Welcome back, for the final article in this 4-part series to provide real-time and valuable information to the multifamily community in an effort to help guide their long-term strategic decisions, especially as it relates to Short-Term Rentals (STR) in a post-COVID world. To recap:
- In Part I, the case was made that the STR industry will look entirely different post-COVID, with many STR operators going out of business and many leases/furniture trading hands.
- In Part II, the case was made that despite this turmoil, travel demand will ultimately rebound, as it always does, and as a result, multifamily STR is here to stay.
- In Part III, the case was made that the sustainability of an STR operator and a multifamily owner are directly linked, and as such, the traditional long-term master lease will be completely redefined post-COVID.
- In this final part, Part IV, we will discuss what safety and security standards our industry needs and why now is the best time to begin this conversation.
Apart-Hotels vs. Mixed-Use Communities
Before I proceed, it's important to distinguish between the two different types of multifamily STR communities: Apart-Hotels and Mixed-Use Communities, because they are often grouped together, but their needs are very different.
- Apart-Hotels: 100% short-term apartment-style units, effectively a hotel.
- Mixed-Use Communities: Usually 5-20% short-term units, effectively an apartment.
Clearly, enhanced security measures such as background screening and noise monitoring are critical in mixed-use communities, where STR guests share walls, common areas, and building access with long-term resident neighbors. But apart-hotels, being effectively hotels, are a whole different animal, with hotel brands like Domio leading the charge. Best to treat apart-hotels as hotels, which I admittedly have no experience running, and focus the remainder of this conversation on mixed-use communities.
The Rise of Mixed-Use Communities
Mixed-use communities vary in use, with buzzwords including co-living, living-as-a-service, travel apartments, STR, hospitality suites, resident home-sharing, and flexible living. But they share the common challenge: managing a wide diversity of occupants, all living together in a harmonious way, with the goal of increasing the property NOI.
On stage at the inaugural FLEX Flexible Rentals Investment Conference in 2019, Steve Lefkovits, Executive Producer at Joshua Tree Conference Group, captured the energy in the room by saying: "Let us recognize that we are at the dawn of a whole new asset class in multifamily."
I caught up with Steve to hear more on the topic. "Homesharing is one key to urban affordability," Steve points out. "When renters can rent their homes, they earn money, which helps them stay tenured in the community. You’re passing on the wealth generation of the property owner to individual renters. It creates sustainability. Owners, managers and residents can all get behind this. We see it intuitively when older people rent out rooms in their homes. That sharing is good for them socially and financially. Why not for everyone who wants it? Where we have failed is focusing on master leasing, which creates financial benefits for the owner and master lessee, but less clearly for existing residents."
Steve also agrees that the digital nomad lifestyle is a real thing and it’s not going away. In fact, Airbnb may be at the forefront when the digital nomad lifestyle hits the mainstream. Brian Chesky, Airbnb's CEO, mentioned during a Skift Livestream recently that he thinks this will be a "huge part of Airbnb," Chesky said, referring to multi-month or “indefinite stays,” with some people opting to avoid rental leases. In fact, monthly stays were already 15% of Airbnb’s business before the pandemic, and are currently at near 50%. This trend may very well be accelerated by COVID when WFH (Work-From-Home) turns into WFA (Work-From-Anywhere).
One might argue that monthly stays on Airbnb are just a means for survival and a passing fad in light of the current travel restrictions across the globe, but I would guess that Airbnb is simply accelerating its play into the long-term rental market in light of COVID (see Airbnb's acquisition of Urbandoor and their investment into Zeus Living in 2019 for context). Their core travel business was forged in the heat of the last recession, proving that consumer habits stick, and this crisis might be the catalyst needed to finally propel Airbnb into the long-term rental market.
A Call for Industry Standards
Mixed-use communities may make sense economically for both the owners and residents, but the bigger challenge remains that most multifamily communities were not physically designed to accommodate this cutting-edge use of space. The STR technology toolkit could be used to help us unlock the utopian, and not dystopian, future for these mixed-use communities. Technology ranging from instant screening to smart access control is already in use today to maximize the safety, comfort, and security of all community occupants.
But technology alone can't manage these new-age communities. We need proper execution and repeatable, reliable operators. Mickey Kropf, former Co-Founder & COO at Rented.com, decided to start his own STR management company Vector Travel based on firsthand experience. Vector is known for going all-in on revenue-sharing agreements while others went the way of the master lease. For all the master lease operators who focus on arbitrage, there are a handful of reputable service-oriented management companies, like Vector Travel, who put an emphasis on the neighbor experience, including standards such as noise monitoring, background screening, and client-facing dashboards.
David Krauss, founder of Rent Responsibly says "The future of the industry will be driven by how the STR industry responds right now. This is a crucial time in our industry. We need to lead within the industry to coalesce and create new standards."
Simon Lehmann, Co-Founder at AJL Consulting shares a similar sentiment, citing a recent Phocuswright study, revealing that the top reason travelers stick to traditional accommodations like hotels is due to safety concerns. "Safety & Cleanliness are the most important standards we need to create."
Proposed Standards for Mixed-Use Communities
To summarize, industry standards, specifically those around safety and security, are not only critical for the well-being and happiness of long-term residents in a mixed-use community, but they are also critical for increasing consumer demand for STRs. It seems that conceptually, our industry agrees here. But practically speaking, who is actually creating and enforcing these standards?
Well, multifamily owners and operators who sign leases or other agreements with STR operators may be in the best position to enforce standards.
