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AirBnB in Multifamily: Friend or Foe?

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A couple of weeks ago, AirBnB announced its Friendly Building program. By applying to join, multifamily owners can control which units are eligible for short-term rentals as well as terms such as lengths of stay, number of nights, etc. And the landlord will earn 5 to 15% of the tenant’s revenue on any rentals.

Then last week, at the MFE Conference in Las Vegas, I met an owner from Kansas City who was testing renting two units to a small business that placed units on AirBnB. This business was paying a 60% premium for those units on a 12-month lease.

With all of this new activity, I thought it might be a good time to discuss the opportunities and potential challenges with AirBnB in multifamily. There are three ways in which apartment owners can participate in the sharing economy:

1. Allow residents to sub-lease through sites like AirBnB. This is what the Friendly Building program is all about.

2. Allow businesses or individuals who have no intention of living at your community to lease apartments (at a premium) that they will then sell on sharing sites.

3. Participate directly by furnishing one or more units and marketing them for short-stay through AirBnB.

These options each come with their own set of considerations. I’ve sat in on at least four industry conference panels or presentations, and here’s a summary of the concerns that I’ve heard.

  • Liability. The biggest concern seems to be a fear of liability. I’m not an attorney, but my layman’s understanding would indicate this is a much smaller issue than it’s made out to be.

    • For options 1 and 2, the owner is not a party to the sub-lease. A tenant would be responsible for their AirBnB guest the same as if they had a friend stay over to house or pet sit. And in the case of option 2 (or even option 1), you could require higher levels of insurance and being a named insured as a condition for removing the prohibition against sub-leasing.

    • For option 1, AirBnB is offering $1 million liability coverage (and for larger owners may be willing to negotiate on that).

    • If liability is enough of a concern for you, then it’s a good reason not to try option 3. But option 2 gives some third-party distance which reduces the liability risk.

    • There is some truth to the notion that you could be sued anyway, so you would still have to deal with the hassle and cost of defending yourself. Insurance can mitigate the cost. As for the hassle, I would argue that we can get sued almost any time for almost anything, so I wouldn’t let that fear get in the way of a good business decision.

  • ScreeningI’ve heard many concerns about screening. Candidly, I find this a bit odd since we don’t screen guests of residents who stay overnight (or a few nights) so why worry so much about this? And if you do fear this, consider that AirBnB has a screening program of its own including former owner feedback on individual renters. While they won’t disclose the exact nature of the screening, they’re comfortable enough with it to offer the $1 million liability coverage.

  • Sense of community. With the average length of stay in a garden community typically less than two years and at or a bit below three years in urban high-rise, I’m not sure I buy the notion that there’s a strong sense of community to lose. That doesn’t mean residents don’t like us or have friends; it just means the bond is not likely as strong as those with this critique believe. Moreover, as a matter of pure actuarial math, it’s not like every day will have numerous short-term stay guests. With options 2 and 3, you can control how many units are available at any given time; and for all three options, you could create buildings or floors in which short-term stays are allowed and others where they’re not. When you think of it, it’s somewhat analogous to dog policies. Some residents love living in a dog friendly building and some prefer otherwise. I’ve had clients who designate certain buildings or floors to be pet friendly and others to be “no bark” zones. I should also mention that there are many operators who rent to short-term stay providers and/or have their own short-term stay operations.

  • Residents will be upset. I think this is a flavor of the “sense of community” concern. I remember the early days of pricing and revenue management. Many were worried prospects would respond negatively to dynamic pricing. I always believed the public at that time was used to the concept, so it wouldn’t be a big issue; and it turned out exactly to be the case. Similarly, I think the public (particularly Millennials) are aware of the shared economy and won’t really care. This is backed up by some recent research J Turner did for the MFE 2016 concept community. Fifty-four percent of respondents said that allowing residents to lease their units out on AirBnB was either not a factor or was viewed as a positive amenity. Only 25% answered they would “definitely not” lease at a community that allowed this. (Note: I believe a survey like this overstates objections since it’s easy for a respondent to say they’ll behave one way when they’ll really not care, or even notice, when confronted with the actual situation while leasing).

  • Cost and hassle. This really only applies to option 3, so don’t choose that if you’re concerned about this.

