Navigating Multifamily Short-Term Rentals in a Post-COVID WorldBy Jesse DePinto, Co-Founder & Chief Product Officer

As if the Short-Term Rental (STR) world wasn’t complex enough, the spread of COVID-19 has turned the industry on its head, and inevitably, the multifamily world is feeling the impact as the two industries are now inextricably linked.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

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Contents

Introduction .................................................................................3

To Force Majeure, or to not Force Majeure ...........................4

Insult to Injury ..............................................................................5

Accelerated Convergence ...................................................... 7

Is There a Future for STR in Multifamily ................................ 8

Multifamily’s “OTA Moment” .................................................... 9

A Path Toward a Sustainable Future for STRs ....................10

So, What Broke Anyway? ..........................................................11

Beyond the Traditional Master Lease ...................................12

The Rise of Mixed-Use Communities ................................... 14

A Call for Industry Standards ............................................... 16

Proposed Standards for Mixed-Use Communities ............18

The Defining Moment ............................................................. 20

Industry Predictions ................................................................ 21

Final Thoughts ......................................................................... 24

Introduction

There is a growing population of multifamily professionals who are now in tight spots with their Short-Term Rentals (STR) partners, who are sometimes left with abandoned furniture, increasingly forced to make drastic and immediate decisions, and worse, given very little information to guide quickly-evolving STR strategies. My intention here is to provide multifamily professionals of all sizes highly-biased yet well-intentioned content, written from the lens of an STR founder who is also caught in the eye of the storm. My company, Frontdesk, along with all other urban STR operators, are being supported by the multifamily industry right now, so my intention with this content is to give back to this incredibly supportive community in whatever, albeit minimal, way possible.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

Pittsburgh, PA

To Force Majeure, or to not Force MajeureCheesecake Factory, among other prominent retail and hospitality chains, has notified their landlords that they will be unable to pay rent in April. They are using the Force Majeure, or “Act of God” clause in their lease agreements to their defense, claiming COVID-19 as the reason. Yet the verdict is still out on whether the courts will determine COVID-19 as an event significant enough to trigger Force Majeure in real-estate contracts.

Commercial tenants aren’t the only ones missing April rent payments, many residential tenants are also seeking relief after the Federal Government’s eviction ban. The government is supporting property owners financed or otherwise affiliated with government financings like Freddie Mac and Fannie Mae by offering mortgage forbearance, but who foots the bill for the other 35% of mortgages that aren’t given such mortgage relief? The FHFA (Federal Housing Finance Agency) hopes that the private market will soon follow suit, but the asset managers I’ve spoken with just aren’t so sure. Many landlords are getting squeezed and forced to foot the bill while more and more misinformation continues to spread that it’s acceptable for all tenants to not pay rent.

So, how do STR master lease agreements fit into all of this? Well, STR operators are not normal multifamily tenants, and there’s no playbook here. Some STR operators are choosing to invoke the Force Majeure clause, whether it’s in their lease or not. Yes, there is an argument for invoking Force Majeure with STR leases. But there is also an argument for taking a more partnership-driven approach by having a conversation to seek a mutually-beneficial agreement in these tough times, such as rent abatement, deferment, or revenue-sharing. In reality, there is no one-size-fits-all approach because every property is unique in its occupancy potential in both the short-term and long-term rental markets, and every STR operator is unique in their ability to pay rent, retain partners, or even their ability to survive this storm.

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Frontdesk Suite

Des Moines, IA

Insult to InjuryThere is no doubt COVID-19 poses a crippling threat to the lodging industry, among many others. However, it’s important to point out that the STR industry was facing challenges before COVID-19 was on anyone’s radar. Let me explain.

The fuel that grew in the STR market is the venture-backing of many high-growth startup companies. On the heels of Airbnb’s success, a number of clever STR management companies (many of Frontdesk’s competitors) followed in Airbnb’s footsteps by raising their own massive rounds of funding. These management companies looked and smelled like Airbnb, with their high-growth nature, booming industry and their

proclivity to technology. But there was one difference, a big difference: These companies are tech-enabled real-estate companies, not tech companies. The proof is in the profit margin.

After WeWork made a splash with its IPO struggles, private investors scrutinized the plethora of tech-enabled companies that argue for tech-company valuation multiples. Many of these unicorn-bound STR operators, as well as startups in many other industries, were met with similar fates to WeWork: not only were they struggling to raise future financing rounds based on their inflated valuations, but they were actually relying on those future

Frontdesk Suite

San Antonio, TX

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funding rounds to continue growing. They were inherently unprofitable. Any mention of layoffs pre-COVID is a good indicator of the STR operators most at risk of default today.