If you're a multifamily owner or operator, and you're not already asking these questions to your STR operator or adding these requirements into your agreements, you may be missing a large opportunity to reduce the risk profile at your mixed-use community.
- Criminal Background Screening: Are all STR reservations screened to the same standards as long-term residents in the community? Who is your screening provider? Are you compliant with local fair housing laws?
- ID Verification: How are you verifying their information? How protected are you against fraud? Does the name on the reservation match the name on the credit card or the ID?
- Secure Building Access: Are you providing unique access codes for every stay? Is it possible for past guests to gain entry to the building after checkout? Do you ensure that codes aren't provided until a guest has completed their ID verification and criminal background screen?
- Guest Risk Scoring: Do you have a blacklist to prevent bad actors from coming back? Are you accepting reservations from guests with no or negative reviews on Airbnb? How do you handle local reservations?
- Property-Facing Dashboard: Will you provide a daily occupancy report, or a live dashboard to show me who's in my community at all times? Will this share the guest's screening results, the number of people on the reservation, and guest contact information in case I need it?
- Active Noise Monitoring: At a minimum, do you install Wi-Fi enabled noise sensors in all units? How do you monitor the noise alerts throughout the night? What is your average % uptime for these sensors? Do you set the noise thresholds to match the community quiet hours? How do you calibrate the sensitivity of the sensors?
- Compliance Enforcement Policies: What exactly are your house rules, and how do you enforce them? What happens when a guest is disruptive? Which local security firm do you partner with? Are they on-call 24/7/365?
- 24/7 Boots on the Ground: If any issue should arise, how quickly would your local manager arrive? Are they also on-call 24/7/365? Do I have permission to call their cell phone to wake them up if needed?
- 24/7 Neighbor Hotline: How do you resolve disputes with guests and long-term residents? Is that our job or your job? Do you have a 24/7/365 hotline where our residents could reach out with any issues or answer any of their questions? Do you have a trust and safety team?
- Community Perks: What do my residents get out of this? Do they get discounted stays for friends and family in our community? Do they get promo codes for stays in your other communities? Do you offer to help manage their Airbnb units?
- Insurance Protection: What insurance do you offer besides OTA host guarantees? Is our building listed as a co-insured? What's your per-incident and your aggregate total coverage?
- Certified Staff: Do you hire cleaners in-house? If not, how do you vet your providers? Are you running background checks on your cleaners? What level of training do you provide before they are granted access codes to our community?
A Note on Revenue-Sharing Agreements: Perhaps one of the most under-appreciated values of revenue-sharing agreements is the direct alignment it creates between an STR operator and multifamily owner, as it relates to the balance of risk vs. reward. For example, owners who expect guaranteed monthly rent payments as opposed to a share in the revenue are more incentivized to reduce their STR risk (ie. minimum stay restrictions, minimum price restrictions, and prohibited OTA channel restrictions) at the cost of the STR operator's margin and sustainability. By sharing in both the risk (bad actors) and the reward (revenue), the owners and STR operators can work more collaboratively toward win-win solutions to strike the proper balance.
The Defining Moment
Bill Gates called COVID-19 the "defining moment of our lifetimes." Similarly, the pandemic is also proving to be the defining moment in the early STR industry. Never before in this young industry have we seen so many lease agreements being renegotiated simultaneously. Virtually all urban STR operators are begging for some form of rent relief right now (see Part III), whether it's early terminations, rent concessions, reassignments, etc.
In a moment where most see problems, Aryn Self, Dallas-based attorney at Munsch Hardt Kopf & Harr, PC, sees opportunities. Aryn has negotiated many STR contracts in her career, typically representing multifamily owners and operators.
"This crisis could be an opportunity to sit down and renegotiate. Multifamily owners & operators typically turned a blind eye to operational issues when their STR operators were paying rent on time. But now that the agreements are reopened, they see an opportunity to better enforce the claims that were made when the lease was originally signed."
Aryn specifically mentioned criminal background screening as a common pain point for owners. The process doesn't seem to be as robust as once promised by a handful of STR operators.
Maitri Johnson, Multi-Family Vice President at Transunion Rental Screening Solutions, says "It’s a standard for property management companies to do criminal background checks, so why is it allowable for STR operators to not be held to the same standard? It’s still not widespread enough, it needs to be standard practice."
"In this uncertain environment, trust becomes even more of a currency. Having the confidence and the comfort to know that every reservation has had a background screen gives the owner at least another thing not to have to think about. It’s an opportunity for an STR operator to differentiate."
Paying a third-party like Transunion or Autohost to manage the STR background checks and risk scoring may eat into the bottom line, but there's value in the credibility of these brands. These pioneers are providing the STR industry with the first set of multifamily-approved tools, which is great. But background screening is just the tip of the iceberg.
In summary, our industry greatly needs a set of industry-recognized standards for the safety, security, and comfort of both the long-term residents and the short-term guests. Multifamily short-term rentals are here to stay. As strange as it seems, this could be the best time for multifamily owners and operators to redefine their STR strategy for many years to come.
"One thing COVID is telling us is that we have to stand together closer than we ever did before." - Simon Lehmann, Co-Founder at AJL Consulting
COVID-19 is not the first crisis faced by our industry, and it certainly won't be the last. Multifamily owners and operators are tough and they are resilient. I have no doubt that they will get through this, and when they do, they will come out even stronger on the other side.
To read the full article on Linkedin, click here.