Industry experts weigh in on whether these leases are a trend or a blip.
As inflation continues as the latest villain to the U.S. economy, multifamily owner-operators have been watching rosy predictions about endless rent growth continuing to fade. Recent national rent reports from Zumper show a mostly downward trend that began in April 2022. According to the platform, “More than half the cities on our list posted month-over-month declines and 19 cities remained flat, leaving just 20% of the top 100 list with month-over-month increases.”
Some owner-operators are experimenting with adding or expanding flexible lease units which could help boost the bottom line. “We have an interest in making it a component of all of our communities depending on where they’re located, size and style of the property,” said Stephanie Summerall, VP of Sales and Marketing for Vero Sade, based in Houston. “It’s going to be 10% of our inventory eventually. Right now, we’re testing it in Houston with a very small sample size – we have six units and we just put it in rotation in June. It’s doing phenomenally well, so we’re very encouraged.”
Premium Pricing = Higher Expectations
Vero Sade’s flexible lease units are netting rates that are 55% to 65% higher than long-term rentals. The margins are not as large as they appear because the higher rents also include utilities and internet fees. There are also higher turn fees on the units and other things to consider before declaring the experiment a total success.
“You have to think about the operational component,” said Summerall. “You’re changing the model slightly. You might have people who are arriving outside of business hours, so having the technical components in place so people can enter the building has to be worked out. In some ways, you are crossing the multifamily residential environment with a hotel. You have to be intuitive and think about what’s going to be needed by that kind of client.”
Vero Sade partners with online rental platforms to funnel in the short-termers. They’ve also teamed up with a local interior design firm to furnish the units to upscale tastes, but they also offer unfurnished options.
Aaron Cohen, COO, CGI+, based in Los Angeles, caters to flexible leasers, including the digital nomads. The firm compensates by exacting hefty prices for their upscale units. “It depends on the property,” said Cohen. “For our more luxurious properties, you get almost a 100% premium. Lower-end properties are about 25% to 50% or more depending on length of stay.” CGI+’s flexible lease residents tend to skew younger and are more demanding.
“The expectations for the customer service experience tend to be closer to a hotel versus an apartment,” said Cohen. “We have been very happy to accommodate and create the proper customer service experience for these specific stays, but it has increased the need for more personal connections and touches.”
Who Are They?
Vero Sade’s short-term residents are mostly job changers as opposed to the nomadic types. “There are a lot of people relocating to Texas right now and they’re coming from other cities, so they’re not familiar with the various areas of town,” said Summerall. “Being able to find a one- to three-month lease in a furnished apartment gives them a little more flexibility to get the lay of the land.”
Her clientele agrees with findings from Zumper surveys of short-term rental users that highlight who and why residents are looking for not-so-permanent situations. Their research over the past two years indicates that “only 12.3% of respondents said they use short-term rentals for nomad life, while 35.2% said they use them to accommodate a temporary gap in housing.” According to Zumper, “While demand is growing for short-term rentals, there’s ample evidence that this demand is not being met, at least not in the way monthly renters want.”
In addition to transplants and nomads, the short-term market also relies on an old standby: “In areas where we see a higher number of short-term leasers, there are contract workers in the construction industry,” said Brian Grimenstein, Director of Revenue Management at Morgan Properties based in King of Prussia, Pa. “They typically bring their own furniture. In areas that see a greater number of internships, or as the traveling nurse industry increases, these residents often request furnished apartments.” Morgan typically does not offer furnished units but can and does tap local rental firms as needed.
Post-Pandemic
As the pandemic eases, many operators are seeing short-term rentals returning to normal numbers. “Now that we are moving into the endemic phase of the pandemic, companies have increasingly moved to a business-as-usual mentality of work, and government infrastructure building has increased,” said Grimenstein. “We are seeing typical short-term lease percentages that we had prior to 2020. The same can be said for our current residents looking for shorter-term options after the end of their lease.”
During the pandemic, most residents stayed put and paid their rent. “People wanted to lock-in a rate because of cost,” said Erin Knight, President, Monument Capital Management, based in Coconut Grove, Fla. “Now, with rents rising and a bit more financial uncertainty, there is a desire for increased flexibility, even if they have to pay more in the short-term.” Monument tends to favor existing residents when it comes to flexibility as opposed to offering it to new arrivals.
The National Multifamily Housing Council (NMHC) has been monitoring the short-term rental market trying to detect where the trend is going or if it’s even a trend. “Pre-pandemic, some apartment operators saw the demand for shorter-term rentals and added some to their mix where it was possible,” said Sarah Yaussi, VP, Business Strategy, NMHC.
“It wasn’t a huge part of the apartment market, but it was still a strategy some operators were pursuing. Through the pandemic, the shift to remote work really allowed people to capitalize on the flexibility of being able to work from anywhere. For those people who that arrangement worked for, it’s hard to claw back that freedom. There are people today looking for something other than a traditional 12-month lease and it’s creating space for some potentially new models to evolve.”
The Future
Nobody can predict the future with perfect accuracy but NMHC’s research does show one possible route the short-term rental market can go. “We asked about interest in a rental housing membership model—something akin to a vacation club—as part of the 2022 NMHC/Grace Hill Renter Preferences Survey Report and were pretty surprised at the responses,” said Yaussi.
“Out of the more than 100,000 responses to that question, 46% of renter respondents said they would be interested in a membership model and 54% said they would not,” said Yaussi. “I’m not sure we were expecting that close to a 50-50 split. Maybe not all that surprising that there’s conversation around whether a membership model could be sustainable.”
In September 2022, Kastle Systems reported that 54.5% of office workers had returned to the daily grind, signaling more of a return to normalcy. While some operators aren’t seeing much of a flexible lease bump, others detect opportunity. “I think it’s going to grow,” said Summerall. “Our clientele is mostly renters by choice and having the flexibility to move is an incredible luxury for people these days.”
In some market segments, the lifestyle changes launched by the virus are sticking and encouraging flexible leases. “I see it growing,” said Cohen. “Many young [residents] look up to the flexible lifestyle, being able to travel and live wherever they please. Our society is emphasizing experience and happiness more than the old-fashioned way of money and stability.”
“Looking at it as an industry, I think this number may actually be increasing,” said Grimenstein. “Some owner-operators have started to either build specifically to accommodate for this need or have taken several of their units, furnished them and offered them up more as an Airbnb model. This could open several different opportunities and revenue streams, but also presents some major challenges that our properties’ current layout and infrastructure were not designed to meet in a way that would make it a suitable venture for us.”
The possibility of more calamities may also be helping to keep the trend alive. “We believe the current trend is driven by economic uncertainty,” said Knight. “People want increased flexibility, but we believe it is connected to that, and not a continuing long-term trend.”
The question of how popular and how many units can be filled by the flexible crowd is another question. “There will always be a contingent of renters that want or need more flexible lease terms, but how big that segment becomes is unclear right now,” said Yaussi. “I do think that more flexible work arrangements are here to stay for more people than pre-pandemic. I think we’ve seen an evolution in the short-term or flex leasing industry, where there’s more structure, discipline and tools that can make it a better—and even branded—experience for those seeking more flexible living including the property owners, operators and existing residents.”
Scott Sowers is a freelance writer for units Magazine.