Short-term rentals assure cash to building owners — maybe

Multifamily buildings seeking any possible extra source of cash flow and operators looking to attract a new type of nomadic tenant are adding short-term rentals to their long-term plans.

“In the first days when you can come in right away with furnished rentals in a great location, we can rent 20 or 30 percent of units right off the bat,” said Alex Chatzieleftheriou, CEO of furnished rental company Blueground. Blueground just made two units available at a high-end rental building at the Essex Crossing development on the Lower East Side that can be rented for as short a time as 30 days.

Cities and towns have cut down on short-term rentals via platforms like Airbnb, but the demand hasn’t disappeared, especially among remote workers who can navigate the globe while salaried.

There are early signs that real estate is taking notice and figuring out ways to cash in.

In South Florida, half of the new condo pipeline is for projects where short-term rentals are welcome, even as multifamily landlords have dealt with stalling rents and rising vacancies over the last several quarters.  Nationwide, conversations with multifamily developers about short-term units are now happening earlier in the planning process, or sometimes even midway in the case of a stalled project trying to close more funding, said Roman Pedan, founder of Kasa, which provides tech for and operates hotel-style accommodations in apartment buildings and former hotels. Pedan said.

“The assumptions people made for new properties aren’t as valid as before,” he said. “So if you don’t already have financing, [short-term rentals] can be a helpful lever.”

Extended stay

Chatzieleftheriou spends 10 months of each year in New York City and two in Greece, a story that is becoming less singular with remote employment.

“More and more people have that flexibility,” he said.

At four-and-a-half months, the average stay includes people who may end up staying for a year but don’t want the headache of buying and selling furniture before they head off for their next locations. 

In the U.S., 70 percent of Blueground’s thousands of units are in buildings run by large landlords, who aren’t interested in running the short-term operations themselves.

DM Developments’ Mark MacDonald, who is working on a San Francisco project that might have been termed co-living in the cozy pre-Covid days, said that he expects high-paid tech employees who don’t need to be in the city all week to take a room during months when they have busy sprints, while keeping a family home elsewhere in the Bay Area. 

Developers are generally enthusiastic about extended stay. Hotel brands in the niche accounted for 37 percent of total hotel projects under construction in April and 41 percent of projects scheduled to start in the year ahead, according to the first-quarter report on hotel construction from Lodging Econometrics, which tracks the hotel industry. 

Higher returns

One month in a furnished one-bedroom apartment at The Artisan, Blueground’s Essex Crossing partner at 180 Broome Street, runs nearly $12,000; a six month stay almost $10,000 per month. A renter going directly to Delancey Street Associates, a joint venture of Taconic Partners, L+M Development Partners, BFC Partners, the Prusik Group and the Urban Investment Group within Goldman Sachs Asset Management, who developed the building, would pay between $5,000 and $5,600 for an unfurnished one bedroom on a one-year lease.

Eliminating moving expenses and furniture purchase means this is “still economical” for some, according to Chatzieleftheriou. Costs for moving furniture in and out are relatively low, and Blueground typically signs one- year leases, so if a location isn’t performing, they don’t renew. 

For building owners, the partnership means more rent immediately.

“You can achieve very interesting premiums by designing units in this way,” said MacDonald, who had been building luxury condos and rentals in California when he started “looking at ways to create ground-up projects that would generate higher returns for our investors.”

The shorter the stay, the higher the price per night was his calculation. He hit on the idea for 300 De Haro in Potrero Hill, near where OpenAi and other AI firms have their San Francisco offices. 

He planned for middle-income tenants, small floor plans, nice finishes, lots of amenities and flexible lease terms, hoping together the combination would deliver enough of a premium per square foot to overcome a tough financing environment, he said.

The seven-story 300 De Haro will have about 450 units of about 300 square feet each, with kitchenettes and Murphy beds. Residents can stay as short a time as three weeks, he said. 

As Pedan put it: “It’s not enough to offset the rapid increase in fixed cost, you can’t do much about real estate tax, or insurance, and usually about debt service. But they can adjust operations.”

Building it in

Blueground has some nationwide agreements for new development where we can help them on the lease up, Chatzieleftheriou said, adding that the short terms and furnished units “helps a lot in the early days, when you can come in right away and it’s a great location we can do 20 to 30 percent occupancy right off the bat.”

Pedan had heard about developers, especially in the Sunbelt, who had planned projects but couldn’t get them built with debt costs so high.

“If you take a floor or three and run it as furnished rentals you can generate more money for the owner sooner,” he said. 

“And once a building is complete, then it’s smaller for them to have to fill. Depends on the percentage of the building, there could be a tipping point at which it helps to make the equation pencil — maybe it’s 10 or 20 percent.

“Some deals,” he added, “are so far gone that doing 50 percent won’t work.”

Because short-term rentals can generate money more quickly, they could also serve a purpose when a developer needs to pay back a bridge loan fast.

MacDonald said he has all the permitting and entitlements done and hopes to start construction this year. He was still waiting to find financing for the short-term, shared-amenity San Francisco building as of the early spring. 

“We have seen the traditional multifamily investors, institutional capital looking at this, but they are waiting for the first movers to build these, lease up, exit and show the full cycle what the returns are.”