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April 28, 2021

The Evolution of Short-Term Rental and Multi-family Real Estate

Short-term rentals (STR) currently exist and have existed in the realm of multi-family real estate, although overwhelmingly within the world of rental arbitrage. Rental arbitrage is simply an STR operator renting an apartment or house, furnishing the space and marketing the space on STR booking platforms in an effort to make profit after paying rent and operating expenses. An arbitrager never owns the property. Many of the big players in the rental arbitrage space such as Sonder, Lyric, Domio etc…adopt an acquisition strategy of renting out multiple full floors of apartment buildings in urban centers. Rental arbitrage operators run the full spectrum from the big players who operate thousands of units to the new operators who are just coming in running a one apartment listing. The beauty of rental arbitrage within multi-family buildings is low barriers to entry, typically 4K to 5K investment for a one bedroom unit and signing a lease. These low barriers to entry make for a robust market which encompasses operators of all sizes offering supply. In this post we will examine the following questions; Why are short-term rentals and multi-family real estate a perfect fit for each other? What has been the effect of the pandemic on multi-family short-term rental operators? What is the future outlook and upcoming opportunities for short term rentals in relation to multi-family housing?

Why are short-term rentals and multi-family real estate a perfect fit for each other?

The answer here has to do with three different but correlated aspects of the business which are operational efficiency, economies of scale and risk mitigation through multiple listings at one property. The operational efficiency aspect is straight forward, if an STR operator hosts multiple units in one building there is no time wasted by the cleaning team travelling in between locations, all the consumable and cleaning supplies can be left at one central location, as well cleaning checklists and procedures can be standardized because of listing layout uniformity. This all leads to a more efficient operation and better end product.  Economies of scale obviously work for the operators who have multiple listings in one apartment building therefore spreading cost amongst more units making them cheaper to operate. The net effect of this is higher profit margin and more pricing flexibility. Risk mitigation comes with the concept of not having an all or nothing scenario. For example, if an operator has five listings in one building as opposed to one non-shared house listing then the chance the operator has to fill occupancy and bring in revenue increase because the operator can sell some of the units for any particular day, it’s not a zero sum game for the multiple listing operator.

What has been the effect of the pandemic on multi-family short-term rental operators?

The covid-19 pandemic has wreaked havoc on the hospitality industry because of travel restrictions and consumer unease. Rental arbitrage giants such as Stay Alfred and others have permanently closed for business. Many have just cut and run on leases with no personal guarantees, these types of actions have caused landlords and management companies to either disavow doing business with arbitrage operators or rent out the newly vacant spaces to other arbitrage operators. There are many operators who have remained resilient and stayed in business, notably due to good lease structure and lower rental costs. At the time of this post there is unprecedented opportunity and risk for rental arbitrage operators in multi-family. Opportunity is there due to apartment vacancies and risk is there due to the uncertainty caused by the pandemic. All in all the operators who have survived the first few months of the pandemic are positioned well because of hotel closures which have cut supply meeting a higher demand especially from regional and local travelers causing upward pressure on price in recent months.

What is the future outlook and upcoming opportunities for short term rentals in relation to multi-family housing?

Thus far we have been focused on rental arbitrage in relation to multi-family and short-term rentals. The future outlook has more to do with the owners of the multi-family assets self managing the short-term rentals and cutting out the arbitrage middleman. More and more big money investors such as airbnb themselves are allocating funds towards hybrid multi-family STR hotels( Natiivo Autin, TX). While there will always be a place for arbitrage operators there is an opportunity for investors to acquire big and small multi-family assets and convert to STR use. The opportunity comes in a couple of ways; firstly hotel closures (which essentially function as multi-family buildings) can be easily repurposed for STR use and secondly small multi-family apartment complexes (20 units or less) can be used for STR without any onsite staff through automation and self-check in. This hybrid version of multi-family and STR is the natural progression of the industry based on the reasons listed previously in this post. The real estate landscape has changed based on the ubiquity of short-term rentals, modified travel and living habits due to pandemic uncertainty. More and more guests are looking for fully furnished mid-term accommodations to have the freedom to quickly pivot in regards to their living situation. The merger of STRs and multi-family are here to stay causing an evolution within the overall real estate landscape.

Key takeaways;

STR and multifamily are a perfect fit for each other.

The pandemic has weeded out bad operators and solidified good operators.

There are unique opportunities with the use of STR for multi-family.

Thanks for you time and attention

Your Co-Host,

AD1 Management

Anuj Datta

Founder/CEO

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