulations governing short-term and vacation rentals.

“Over the years, we have learned that the only effective way to allow short-term rentals in our communities is through a third-party company that can handle all aspects of leasing, check-in, and turnover. Technology, including smart locks, enable guests to check themselves in and out. That keeps the process from becoming labor intensive for our on-site teams.

“Our policy regarding only allowing short-term rentals through certain operators, and not individuals, has not changed. We do not allow residents to individually sublease apartments.

“However, we have adapted stronger cleaning protocols and encouraged those companies do the same in the units they lease for short-term rental use. We will continue to update them on the current policies as it relates to COVID-19, but in the short term, a stronger cleaning and communication approach is imperative.”

Although short-term rental operators have developed enhanced protocols during the pandemic, RKW Residential requires that operators confirm that each guest has answered ‘no’ to the following questions:

  • Is anyone in your household presently unhealthy?
  • Is anyone in your household presently self-quarantined?
  • Has anyone in your household been medically directed to be quarantined?

Casper says short-term rental traffic did take a brief pause, “but we are seeing some companies start to inquire about resuming short-term rentals as the local government restrictions imposed during the pandemic begin to be lifted.”

Sonder could be one of the short-term rental survivors. It announced in June that it recently closed on a Series E round of $170 million, which brings Sonder’s valuation to $1.3 billion. And in the coming weeks, it expects to raise additional capital from new and returning investors that will bring our Series E total to around $200 million.

The news came from the company’s blog with a headline “The Next Step in Travel’s Future,” and its direct effects on apartment leases is not provided.

Not Worth the Hassle

Depending on the market, government restrictions can be a deal-ender for some firms that have considered using short-term rentals to booster revenue.

Juan Carlos Suarez owns five communities totaling 550 apartment homes in Texas, mostly in the Rio Grande Valley located in and around McAllen, Austin, and San Antonio.

He’s looked into short-term rentals but has found that any lease terms of less than 30 days became a nuisance to deal with and involved local government permit fees and regulations that weren’t worth the investment.

In San Antonio neighborhoods near his properties, there’s a density rule that prohibits two buildings that offer short-term rentals from being within one block of each other. The annual permit fee is $800 initially and $400 each year thereafter.

“There’s no big events scheduled near my properties so demand is not there, anyway,” Suarez says. “Most of my renters are in the oil, technology, and health care industries. I offer monthly leases, and that’s usually attractive to them. I have a few condos and thought about using them for rentals for less than 30 days, but it wasn’t worth the effort and expense.”

Short-term rentals are neither helping or hurting Cortland. The company currently does not permit residents to sublet their apartments, nor does it have any short-term rental programs, other than corporate housing relationships at a few of its communities.

Its chief experience officer Mike Gomes—like many other operators who have observed the short-term rental craze since a few years back—continues his focus on a resident-centric organization.

“Although the conversation around short-term rentals has evolved over the years in certain areas of the commercial real estate market, we have not changed our policies with respect to allowing short-term rentals, mostly to maintain the high standards we have established for our resident and community experience. Another key factor in this decision is the location of our communities.”

Cortland’s investment strategy focuses primarily on the suburbs surrounding high-growth cities,” Gomes said in May.

“With the current short-term rental market largely driven by consumers seeking a place to stay in downtown locations, core business districts, or tourism corridors, the locations of our communities don’t typically lend themselves to the short-term rental market. So, the decision for us not to allow short-term rentals has been pretty straightforward.

“We conduct and participate in extensive research to help ensure the services we provide our residents are meaningful and valuable,” Gomes says. “As part of industry research that National Multifamily Housing Council and Kingsley released in 2019 about renter preferences, in which Cortland residents participated, we saw more residents react negatively to the notion of short-term rentals or actually state they would not rent at the community if we offered short-term rentals.”

Desperate Times

Unemployment and a prolonged economic slump could bring a return to illegal subletting by residents in apartment communities. Desperate to make rent, there could be an uptick in attempts.

“Move-ins have slowed,” Joy Anzalone, COO of Burton Carol Management, says. “We offer a rent deferral program where renters can pay half in April or May and then the rest over a four-month period. We have 6,000 renters, and 73 have applied for this payment plan.”

Her portfolio’s delinquency rate in March was 2.13%; in April it was 5.69%, and in May it was 3.9%.

“We don’t allow short-term rentals,” Anzalone says. “Back in 2016 it was popping up in Michigan. We were really proactive about policing it. In 2016, the Republican National Convention was in Cleveland so it was a big deal. But not right now. But you don’t know what you don’t know.”