AirBnB in Multifamily: Friend or Foe?
by Donald Davidoff | October 05, 2016
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.
Screening. I’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!