So, why should multifamily professionals care? We are now reminded in this post-COVID world that any commercial tenant’s ability to pay is not only correlated with the amount of their cash reserves. An STR operator’s ability to pay rent is more accurately a function of their cash runway (Cash Runway = Total Cash Reserves / Burn Rate), especially in a downturn. This formula is important to consider before signing a master lease with dozens of units, because it may lead to STR market saturation,

which leads to compressed margins, which leads to an increased burn rate, and ultimately setting the STR operator up for failure to fulfill rent obligations when the going gets tough. Large balance sheets and massive funding rounds certainly help, but as we’re seeing COVID unfold, the largest players are perhaps the most vulnerable to economic shocks due to their low margins and reliance on VC funding to keep the lights on. In winner-take-all markets with high gross margins, Reid Hoffman’s Blitzscaling technique of growth-at-all-costs makes sense, but in the capital-intensive world of real-estate, the risk of hypergrowth outweighs the reward.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

Fort Worth, TX

Accelerated ConvergenceIf there’s one company that fits squarely in between the hospitality and real estate industries, it’s RealPage®. If you haven’t seen it yet, here’s a link to the webinar that they released, titled COVID-19: Impact on Short-Term Rentals. RealPage is not only the leading real estate technology provider, but they also know a thing or two about the STR space with their Kigo business unit, which was acquired in 2014 and has been rapidly growing ever since. I had a chance to catch up with Daniel P. Bowen, General Manager at Kigo, A RealPage Company, to probe into his mind.

Daniel mentioned on the RealPage webinar that “This black swan event is forcing a convergence of short-term and long-term. These multifamily operators are going to realize that their exposure to these events is larger than they thought.” I asked Daniel to elaborate.

Daniel continued to describe to me the two categories of multifamily STR operators today who are predicted to face two different fates:

1. Professional STR Operators2. Not-So-Professional STR

Operators

Generally speaking, the 80/20 rule applies here as well, estimating that 20% of the STR units managed by not-so-professional operators, or bad actors, are bringing 80% of the harm to the industry. For example, Vice uncovered a nation-wide scam in late 2019, causing both owners and guests to double-check their references. In the multifamily context, these bad actors are the same tenants that are listing on Airbnb, Vrbo and other STR listing sites without explicit permission by their landlord, resulting in lease violations. The professional operators, on the other hand, are not only given explicit permission to operate by the landlord, but they are also the most likely to ensure safety & security standards are implemented by default: Unique lockbox codes for every stay, criminal background checks on all reservations, and 24/7 active noise monitoring and enforcement in all units, for example.

Daniel’s thesis? The 20% of bad actors will likely die off quickly, while the remaining 80% of the more-professional STR operators may survive but not unscathed: They will soon be held to higher standards. The question is, who defines these standards? Let’s come back to that.

“

Daniel P. BowenGM

I think that this event has accelerated the convergence of the short-term and long-term rental industries by probably three years. Everyone in the industry has seen it coming, some have had their head in the sand, and most are realizing this has to happen faster than previously intended. ”

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Is There A Future for STR in Multifamily?So, with a handful of STR operators either going out of business or firmly seeking rent relief during the COVID lockdowns, will multifamily operators move away from their STR partners once and for all? Donald Davidoff, founder at D2 Demand Solutions and a thought leader in multifamily yield management, doesn’t think so.

Donald pointed my attention to the Great Recession where many well-known corporate housing operators sparked negative publicity for not paying rent and leaving landlords high and dry across the country. Well, corporate housing is still alive and well today, and other than Gables and a handful of other ambitious and niche property management companies, most of the corporate housing operations are still handled by third-party operators like VIP & National Corporate Housing. If there is a playbook for the relationship between STR & multifamily operators post-COVID, it would be to examine how the corporate housing giants navigated post-Great Recession in 2008 while keeping in mind the big difference between these two recessions: stocks plummeted in 2020 in a matter of weeks, not months.

