by Roman Pedan
Apartment owners might be skeptical of short-term rental companies—after all, several of them went belly-up during the pandemic. But the reality is that while the short-term rental providers operating under master lease agreements struggled, others developed uniquely sustainable business models that proved their resiliency under the most difficult conditions in a century. These providers are now thriving, offering tremendous revenue potential for owners and operators.
Here are a few reasons why:
Working from home is here to stay
Many companies have announced plans to increase employee access to remote work or make remote work permanent. As a result, employees increasingly feel unconstricted by geography. They are blurring the distinctions between work and travel and seeking ways to live with more geographic flexibility over the long-term. Spending a couple of months in Denver in the winter, spring in Austin, and summer in Chicago, for instance, might be a kind of planful nomadism that people increasingly embrace. Multifamily communities need to adapt their offerings to this accelerating base of demand. Apartment communities that don’t offer a flexible, furnished option could be left behind.
The revenue-sharing short-term rental model offers upside while protecting the downside
Pre-pandemic, several short-term rental companies operated on a master lease model, which seemed low-risk to many multifamily companies. But those master leases proved to be toxic financial instruments for both parties once demand and revenue plummeted in every market simultaneously. Owners were left with units that were vacant and not monetizable for months on end. Short-term rental providers operating on a revenue-sharing model, however, were still remitting 90-95% of market rent, far superior to the alternative of vacancy and uncertainty. Kasa, for example, has been able to deliver 140% to 200% net effective rent across a diverse set of buildings in multiple markets.
Short-term rentals allow flexibility, which reduces risk
Short-term rentals can deliver above market cash flow. If short-term rentals are not performing well, owners always have the option to convert them back to multifamily homes for rent. The worst they can do in a short-term rental revenue share agreement over the long-run is the same they would make from multifamily income. Conversely, if traditional multifamily occupancy drops, owners who have implemented short-term rentals can easily backfill that space with short-term rentals. These agreements can also better adapt to changes at the community, and revenue-sharing contracts have the ability to change the unit mix to best suit the property needs and help with leasing. Ultimately, short-term rental income is inversely correlated with multifamily income, creating a more diversified overall cash flow for the asset. If multifamily income goes down, short-term rental income likely will go up (and vice-versa). This balancing act creates cash flow stability.
Owners need a hedge against low yields, demographic changes, and new supply
There are macro reasons for multifamily companies to consider mitigating their risk. The combination of record new supply, a reduction in the size of the echo-boom renter demographic, and low yields on apartment purchases, means the waters we enter may be rocky. The multifamily industry will no doubt continue to thrive, and short-term rentals are here to help: they provide a hedge against potential occupancy drops while simultaneously offering upside through above-market cash flow.
Short-term rentals are proving to be resilient—operators who have begun to emerge from the pandemic have demonstrated their staying power through this once-in-a-century storm. The demand for flexible, furnished rentals is accelerating, and as direct bookings continue to increase, it’s becoming more obvious that short-term rentals are the solution people prefer. Owner-operators need to embrace the shift in living preferences while seizing the opportunity to generate more revenue.
Categories: Apartment Leasing, Short-term rentals, Thought Leadership
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