The popularity of short-term rentals continues to rise among hosts and guests alike. Today, Airbnb boasts more than 5 million listings and has reshaped both the real estate and hospitality markets, earning it third place on CNBC’s 2018 Disruptor 50 list.
As the short-term rental industry has expanded, multifamily investors have benefited from a lucrative means for increasing revenue per unit. At this late stage in the investment cycle, with multifamily assets trading at record highs, investors are seeking creative strategies for increasing income to maximize returns — a furnished short-term rental strategy is one such approach.
Renting units on a short-term basis requires more intensive management and implies higher vacancy risk than the typical 12-month lease business plan. That said, submarkets with more transient demand — think tourist destinations, hubs for business travelers and higher education institutions — are prime locations for this approach. Proof of this strategy’s effectiveness, roughly 65 percent of booked nights in short-term rental properties occur in multifamily buildings.
Short-term rentals in Connecticut
Airbnb reports that 6,900 guest stays earning nearly $2 million were logged across Bridgeport, Danbury, Greenwich, Norwalk and Stamford from November 2016 through October 2017, with Greenwich and Stamford ranking in Connecticut’s “top 10” for the time period.
Nearby New Haven, which is home to Yale University and a health sciences population, brought in $2.2 million from 15,000 guests in 2017, making it Connecticut’s largest Airbnb market.
With demand for traditional 12-month multifamily housing driven by the local workforce, and demand for short-term furnished rentals driven by students, business travel and tourism in these markets, multifamily investors may take advantage of dual strategies to increase income and maintain strong occupancy rates on well-positioned assets. Absent this potential income growth, current pricing for value-add Class-B and Class-C assets may appear less attractive to income investors. As always, the market must incentivize investors to take the financial risks and make the capital improvements necessary to bring desirable housing units to market.
The Hudson Valley
While reports indicate more than 3,000 new apartment units opened in Westchester County during 2016 and 2017, demand is still outpacing supply. The number of new units coming online is projected to soon reach as many as 2,000 per year in an effort to meet demand from locals and those who have been priced out of New York City.
In neighboring Dutchess County, which receives more than 4.75 million visitors annually, short-term rentals have impacted the tourism industry. Airbnb bookings in Beacon rose by a reported 62 percent in 2017, while Realtors note communities such as Millbrook and Rhinebeck are also desirable.
Not only landlords benefit from offering short-term furnished rentals via Airbnb and other online platforms. Many tenants are also inclined to offer their individual units for short-term stays, although this practice is more popular with younger renters. The National Multifamily Housing Council’s 2017 Renter Preferences Survey found nearly half of apartment renters under the age of 25 (49 percent) were interested in the opportunity to generate income through short-term rentals, compared to only 15 percent of renters age 65 and over.
Affordable housing advocates complain about market distortion caused by the growth of short-term rentals offered via online platforms. They maintain that when landlords set aside units for short-term use, they leave fewer units available for workforce tenants on 12-month leases. While some municipalities aim to regulate the short-term rental industry in the hopes of maintaining access to affordable housing for residents, advocacy groups such as the Real Estate Board of New York (REBNY) are encouraging officials to establish policies that are equally friendly to landlords and tenants alike. For example, as New York City strives to establish a central database of short-term rental properties, REBNY has suggested this data be made available to property owners so they can control illegal activity within their own buildings.
That said, government regulation might be seen by investors and tenants alike as an unconstitutional restriction on individual property rights. Property owners who choose to rent their property on a long-term basis or as a short-term rental both have the same protections under our constitution.
“Short-term rentals and other aspects of the sharing economy are examples of technology-enabled innovation that have been good for consumer choice. It will be bad for everyone if cities and states thwart those strong ideas through the blunt force of regulation,” said Patrick Tuohey, director of Municipal Policy at the Show-Me Institute.
Edward Jordan is the founder and managing director of Northeast Private Client Group, an investment real estate firm with offices in White Plains and Shelton. He can be reached at email@example.com.