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“

Donald DavidoffFounder

Some STR companies will merge or go out of business, creative destruction in the long run. The industry will come back, there’s enough big business behind it. It will suffer and undercapitalized companies will churn, but it will come back. There could very well be another 10-year bull market on the other side of this! ”

Frontdesk Suite

Minneapolis, MN

Multifamily’s “OTA Moment”I believe that the multifamily industry as a whole is currently facing an inflection point as it relates to STR. This could be the moment in history that defines the relationship between these colliding industries. Not only do multifamily operators have more options to choose from in light of their STR lease re-negotiations, but they also have just enough data from the past few years to see how this will really play out in the coming 10-years, in both good times and bad.

So, will multifamily operators finally bring their STR operations in-house? Will they ban STRs in their communities altogether? Or will they pick up where they left off before the world hit “pause” and simply use this learning lesson to beef up their master-lease agreements?

Well, let’s look at the hospitality industry for comparison. Just as multifamily owners/operators have worked with STR operators over the

years to solve their vacancy problem, hotel owners/operators flocked to OTAs (Online Travel Agencies) like Airbnb, Expedia and Booking.com over the past decade to solve the same problem. Hotels operators today will be the first to admit that they are too heavily-reliant on OTAs, but that’s just the way it is in 21st-century hospitality. Rather than avoiding OTAs, hotels constantly work toward diversifying their channel mix and reinforcing their direct-to-consumer brand in efforts to reduce reliance on any one supplier of leads.

So, is multifamily looking at their “OTA moment” head-on or in the rearview mirror? Well, my personal opinion is that the multifamily industry’s opportunity to regain control left the moment that real estate developers broke ground on properties with STR revenue as an underlying assumption for profitability. But that doesn’t mean that it’s too late to take action.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

If multifamily operators haven’t formed a formal STR strategy, now is the time.

- Daniel Bowen, GM at Kigo

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Frontdesk Suite

Phoenix, AZ

A Path Toward a Sustainable Future for STRsWe’re too far in at this point to turn back now and kiss STR goodbye in urban multifamily properties. When your owner complains that the multifamily property you manage is below the average submarket occupancy rate, the excuse that STRs

are a financial and operational risk will likely not hold up as well today. STRs are here to stay. Rather than avoid the disruption, why not embrace it, using it as a tool to outperform your competition?

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So What Broke, Anyway?Before we work toward a sustainable path forward for multifamily STRs, let’s look at what got us into this mess in the first place. If there’s one thought leader who excels at making accurate STR industry predictions, it’s Simon Lehmann, Co-Founder at AJL Consulting and previous board member and/or executive to companies including HomeAway, Vacasa and Phocuswright.

Simon has been arguing for years now that the Master Lease bubble will soon burst. Master Leasing, otherwise known as Rental Arbitrage, is the act of renting a property long-term and then re-renting it on a short-term basis on Airbnb, Vrbo, or other vacation rental listing sites. After WeWork’s IPO struggles in 2019, the industry seemed to finally agree with Simon that Master Leasing is not sustainable, but by then it was too late: VC-backed Master Lease startups like Sonder, Stay Alfred, Lyric, and Domio had already raised many hundreds of millions and were aggressively signing apartment units by the tens of thousands via 1-10 year lease commitments. Most sales teams in this cohort were rewarded based on the number of leases signed with no incentive to sign the more profitable leases. Predictably, soon after, the get-rich-quick real estate copy-cats

followed suit, accelerating the Master Lease model.

Until the Black Swan of 2020 known as COVID-19 reared its ugly head, the multifamily industry was thought to be immune from this foolish spending of venture capital. A Master Lease appeared to be a great deal for the multifamily operator: Guaranteed revenue, high renewal rate, virtually no marketing cost, and liability that is offloaded to the STR operator. But now, in a post-COVID world, the multifamily industry is realizing that when the STR operator feels a squeeze, so do they. According to the WSJ, Sonder “has negotiated more than $20 million in [rent] concessions and hopes for more.” To make matters worse, these STR operators are often the sole tenant of a given multifamily building.

“Simon Lehmann

Co-Founder

Companies like Sonder, Lyric, Stay Alfred, etc. have taken out huge lease commitments. Very few of them will survive, simple as that. None of them can service their debts. This model will disappear just as quickly as it evolved.”

Frontdesk Suite

Atlanta, GA

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Beyond the Traditional Master LeaseSo, if Multifamily STRs are here to stay, but the Master Lease bubble is thought to have popped, what will these agreements look like in 2021 and beyond?

