Are Short-Term Rentals the Next Niche in Multifamily?
In 2019, multifamily was the top target asset class with 68.3% of investors indicating that they would be allocating investment dollars into one or more multifamily deals during that year. One reason that the multifamily sector is in high demand is because of its increasing diversification. With the growth of niche asset classes such as student and senior housing facilities, co-living spaces, and micro-unit apartments, the sector is gaining the interest of individual and institutional investors alike while driving change within the market and creating additional investment opportunities.
As niche multifamily assets gain popularity amongst investors, a new trend is on the rise: short-term rentals. The short-term rental industry is thriving with an annual revenue of nearly $18 billion in 2018 and a forecasted rise to $23 billion by 2022. Recently, multifamily owners have begun to embrace the short-term rental model created by the emergence of Airbnb. In fact, the National Multifamily Housing Council estimated that 65% of recent Airbnb bookings were made for a multifamily unit. With increasing investor interest in multifamily niches coupled with the rising demand for short-term rentals throughout the nation, could these rentals be the “next big thing” in multifamily?
Read ahead to learn why short-term rentals are taking off in the multifamily sector and how this new niche impacts the multifamily asset class.
What are short-term rentals?
Short-term rentals are fully furnished properties that, unlike traditional multifamily units, are typically leased to guests on a nightly, weekly, or monthly basis. These rentals have become a popular alternative amongst vacationers and travelers because they provide a home away from home and offer in-unit amenities such as lounge areas, a full kitchen, a laundry room, and other necessities not traditionally found when making travel accommodations elsewhere. Additionally, short-term rentals offer more privacy and space at a lesser cost than hotels.
Why are short-term rentals gaining traction with travelers?
The short-term rental space, although not an entirely new concept, has evolved tremendously over the past decade. There are several factors that have prepped the U.S. market for an influx of short-term rentals including changes in travelers’ lodging expectations and an increasing number of yearly business-related travels. Short-term rentals feed travelers’ apartment-grade expectation by providing apartment-style amenities and allowing visitors to be completely comfortable. This trend is most popular amongst Millennial business travelers. In fact, 7 out of 10 Millennial business travelers prefer to stay in local host rentals for reasons that include staying in a unique place, feeling at home away from home, having access to a local neighborhood.
How does demand for short-term rentals impact the multifamily sector?
Reduced Vacancies
With an influx in the delivery of new downtown and urban Class-A apartment buildings during the 2010s, the number of short-term rentals occurring within multifamily facilities grew. To legitimize short-term rentals, there are companies, like WhyHotel, that partner with existing multifamily properties to occupy vacant rooms until full leases are able to be signed. By permitting this type of rental, multifamily vacancy rates can be significantly reduced until a full-time, long-term tenant is found.
Diversified Revenue Streams
To avoid not earning or potentially losing income altogether, short-term rentals can be used as an alternative revenue stream. Apartments and homes in short-term rental markets average between 15 and 22 booking nights monthly with average daily rates from $162-$202. A multifamily property that gets $1,500 to $2,000 per month would only need to book 8 or 9 nights monthly to meet its revenue expectations. Additionally, the average multifamily owner will see 30% more revenue per unit by renting on a short-term basis rather than using the traditional year-to-year rental method. By entering into short-term rentals permanently rather than simply to fill vacancies, an opportunity for more diversification in the revenue stream would be created.
Increased Demand
The short-term rental market is in a state of continuous growth with no signs of slowing down. It is predicted that within the next 3-5 years that there will be a convergence of hotels and homes. As the lines between hospitality and housing begin to blur, the demand for short-term multifamily rentals that meet travelers’ needs will increase. This surge in demand will draw more attention to multifamily properties and create new opportunities to capitalize on the growing housing vertical.
Read The Hospitality Industry is Fighting Back Against the Short-Term Rental Disruptors for more on how short-term rentals are impacting commercial real estate.
