A recession is coming. It’s not a matter of if, but when.
The degree to which the economic downturn will impact the real estate industry is debatable, although it’s likely to affect all sectors in one way or another. With economic concerns as the backdrop, signs of preparation are everywhere. Retailers are revitalizing brick-and-mortar outposts by creating “experiential” destinations to get consumers into stores. Residential condominiums and office buildings are amenitizing like never before, adding trendy food and beverage options and flexible co-working spaces to accommodate collaboration.
Still haunted by the 2008 financial crisis, multifamily developers and owners are no different. They are looking for stronger, more dynamic models to safeguard their assets before the recession hits. One tactic that scales consistently across broad portfolios, and is beginning to gain mainstream acceptance as hospitality spills over into multifamily, is the integration of short-term rental programs — legally and with proper management, of course. My team is constantly working with building owners, developers and property managers to inform them of our industry, discuss the benefits and share what we’ve learned about exactly what makes for a successful short-term rental integration.
The mash up of hospitality and multifamily has been trending in the news, as both industries align with evolving consumer lifestyle priorities. The merging of the hospitality and multifamily asset classes is becoming more apparent, as “multifamily owners are incorporating more amenities and services into properties to drive occupancy and rents.”
Simultaneously, the market demand for alternative accommodations continues to accelerate globally. In fact, the National Multifamily Housing Council estimated in late 2017 that 65% of one platform’s short-term rental bookings were in multifamily buildings. For owners and property managers, short-term rentals can also offer “the ultimate try-before-you-buy,” according to Bisnow. The opportunity to stay overnight as a short-term rental guest can cultivate interest in long-term resident leases.
On the revenue side, with short-term rentals (STRs) — which have matured to become professionally operated at a national level like a large hotel brand — we can provide a secure, multiyear lease with guaranteed rent payment. This reduces operating expenses for property owners by eliminating the vacancy loss and turnover; reducing marketing, leasing and administrative costs; and capping units under property management (because STR operators assume the care and maintenance of their inventory). Once short-term rentals have been added, I’ve seen assets consistently achieve a net operating income (NOI) boost of 25% or greater. And, with an annual escalation clause, the model continues to become more profitable year after year.
For developers at the drawing board, designing short-term rentals into new construction can provide immediate financial certainty by mitigating the risk of lease-up. By allocating a few to many floors in the new property to travel apartments, developers gain immense control needed to navigate construction loans. And as transaction volume consistently increases among multifamily assets with an STR program currently operating within the building, concerns of value impacts are proving to be unfounded.
Whether or not we see a dramatic downturn this year, it benefits residential developers to continually improve their portfolio performance. If you’ve been sitting on the sidelines watching short-term rentals gain traction and are ready to explore it further, I recommend beginning with these questions:
1. Do you have a new building under construction and in lease-up, or a stabilized property with occupancy below 85%?
2. Is your property in a location that is desirable for leisure travel tourists or business travelers?
3. Are you finding it increasingly difficult to maintain acceptable NOI given operating expense increases, new regulations and/or higher tenant turnover?
4. Do you have a few units, a few floors or an entire building to commit to short-term rentals?
5. Would your tenants benefit from discounted short-term stays within other multifamily properties?
6. Are you looking for new lifestyle amenities that can set your property apart from competitors?
7. Are you intrigued with innovation and wanting to explore the hospitality/multifamily synergies to appeal to modern consumers? Are you interested in immediate, incremental rent roll through add-on options sometimes offered by STR operators?
In the best of situations, the real estate industry will experience a slowdown before long. Multifamily developers can be prepared for the coming recession by exploring new and innovative ways to safeguard and even improve their portfolio performance.