Moving forward, STR agreements must be sustainable to the STR operator, without reliance on venture capital subsidies, in order to also be sustainable for the multifamily owner. We’re seeking a win-win outcome in both good times and in bad.

Here are a few proposed alternatives to the traditional long-term Master Lease:

• Shorter-Term Master Lease Agreement: 12-month or less commitment with a rent guarantee, allowing for units to more easily flex back into the long-term market pool when travel demand dips.

• Undersaturated Master Lease Agreement: 10% cap on STR leases per property with a rent guarantee, allowing for adequate diversity in revenue streams, along with maximizing profitability for each STR unit.

• Revenue-Sharing Agreement: 25-50% management fee with no rent guarantee, similar to hotel management agreements, allowing for shared risk/reward between owner and manager.

• Hybrid Agreement: 25-75% management fee with a 25-50% market-rate rent guarantee, also allowing for shared risk/reward between owner and manager but also providing a guaranteed minimum to show the CRE lenders.

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Frontdesk Suite

Milwaukee, WI

• Technology Services Agreement: 10-25% management fee for all remote management services like dynamic pricing, digital marketing, customer service, screening, access, and security management, where the property is managing the on-site needs like furnishing, cleaning, and lock-outs.

We may very well be moving beyond the traditional Master Lease agreement in multifamily STRs sooner than anyone thought to be possible. In fact, many STR operators today are converting their Master Lease Agreements into Revenue-Sharing Agreements of sorts, at a rapid pace, and that’s a good thing. It’s a win for the STR operator who gets to live

another day by reducing their April-June rent obligations, and it’s a win for the property owners who get compensated for their generosity in the short term in exchange for making above market-rate rent on their STR units when travel rebounds. After all, why would a multifamily owner share in the STR downside without also sharing in the upside?

As Steve Winn, Founder and CEO at RealPage, said during his presentation at the 2019 Flexible Rentals Conference, “It’s only a matter of time before the owner raises their hand and says ‘I want a disproportionate share of this yield’ - it’s coming.” The good news is that most STR operators want this as well.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

Cincinnati, OH

The Rise of Mixed-Use CommunitiesMixed-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 (Net Operating Income).

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:

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 argue that Airbnbb is simply accelerating its play into

Navigating Multifamily Short-Term Rentals in a Post-COVID World

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“Steve Lefkovits

Executive Producer

Let us recognize that we are at the dawn of a whole new asset class in multifamily.”

* Mixed-Use Communities: Usually 5-20% short-term units, effectively an apartment. Compared to Apart-Hotels: 100% short-term apartment-style units, effectively a hotel.

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.

I think [monthly stays]will be a huge part of Airbnb.

- Brian Chesky, CEO at Airbnb”

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Frontdesk Suite

Jacksonville, FL

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

St. Louis, MO

A Call for Industry StandardsMixed-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.

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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.”

“Mickey Kropf

CEO

We strive to be a good steward of the asset and a good neighbor to the residents.”

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

Columbus, OH

Proposed Standards for Mixed-Use CommunitiesTo 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?

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?

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?

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Navigating Multifamily Short-Term Rentals in a Post-COVID World

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.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

St. Paul, MN

The Defining MomentBill 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, 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.

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.”

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.

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Navigating Multifamily Short-Term Rentals in a Post-COVID World

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Aryn SelfAttorney

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.”

“

Maitri JohnsonVP

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.”

Industry PredictionsAs hard as it is to predict the future amidst such an uncertain time, it is fun. So please, humor me here.

1. Many leases will trade hands, and some landlords may even insource their STR operations. If massive layoffs and closure of units are any indication, it’s likely that one of many of the STR behemoths will go out of business, merge, or become acquired as distressed assets. Airbnb may even be one of the buyers. The STR market has been ripe for a private-equity-style rollup given how fragmented and regional this service-oriented business is. So, what happens to all of that furniture in units that aren’t included in an M&A roll-up? Well, either it will be sold as pieces, moved into storage, or left with the property as

collateral. Many landlords will have both the blessing and the curse of inheriting fully-furnished apartments, as a subtle memory of those one-trusted, and now insolvent, STR partners. They could choose to rent the unit as-is as a long-term furnished apartment, but in reality, most dense urban markets will have more supply than demand for long-term furnished leases. Alternatively, they could choose to dip their toes into STRs by offering mid-term furnished leases, or they could choose to go all-in and use a tool like ApartmentJet to self-manage the STR units, especially if they have reason to believe there is a high-profit potential.

