Short Stays: Why Temporary Rentals Are Becoming a Permanent Solution
- Aug 08, 2017
The number of freelancers, temps, independent contractors and entrepreneurs is on the rise. According to the U.S. Bureau of Labor Statistics, such individuals will constitute 40 percent of the workforce over the next five years, up from 30 percent today. This means more people traveling, creating businesses and otherwise in need of quick space solutions. Whether office locations to house their workflow or apartments to rent during their travels, temporary rentals are growing in popularity due to their flexibility, convenience and affordability.
Thanks to companies like WeWork, coworking is changing the way businesses operate, expanding location options to include nontraditional alternatives such as shared spaces. In many cases, these coworking spots will be filled by strangers, working side by side for unrelated companies. This movement is challenging traditional office spaces by offering a more open and collaborative environment. According to a 2015 MBO Partners Report, by 2020, the number of independent workers in America is expected to grow from today’s base of 30.2 million to roughly 37.9 million, which includes both entrepreneurs and larger company employees, whether full or part time. Demand for coworking spaces in major markets like Chicago, Atlanta, New York, Los Angeles and Boston is skyrocketing as employers seek to branch into new locations or start businesses and individuals search for alternative work environments for a better work-life balance.
Although this creates a huge opportunity for building owners, they need to plan ahead to determine whether offering short-term rentals will work for them. Most long-term leases require a minimum five-year commitment. But with short-term rentals, most leases are month-to-month, and the majority don’t last beyond a year, making the agreement much more transactional. Owners need to be equipped to operate in this new type of environment.
“Typical owners know they are not cut out for handling these short lease terms. It’s not just a one-time transaction that is set up for years. There are day-to-day tasks and challenges that you have to deal with when offering these short-term spaces,” said Mark Hemmeter, CEO of Office Evolution, a Colorado-based office rental service provider with 111 locations. “It’s very similar to how a hotel operates. You have smaller self-branded ones, but a large majority choose to join a brand because they understand that ownership is different than the operation.”
These individual operators handle services such as the onboarding process for tenants, learning about the clients’ business and employees, giving them access to the buildings and Internet, and coordinating the amount of space needed to be leased. By partnering with service companies such as Office Evolution, Spacegrab, WeWork or Regus, both building owners and company owners can try out short-term rental agreements.
“For building owners, they can lease these short-term spaces in order to maximize occupancy rates rather than getting stuck with downtime in searching for another long-term deal,” said David Hay, founder of Spacegrab, an online marketplace that allows leaseholders to sublease or assign a space before the lease term expires. “For business owners, this option gives them the opportunity to be able to lease from a coworking company or take over a lease or sublease space that is available.”
The hotel operations model provides advantages for office workers, too. Offices in North America offered 176 fewer square feet of personal space in 2012 than they did in 2010, according to CoreNet Global. Short-term rentals, whether of a fully leased space or an individual desk unit, reduce the search for isolation, improving the work experience. The configuration of most coworking spaces provides two areas: public space and private space. Public spaces, much like the lobby of a hotel, include the reception area, kitchen and conference lounges. The private spaces are smaller offices, much like the guestrooms in a hotel, in which tenants can set aside time for phone calls, presentations and other work that benefits from a quieter setting.
Many of these lease operators are also offering amenities to their tenants, creating a comforting workspace that doesn’t really feel like an office. WeWork, which currently operates in more than 140 locations in 15 countries, features amenities such as daily cleaning, bike storage, office supplies, social events, package handling and freshly brewed coffee. Along with 24/7 access to any of the facilities around the globe, servicers like WeWork and Office Evolution are providing more than just an office alternative—they offer an alternative environment.
Interest in short-term rentals may be growing in the office sector, but the response from the multifamily industry is less welcoming. Results from a recent NMHC survey about home sharing found that 96 percent of participants do not allow units to be listed as short-term rentals. And 52 percent said they are not aware if their residents are doing so.
The pushback comes from the large amount of concern associated with not knowing who is occupying the apartment at any given time. There are procedures for tracking this, but many building owners and managers just don’t have the time to implement them.
“You need to keep track of your local regulations, check the language in leases to see whether this is something that could even be allowed, and be aware of the impact this will have on your current residents,” said Rick Haughey, vice president of industry technology initiatives at NMHC. “The majority don’t like the idea of their neighbors renting out apartments. They don’t want to be put at risk with who is coming in and that creates exposure on the liability end of things. Some companies will be held liable for what their residents are doing and if something happens in one of those units.”
Among respondents to the NMHC home-sharing survey, 42 percent said they would not consider participating in a program that offers short-term rentals, citing as the top three reasons safety issues, liability and insurance, and quality of life concerns and neighborhood dynamic.
The Airbnb model
At the same time, Airbnb’s revenue is projected to be as much as $8.5 billion in 2020, according to Fortune magazine. Already, the annual number of guest arrivals is close to 80 million, up from 40 million in 2015, helping to push the cumulative number since the company’s founding to nearly 160 million.
As the company strives to expand further, it is addressing building owner and manager concerns. Two years ago, it debuted its Friendly Buildings Program, through which it partners with owners and managers to permit residents to lease out their units. The contract outlines each participant’s responsibilities within the program, and Airbnb works with the management team to share implementation information with the current residents, getting their feedback as to how the program should operate in the space and then turning on the amenities for residents so they can home share.
Jaja Jackson, director of global multifamily housing partnerships for Airbnb, listed four main concerns for building managers, concerns Airbnb aims to address:
- Transparency: “The building managers need to be able to see what home-share activity is taking place in the building or get an indication of when and by whom.”
- Control: “They need to be able to see what’s happening and create guidelines consistent with local law and building rules and regulations guests can understand.”
- Insurance: “They need to know that any damage can be remedied through an insurance channel and that managers don’t need to deal with these issues out of pocket.”
- Profit Share: “Management feels it’s fair that the building receives a financial benefit if facilitating residents to host.”
More and more people are recognizing home sharing as a way to travel and experience a neighborhood. As a result, more people are using the platform. At the same time, residents don’t want their entire neighborhoods turning into “hotels.” As of today, the Friendly Buildings Program covers more than 10,000 units within the United States and Canada. The company opened its first building in April 2016: Equity Residential’s 99 Vista in San Jose, Calif.
Jumping on Board
Before getting started, those apartment owners and managers that, like the 24 percent of NMHC survey participants, are interested in pursuing home sharing need to ask themselves a few questions:
- Should we lease the property ourselves or get a third party to handle it?
- Are short-term rentals going to produce a better return?
- What percentage of units should be available for home sharing?
“There is a learning curve involved in this,” noted Mickey Kropf, co-founder & COO of Rented.com, a marketplace for short-term multifamily rentals that are run on a third-party basis. “Most of the time it works as a corporate leasing model: You get a certain amount of units in a single transaction, and it’s the servicer’s job to fill those leases. If you work with a partner then you get the added security of knowing these residents will be screened, are given background checks, are compliant with local regulations, and you can track who’s coming and going through on-site management.”
If done correctly, Kropf says there is a lot of potential for short-term rentals to be a long-term option in the multifamily industry. Renters may be residents using short-term rentals to manage their travel, entrepreneurs that don’t have a brand yet and are traveling to meet with clients across the country, or multi-billion-dollar corporations that see an opportunity to lease units on a long-term basis to these online platforms and bring in residents in multiple cities at a higher rate.
Originally appearing in the Mid-Year Update 2017.