Could Short-Term Rentals Actually Boost A Building’s Valuation?
For many years, developers have seen short-term rentals as a last resort. If their buildings weren’t leasing fast enough, they would reluctantly begin offering the remaining units to overnight guests as a temporary solution.
But at the offices of Stay Alfred, one of the largest short-term rental operators in the country, phones now ring every day with calls from developers interested in setting aside some or all of the units in their new buildings as permanent short-term rentals.
What changed was the industry’s outlook on valuations. Developers once thought that offering short-term rentals alongside traditional apartments would put a dent in their valuations, but as the model spreads, it is becoming clearer that having a short-term rental operator in a multifamily building could actually boost the building’s value.
“Everyone wants to increase net operating income,” Cushman & Wakefield Managing Director Meghan Czechowski said. “If a building has short-term rental units that throw off more revenue and are less expensive to run than the long-term units, a lot of investors would be interested in that.”
Czechowski studies the new class of short-term rental operators, including Stay Alfred, Sonder and WhyHotel, and she has authored white papers on their impact. While the idea that short-term rentals could boost valuations is not new, she said, the model is gaining traction with developers as they find large-scale professional operators they can trust.
On the surface, the math is fairly simple: Short-term rentals bring in more revenue than long-term rentals. By leasing a few floors of multifamily units to a short-term rental operator, developers and owners are able to lock in market or better-than-market rent rates and boost their top lines.
But short-term rentals can also boost bottom lines by helping to reduce operating expenses. Stay Alfred, for instance, can help to defray the costs of payroll, utilities, billbacks and contract administration, costs that would otherwise fall to the property management team or directly to the ownership group.
Because they occupy a portion of the units in a building, short-term rental operators also reduce costs associated with tenant turnover, including marketing expenses and occupant due diligence.
“It’s fairly standard for a multifamily building to run an expense ratio of 35% to 40%,” Stay Alfred Senior Vice President of Real Estate Mike Wilson said. “The buildings we work with are able to cut that down to about 25%, or even 20% if we take all of the units.”
Czechowski added that setting aside a portion of rooms for short-term rentals can reduce the number of residents a building has to find during its lease-up. Especially as markets become oversaturated with luxury apartments, reducing the lease-up period can be a massive boon, as it means paying off costly construction loans and switching to more sustainable funding more quickly.
Now that Stay Alfred has grown to 33 markets and over 2,500 units, Wilson said the economics of partnering with the company have become extremely attractive to developers. But the numbers aren't what proves to him that developers have changed their minds about short-term rentals. It is the calls.
“They’ll call up and say, ‘We have a project going up in Miami and I think Stay Alfred could be a perfect fit.’ We’ve been getting inbound leads since the end of 2018. We predicted this shift would be coming, but it’s very exciting to watch it actually happen.”
Not only are developers calling more often, they are also calling earlier. Rather than treating short-term rentals as a last resort or a temporary fix, Wilson said, developers are reaching out long before construction begins. They typically ask what Stay Alfred would need in terms of building infrastructure, and are willing to make permanent physical changes to their buildings to accommodate short-term guests.
This change represents not just a shift in economic thinking but a shift in trust. Czechowski said “short-term rental” had once been a nasty term that developers associated with covert Airbnb operations that sapped their revenues and landed them in court. It is only thanks to large-scale professional operators that the term has been rehabilitated.
Wilson said he doesn’t lose sleep when developers decide to work with short-term rental operators other than Stay Alfred.
“Even when developers ultimately chose to engage with a competitor, it’s good for the burgeoning alternative accommodations industry. We’re at a critical moment when CRE professionals are starting to see the value in short-term rentals and embrace them, and we’re all for it.”
This feature was produced in collaboration between Bisnow Branded Content and Stay Alfred. Bisnow news staff was not involved in the production of this content.