Developers of multifamily projects are always looking for innovative ways to reduce vacancies and improve cash flow. Savvy developers in urban markets with an oversupply of multifamily housing and/or an undersupply of hotel rooms can benefit from a nontraditional tool to accomplish these goals: short-term rentals.

Who benefits in the sharing economy?

Over the past decade, peer-to-peer service providers, like Uber and Airbnb, have used online tools to bring significant change to many established industries. For example, in the hotel industry, business travelers and tourists who wouldn’t dream of staying in someone’s home only five or 10 years ago increasingly are choosing alternative accommodations that feel like a home with hotel-like amenities, such as gyms, pools and concierge services.

Airbnb properties aren’t limited to guest houses, extra rooms, basement apartments and unused vacation homes. According to the National Multifamily Housing Council, nearly 65% of Airbnb rentals are in multifamily buildings.

What are the potential perks for developers?

Developers of multifamily properties can leverage these trends by leasing out blocks of units to short-term real estate operators, such as Stay Alfred and WhyHotel. The strategy helps expedite lease-up, reduce or even eliminate vacancy loss, and amp up cash flow.

That means developers can more quickly pay off their high-interest loans, return equity to their investors and refinance at lower interest rates. The arrangements also slow tenant churn and lighten the load — and reduce the need — for leasing agents.

How does it work?

Short-term rental operators may, for instance, sign 15-year master leases for dozens of rooms in upscale multifamily buildings and convert them into furnished apartments. To make the most of the opportunity, developers should get the operator involved early. That way, the operator can be a partner through the building’s life cycle, from preconstruction to lease-up and beyond.

Operators can share their know-how on design (including layouts, materials and amenities), marketing and other critical issues that might not occur to developers who historically have targeted long-term tenants. For example, short-term visitors generally require less space than someone who will live in a unit. Experienced operators can help you find the happy medium in square footage, between the size of a standard hotel room and a full apartment.

Short-term guests may need more extensive signage when navigating the building. Operators also might recommend you build separate entrances and luggage storage rooms for short-term guests.

The field of short-term rental operators is getting crowded, so it’s important to conduct due diligence before entering leasing agreements. Among other things, look for a proven track record, a solid balance sheet that shows the ability to meet long-term financial obligations, and a clear breakdown of liability between the developer and the operator.

In addition, find out how the operator will service and manage its short-term guests. Will guests have access to a company representative 24/7? Will the operator have an on-site manager to work with guests? Consider asking for information on the operator’s guest screening process.

If you can’t beat them

As the statistics on Airbnb properties show, many long-term tenants already are leasing out their units to short-term guests, with or without permission from their landlords. Savvy multimarket developers are jumping on board now, too, and reaping the many benefits, from quicker lease-ups to higher net operating income and greater stability. Contact an Elliott Davis advisor for more information.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.