The state of STRs and their adaptation


Girish gehani

The perception of the multi-family short-term rental industry has evolved over the years. Before the pandemic, short-term rentals were seen first as a threat, then as a benefit.

Now, recent market volatility has led to a new layer of skepticism about short-term leasing after the failure of several suppliers operating under nationwide framework leases.

Due to the impact of the pandemic, short-term rental platforms have pivoted in a very short time, resulting in changed business models that are more financially sustainable and more flexible for owners / operators. Their resilience in the most difficult financial environment in over a decade shows that short-term rentals are here to stay.

In fact, demand for flexible living options is accelerating even faster and is expected to continue on this growth path well beyond the end of the pandemic. Operators must adapt to meet this demand with short-term rental options, but not without a full understanding of how short-term rentals have changed, what models have survived the pandemic so far, and the importance of bringing in a third party to handle the complexities of short-term leasing. -term rental inventory.

Revenue sharing models

First and foremost, we learned that master lease models come with unanticipated risks. The structure of master leases offered the mirage of pro forma income in the long run, but when each market simultaneously reduced demand and income, master leases proved to be detrimental to owners / operators.

As the main lease providers lost their occupancy, they were unable to meet their long term obligations and subsequently turned over the keys to the owners / operators resulting in loss of occupancy and revenue. The structure also ignored one of the distinguishing features of short-term rentals: the increased cash flow for owners.

Understandably, head lease failures have given short-term rentals a bit of a “black eye” and could create additional reluctance to incorporate the short-term rental inventory into a larger operating plan.

However, not all short-term rental providers have created the illusion of simplicity and stability with master leases. Some have created or adjusted their models based on a revenue sharing structure. A flexible living inventory operating on a revenue sharing model can generate an immediate revenue stream and produce above-market cash flow on already vacant units without tying them up in a head lease. This means that an operator can choose to stop offering accommodation for short-term rental and rent it out instead, without the headache or paperwork.

Owners / operators should also consider the cost of unit rotation, porting and marketing costs needed to find the next resident, the vacancy cost related to downtime required to find the right long-term resident for sign a lease, along with the required concessions and incentives. attract new residents.

This is especially true in an environment where market-rate apartment development continues unabated and Millennials are transitioning to larger-format housing.

Add an ancillary source of income

Short-term rentals operating on a revenue-sharing model can increase the value of underutilized units and assets, while ensuring the overall success of the community. The income stream from short-term rental inventory can compensate for loss of vacancy and help owners / operators improve an asset’s financial performance.

Revenue sharing models can generate revenue on vacant units, as well as new development rentals and underserved suburban hotel markets, and provide an ancillary revenue stream that complements long-term inventory.

If a building’s occupancy rate decreases, owners / operators with a short-term rental model based on revenue sharing can fill a new and pending vacancy and create a floor for the NOI.

This is particularly beneficial for new development communities that are trying to generate rental income or for communities in cities that expect to experience significant new volatility in supply or demand, as it creates an additional layer. financial protection.

Conventional wisdom is to offer large concessions to tenants to rent out a newly developed apartment community. These concessions are often difficult to burn and create challenges in stabilizing a property. Short-term rentals can ease this burden by instead providing above-market cash flow until a community attracts a long-time resident.

With demand accelerating for flexible living options, the short-term rental reservation pipeline has been robust in multi-family communities, allowing owners / operators to rely on short-term rentals as a source of ancillary income.

Tenants’ demand for flexibility is increasing

The demand for short-term rentals is increasing and a new generation of renters want more than a hotel experience. This trend became even more evident during the pandemic. Demand for short-term rentals has exceeded demand for hotels during the pandemic and is not slowing down. Some short-term rentals even doubled hotel revenue per available room during the pandemic.

The preferences of modern renters are changing due to a new remote working environment and the desire for amenities that hotels don’t offer, like a kitchen and washer and dryer. With travel set to increase after the pandemic, owners / operators should note that tenants’ needs for flexible living spaces are changing more and more as people can work remotely.

The new generation of tenants has created a demand for furnished spaces with flexible conditions and operators must adapt to meet this demand. Operators need to recognize that the operational burden of truly flexible accommodations is different from that of traditional multi-family operations, so relying on a third party to help manage short-term rental units alleviates many of these challenges.

Remote working has changed the landscape of accommodation preferences, and tenants increasingly want a flexible lifestyle now that the pandemic has prevented people from living near their jobs. Workplaces have already indicated that remote working will continue after the pandemic. As you continue to work remotely, the need for flexible inventory will only increase.

The current state of short-term rentals is different from that of short-term rentals before and during the pandemic. A revenue sharing model is a reliable and sustainable source of income for owners / operators.

Even in a volatile market, short-term rentals provide financial benefit, generate income, and create an ancillary income stream. New sustainable revenue sharing models offer good opportunities to implement short term rentals with relatively low risk and high rewards.

Girish Gehani is COO for Trilogy, where his responsibilities include implementing asset strategy, acquisition due diligence, construction management and maximizing property value. Gehani also oversees Trilogy Residential Management LLC, Trilogy’s affiliated property management company, where he develops and implements portfolio-wide initiatives.

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