So why, you may ask, do I think it’s a good idea to at least experiment with the sharing economy? As a demand management and pricing strategist, I am attracted by the opportunity to segment and optimize a high-yield demand stream, especially given how hard it is to move the revenue needle in our business. This could help us increase average rents and, in some cases, even occupancy for challenged communities.

The math can be compelling. Take the case of the Kansas City community mentioned earlier. Assuming a $1200 average rent and a 6.5% cap rate, that’s $17,280 in incremental revenue and a valuation increase north of $265,000 (on an urban or luxury property with $2000 plus rents, this could be a half a million or more dollars in increased value). Assume a 250-unit community, and that’s the same as a 5bps increase in rent on the entire property coming from just two units.

Lastly, I would argue that this is happening right now anyway. Whether you realize it or not, chances are residents of yours are listing units on these sites today, and have been doing so for a while. While I’m sure something can go wrong (things go wrong every day with our “normal” residents), if the practice created many problems, we’d be deluged with complaints already.

One final note: you may have noticed I left off local laws and regulations as an objection. I did this intentionally as I would never advocate breaking local laws to try this out. So this entire discussion presumes we would implement options only where allowed by local rules.

I’m sure many people in the industry will disagree; but I would encourage you to think about the opportunities. We talk about wanting to be innovative. Here’s a chance to be exactly that!

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  • Sheryl Erenberg

    Great piece Donald. Thanks. This is just emerging as an issue here in Toronto. You've busted all the myths.

  • Thanks for the comment, Sheryl. I'm not sure everyone else will agree :) ...but I appreciate the endorsement!

  • I just talked to someone at Rented.com, and they are doing something similar to #2. They are trying to connect properties who are willing to allow some of their inventory in this fashion to companies who are set up to handle the operations of a short term rental like this. He also mentioned the sectioning off of units for this purpose, which is a really smart idea. I'll see if he would like to chime in.

  • Thanks for sharing that. Hopefully he'll be willing to chime in. The reality, IMO, is that this is going on. We can either resist and be behind the curve or learn. Look what happened when the record labels tried to stop file sharing. They may have succeeded in some places (knocking off Napster), but the wave overcame them anyway. This isn't that big of a deal to MFH, but it still "evolve or be left behind."

    I wonder if, should the WSJ's recent article about rent declines end up being the harbinger of a rental recession, whether many scared of AirBnB and the like might change their tune when they need to find new sources of revenue growth. The bull market has made it easy to sit on the sidelines and still make plenty of money. A recession may shake that up.

  • Mickey Kropf

    Thanks for raising this issue and opportunity, Donald. As Brent indicated, Rented.com has been connecting professional short term rental management companies with multifamily buildings (particularly urban apartment buildings in lease-up) for multiple unit annual leases through our Rented Corporate Leasing program.

    For the multifamily owner or on-site manager, it's an opportunity to lease likely 10-20 units in a single transaction to a professional company that will essentially run everything like a traditional corporate housing company would but with a different end use (i.e. nightly and weekly stays). Our clients pay market rents (not a premium), furnish, pay utilities, and take responsibility for guests and interior property conditions. They are responsible for regulatory compliance in terms of short term rental licensure as well as transient occupancy tax collection. Our platform is free for those with multifamily units to lease because our short term rental management clients pay us for success. Lastly, your normal residents gain an amenity in the form of on-site lodging for their friends and family who would otherwise likely have to stay in a nearby hotel.

    I would recommend against embracing the operation of short term rentals by amateurs/regular tenants, however, due to the myriad safety, compliance, and regulatory issues they're likely to run afoul of over time. Furthermore, the amateurs have less at stake in terms of brand reputation and likely balance sheet risk. With a sanctioned professional management company on-site, you'll actually gain an additional policing force ensuring there are no unsanctioned operators in the building who could be operating in as substandard manner.

    I would also recommend against a multifamily manager or owner without hospitality experience entering the space. It's an increasingly sophisticated industry with unique distribution platforms, revenue management, hospitality and communication needs, staging, cleaning, and maintenance requirements. It's far easier to profit from short term rental by outsourcing to professionals who consume vacancies in the building through corporate leases and are on the hook for compliance with building regulations.