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Charlotte, NC

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2. Flex Rentals will be the new Short-Term Rentals. As with any Darwinian environment, the STR operators who can best adapt to the post-COVID world will have the highest chance of survival. Furnished apartments can easily be advertised as weekly or monthly rentals just as easily as nightly rentals. We are already seeing an incredible amount of STR units that are now hitting the market as medium-term rentals and, as such, tenants will form new apartment-hunting habits. Not only will they add Airbnb to their search along with Zillow and Apartments.com, but they will also come to understand that there are financially-viable options other than signing a BYOF (bring-your-own-furniture) 12-month apartment lease. Given the uncertainty in the world, they may pay a higher rate to have the flexibility of a month-to-month lease. Once they experience the low friction and instantaneous nature of booking an Airbnb monthly rental, the pressure for multifamily property managers to up their technology game will continue to increase (See “Virtual Leasing” for example). Airbnb and Zillow will

also compete for this emerging market between hospitality and real estate, advertising more aggressively for mid-term rentals.

3. Revenue-Sharing Agreements will outnumber Master-Lease Agreements with Urban STRs. Many STR operators saw the writing on the wall post-WeWork but pre-COVID. We, as an industry, recognized the inherent risk associated with guaranteed rent payments. Coworking startups like Industrious came out during the WeWork struggles, singing the praises of their revenue-sharing/management-model agreements, as they are more resilient in any future expected economic downturn. Venture Capital will likely now flow more to the sustainable and resilient startups, and therefore the multifamily industry will likely have more pressure to move away from master-lease agreements. After all, the multifamily property owners are already sharing in the downside with the onslaught of STR lease rent abatements and deferments happening now anyway, so why not share in the upside as well?

Frontdesk Suite

Kansas City, MO

Navigating Multifamily Short-Term Rentals in a Post-COVID World

4. Digital Nomads will go mainstream. Yes, travel could very well have a slower rebound than the rest of the economy, and yes, business travel will likely take even longer to catch up, but there is also a whole new category of travelers emerging: The Digital Nomad. Working from home will no longer be a perk, it will be a requirement for any company seeking to attract high-demand tech-savvy employees. This newly-found freedom that today’s knowledge workers will find will propel the trend of digital nomads who can keep up with the demands of a legitimate career while living life on the road. To appeal to these Digital Nomads, apartment leases could bend either in the direction of T-Mobile (no commitment, flexible terms) or ClassPass (long-term commitment to a network of apartments across the world, not just one. For example, see Landing).

5. Airbnb will come out ahead. While STR revenue fell off a cliff in Q2, the demand did not go anywhere. Travel will eventually

rebound, it always does, whether it’s via V, U, W, L or my favorite, Nike-Swooshed-shape recovery. Booking Holdings (-17%), Expedia Group (-40%) and other OTAs experienced massive drops in valuation over the past month, along with Airbnb who just raised $1bn “in a combination of debt and equity securities.” Wall Street Journal wrote on April 7, 2020 that the $1 billion recent investment included debt at a 10% interest rate and “warrants that can be converted into shares with a valuation for the company of $18 billion.” Airbnb may be wishing they went public in 2019 now, and they have upset many hosts with their liberal COVID-related cancellation policy, but they are successfully continuing to raise money and they are winning over the guests and the public with a trusted consumer brand. Ultimately, the host community will follow wherever the travel demand is found, even if they do so begrudgingly, assuming Airbnb can quickly pivot into the long-term rental market to continue delivering leads to their host community.

Navigating Multifamily Short-Term Rentals in a Post-COVID World

Frontdesk Suite

Cleveland, OH

Final ThoughtsIn 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.

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.

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”

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Frontdesk Suite

Scottsdale,AZ

About FrontdeskAt Frontdesk, we value safety, security, and comfort above all. We’d love to be considered your trusted short-term rental partner at your multifamily community or organization.

Founded in January 2017, Frontdesk is a tech-enabled short-term apartment rental startup based in Milwaukee, WI with over 500 suites in 28 cities across the United States.

We are the preferred STR partner in over 100 apartment communities and trusted by top NMHC Managers. Our multifamily offerings range from white-glove to white-label.

Learn more about us at: www.stayfrontdesk.com/partner

Want a free consultation? jesse@stayfrontdesk.com

Disclaimer: The content here is for informational purposes only, should not be taken as legal, business, tax or investment advice or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any company that is mentioned here.