    I'll add a few notes to your already comprehensive subsections here:
    Liability: our clients are aware that resident safety is of the utmost importance, and they take measures to screen guests using services such as SafelyStay.com for instant background checks. They carry liability coverage and require guest deposits and often credit card holds.

    Screening: there are already potential issues with normal tenant guests as you point out, but it is a best practice to have the short term rental manager do background checks on their guests. Again, the manager will be responsible for whomever they place in the building, so your incentives are aligned.

    Community: I agree with all your points and I would add that short term rentals can actually build a new dynamic within a community. Think about the opportunity for residents to meet often affluent, interesting people from other parts of the world on a regular basis within the confines of their own building. It may actually become a positive if embraced in the proper way, such as by clustering the units on a single floor or in a single section of the building if possible.

    Residents will be upset: There is potential for resident pushback to corporate leasing to traditional corporate housing companies, short term rental managers, and even individual residents that do not share the same values of a given tenant. I would say there's always potential for disgruntled residents but if executed properly (i.e. leasing units to a vetted professional management company with standards and good operating procedures), residents can view these units as a new hotel-like amenity at their disposal that can bring interesting new people to the community.

    Cost and hassle: As you point out, this is an opportunity to lease more units more quickly, which should increase the output of onsite leasing professionals. Lease rollover risk is a potential issue that can be mitigated with staggered lease terms or with an ample termination notice requirement (e.g. 90 days notice).

    This opportunity is relevant now in nearly all primary and secondary urban markets as well as some tertiary and destination markets. As the short term rental industry continues to grow, more markets and properties will become relevant. If absorption rates begin to slow, corporate leasing to short term rental managers can be a good means to stabilization. Feel free to direct message me to speak live.

  • Thanks for the post. I think you've added a fourth option to my list of three. Rather than dealing directly with the third party company, work through an organization such as yours that serves as a market maker for those deals. The operator gives up the premium but gets extra backing/support through you and your vetting.

    All this continues to support the notion of being innovative in finding revenue sources. Thanks again!

  • Great stuff, Mickey. Thanks for sharing.

  • Here's an article that will appear in NAA's UNITS magazine this week (Oct issue) about the KC owner Donald mentions in his blog post.

    Apartment Community Agrees to Allow Sublets to Airbnb Operator
    BY PAUL R. BERGERON III
    A Class “A” community in the Kansas City metropolitan area has struck a deal with an Airbnb operator, allowing him to lease 10 percent of its apartments while charging him a hefty rent premium.

    The operator signed a 12-month lease for the apartment homes at the “A” community with an agreement that after 90 days the apartment owner would decide if the operator could expand into other properties within their portfolio.

    The company’s COO, who requested anonymity, says the arrangement has been successful and lucrative for both the property and the practitioner, indicating it is likely the operator will be allowed to expand into other properties in their portfolio when this 90-day trial period is completed in October.

    As part of the agreement, the ownership group rewrote its lease to allow the operator to sub-let the apartments he is leasing, which are located near urban nightlife. This decision to allow subletting is a break from the typical stance that most apartment industry executives have expressed at industry conferences in regard to applying the Airbnb model for its own bottom-line benefit.

    Many who have spoken recently during apartment industry conferences have pointed to concerns about resident screening and the risk of spoiling the resident experience that comes with its community’s culture. They add that they monitor Airbnb use by their residents who, by doing so, are violating their lease terms, which disallows both subleasing and “running a business” through their apartment homes. Management is then choosing to either warn or evict residents who are caught posting their units on Airbnb, a short-term rental website platform.

    “We’ve had no complaints from our residents and no bad incidents,” the COO says. “He’s leased his units for one- to three-night stays, and has filled them for 80 percent to 85 percent of the month.”

    The COO says the Airbnb operator expected to charge $130 to $170 per night for each of his units, which include one- and two-bedroom apartments. The community rents similar units to its full-time residents for between $1,200 and $1,600 per month.

    “The operator came to us originally asking if he could lease more units in our community, and do the same at several of our other properties; he wanted a broader, exclusive agreement,” the COO says. “He offered to pay a 30 percent premium on rent. We charged him that, and then when you take into account the other additional charges he’s paying--such as higher costs for parking and access fees--we’re earning close to a 55 percent premium.”

    Airbnb in September announced greater details about its much anticipated “Friendly Buildings” program (see “Airbnb Shares Details on New Home-Sharing Program”). However, this arrangement at the Kansas City community is not part of that program, the COO says. With Friendly Buildings, owners agree to allow residents to rent through Airbnb and they, along with Airbnb and the resident, each earn a percentage of the income, typically 3 percent to 6 percent.

    “The way our arrangement works, we do not take on the additional risk that arrangement may trigger,” the COO says. “We are named as Additional Insured on his General Liability insurance policy and he has provided proof of additional coverages as well. He also has insurance through Airbnb (as would be any Airbnb host, according to Airbnb’s terms and conditions).”

    The Kansas City area property also does not pay the costs to clean or to turn the operator’s apartments. The COO says that the operator budgets $500 per month, per apartment for a cleaning service. Additionally, the property’s staff does not participate with the “key” hand-off, instead utilizing a controlled-access system that allows codes for the apartment homes to be changed with little effort.

    “If there had been any issues with this arrangement, our residents would have said something or expressed concern about these ‘guests’ who are entering and exiting the community, because it is highly visible activity,” the COO says.

    “[The operator] really has done quite well for himself. He uses this same business model at approximately 100 units in other Kansas City apartment communities. He’s in his early 30s, and he wants to grow his short-term rental business. He is competing against at least one other larger base Airbnb operator in our market. From what we see, he provides very good customer service. He tells me that he thinks he’s undercharging for his units right now while he builds his reputation and increases his market presence. Eventually, he’ll raise his rents.

    “It’s interesting to me that hotels near our community that offer comparable quality living arrangements and amenities sometimes list their hotel rooms at rates lower than what he is charging, but he’s still successful with his business. I think he caters to the type of person who wants to enjoy Kansas City’s nightlife and then go home to their own place and not have to live in a hotel-type culture.”

    The COO says that Kansas City has a strong hotel lobby, adding that ultimately, through its objections, could disrupt this arrangement through regulations, etc., causing it not to work as well as it is.

    “We have language to our agreement with the practitioner that says if the local jurisdictions adjust how they enforce short-term rentals or the tax structure, our deal with him will be terminated with a 60-day notice,” the COO says.

    The COO adds, “Our owners have an entrepreneurial spirit, so they support others in business who possess that drive. They approved this arrangement, and hope it will be able to expand, as the premiums are higher than we would get in the normal market.”

  • terry chili

    Donald, This is the most extensive article I have seen so far on the new program. I have been following Airbnb after interviewing one of ASM's clients, Peter Larson, with Horning Brothers in DC. He talked about how he had used the third option you outlined for a small unit in one property. He was very pleased with the results and is investigating if this would be a good option at other sites in their portfolio. Thanks for the insight.

  • Rich Hughes

    (Views are my own, not necessarily my employers)

    Having talked to multiple large (national footprint) operators, one of which polled its residents, it seems that this is something residents overwhelmingly do not want (This is at odds with your above numbers, but I suggest a creaful reading of the source material*). I have also been told that AirBnB is reticent to remove inventory from its program when request by owners who are not partners with AirBnB

    *From the poll: "One-fourth (25%) answered “definitely not” to living at a community that allows residents to rent out their units for a day or a week, similar to the Airbnb model. Additionally, 21% of respondents are “less willing” to rent at such communities, while another 18% expressed ambiguity, saying they’d be “somewhat willing.” All told, more than 64% of all renters expressed a degree of negativity regarding short-term rentals."

    http://www.multifamilyexecutive.com/property-management/apartment-trends/cost-conscious-what-renters-want-in-the-next-gen-apartment_o

  • Rich,

    3 key points: 1) To get to 64% showing negativity, you have to add "definitely not" (25%), "less willing" (21%) and "somewhat willing" (18%)--not sure how "somewhat willing" is negative as that's like saying "somewhat agree" is disagreeing, 2) the "less willing" is far from unwilling...even counting that as "bad", more than half (54%) don't care or have mild or strong positive feelings and 3) you know that a survey of "intended behavior" is notoriously inaccurate in predicting actual behavior. Questions about any kind of change are highly likely to elicit much more negative reaction that would actually happen. So these numbers are absolute worst case scenario, not likely scenario.

    I remember when we first introduced pricing and revenue management, everyone was terrified that the public would reject dynamic pricing. I'm pretty sure if you did a survey then, the (vast?) majority of respondents would have been "against" landlords changing pricing every day (I can't prove that since we never ran the survey). I believed back then that the public was much more used to variable pricing than those who feared it thought so, and it would be a non-issue. It turned out to be totally a non-issue. Similarly I think the public is much more used the sharing economy...

    My "evidence" to support this is that it is already going on, with and without the operators knowledge. If it was such a bad thing, we'd hear about resident revolts, lawsuits and other terrible results. Instead, I've only heard of positive stories (I include in this both companies actively participating and the many companies I know who don't allow this but aren't enforcing anything while their residents do this under their nose..sort of "don't ask, don't tell" for multi-family).

    My understanding is that AirBnB isn't just "reticent," they WON'T remove inventory that is not in the program. Solution to that is simple. Join the program. Then you could create buildings where it's allowed and buildings where it's not (if you want to).

    One more thought...I can AirBnB my home and my neighbors have no say. Similar if you have a condo unless your HOA prohibits it. So why does a renter care more (or feel they have more of a say) in what their neighbors do than in the ownership side?

  • Richard Hughes

    Donald Davidoff

    I'm not taking a position on the veracity or interpretation of the data, I simply wanted to pass forward the authors interpretation of their own study. (Like you) I'm not a survey fan - maybe we'll flag communities that offer it and measure the long term impact on NOI vs those that don't?

    With regard to "My understanding is that AirBnB isn't just "reticent," they WON'T remove inventory that is not in the program. Solution to that is simple. Join the program." - this feels perilously close to acquiescing to a bully to me, which I'd have ethical concerns with.

    "Similar if you have a condo unless your HOA prohibits it. " - , some HOA's do, and in that case the degree of 'ownership' is much higher than renting.

    I suspect the major concerns outside of resident perception will be:

    1) Is the value share enough? (seems small to me)
    2) Professional re-renters taking inventory and never living there (already a problem).

    Again, all views are my own and I have no strong feelings towards AirBnB either way.

  • There is a "conference call" on Green Street Advisors today at 11 a.m. ET.
    This could net some more comments from owners, etc.
    Discussion with Jaja Jackson on Airbnb’s Multifamily Initiatives

    Please join Green Street Advisors Wednesday, October 19th for a conference call discussion with Jaja Jackson, Director of Global Multifamily Housing Partnerships at Airbnb. Airbnb, an online marketplace that enables people to list and rent vacation homes, recently ramped up their multifamily initiatives to partner with building owners. Dave Bragg and Lukas Hartwich will host the conversation which will concentrate on this new program and implications for the residential and lodging sectors.

    Learn more about Airbnb’s new Friendly Buildings Program or email buildings@airbnb.com.

    Conference Call Details

    Date: Wednesday, October 19, 2016

    Time: 11:00 am ET / 8:00 am PT / 4:00 pm BT

    Pre-Registration Link:
    https://cossprereg.btci.com/prereg/key.process?key=PFTTRJGC4

    Call in numbers: (877) 261 8936 US/ +1 857 244 7414 International

  • Chris Finetto

    Yes, this has been a hot topic in the industry lately and I don't see it going away. For the most part, I agree with Donald in the article above. Doing a bit of research on my own, I came across Pillow (www.pillow.com). I had a couple of discussions with Pillow and their solution is somewhat wrapped around overcoming the challenges. They understand the gap between Landlord / Tenant / AirBNB Guests. The Pillow fellows are working to have a solution for controlling the activity (limiting the number of nights and such) and will have some visibility or vetting of the occupants. I will keep you posted as I learn more and would others to do the same.

  • Chris, Thanks for adding to the conversation. I'm very familiar with Pillow Homes, and they are one of many players worth getting to know. Just to name a couple of others...Blanket Homes and Stay Alfred; and there are myriad other small businesses toiling locally and often (intentionally) under the radar. Each approaches the opportunity in there own way. So lots of experimentation right now though I expect like every new industry it will settle down over the coming years.