By: Jacky Cheng
As we approach the two-year anniversary of the start of the Covid-19 pandemic, it is important to recognize how quickly society has adapted to new work routines and in turn how that has impacted certain areas within the real estate market. With the significant migration from metropolitan to suburban and rural areas, the office and retail markets have struggled, requiring many investors to get creative in how they capitalize on the distressed opportunities. Additionally, working from home has increased the demand for single and multifamily properties. In turn, residential housing prices have skyrocketed, leaving many hopeful homebuyers unable to afford homeownership. As a handful of employers start to welcome their employees back to the office, there is one pandemic trend that is here to stay: the demand for flexible and short-term apartment and single-family home rentals.
Most US workers were not traditionally accustomed to working from the comfort of their own homes. However, due to the stay-at-home restriction during the pandemic, many workers started to utilize short-term rentals in more remote locations. With the uncertainty around when people would be able to return to the office and the risks associated with densely populated metro areas, many employees fled major cities. An astounding number of professionals took the opportunity to experience a nomadic lifestyle, living in a new place every month. While hospitality struggled due to sanitary concerns and regulations, short-term rental demand increased exponentially, leaving Airbnb as the big winner. Because of Airbnb’s business model, they quickly adapted to the changing landscape and were able to offer “covid proof” lodging accommodations that traditional hotels couldn’t compete with. Although many workers are returning to their normal commutes, housing companies are predicting that 20% of workers will continue to work remotely. That 20% represents about 36 million workers, leaving a significant market for short-term rental accommodations. These short-term housing companies are betting that renters will ditch the traditional 12-month lease if a more convenient and flexible alternative is available. That is why companies such as Blueground, June Homes, and Landing are expanding into new cities and adding thousands of units to their platforms. Even JLL and Brookfield want a cut of the pie through strategic partnerships with companies specializing in short-term rentals.
Companies like Blueground, a New York City-based apartment rental company, were able to raise significant capital. Blueground raised $140 million in September 2021. Although Blueground had setbacks due to the pandemic, they are still planning to aggressively expand to 30,000 units by 2025 from the current 5,000 units. The pandemic has accelerated the trend that Blueground relied on: flexibility. The financing that Blueground was able to obtain given the current circumstances was extremely attractive and provides support for the growing market trends in short-term rentals.
Looking at future trends, new demand for short-term rentals will return to the cities according to AirDNA predictions. As vaccines are distributed and attractions reopen, urban travel is expected to begin to recover in early 2022, with urban demand exceeding 2019 levels by 2023. Urban rentals could rebound even quicker than anticipated if business travelers opt for private accommodations, rather than traditional hotels. As the US reopens its borders to international travelers, demand in once highly sought-after urban markets, such as New York, San Francisco, and Miami, will rebound and likely exceed pre-pandemic levels. The increasing demand for short-term rentals will bring in thousands of new hosts, allowing more and more people to stay in short-term rentals instead of traditional hotels. This would create an opportunity for investors to meet the demand by supplying more short-term rentals, whether it is in the suburbs or in mid to large cities.
Unlike hotels, extended trips will become more common than they were pre-pandemic due to flexibility. According to AirDNA, in Q1 2021, the average length of stay was four days, 25% higher than before the pandemic. As leisure and business travel returns to cities that were heavily impacted by the pandemic, the length of stay is expected to shorten, but remain materially higher than 2019 levels. The norm is that more travelers will combine business trips with leisure, which will extend trips, creating a demand for mid-term accommodations.
Multifamily and single-family assets have become very popular because of the current market trends. With limited new supply and strong demand, most short-term rental operators are able to continue gradually raising rates, in turn increasing the revenue earned per unit. Due to the scarcity of housing supply and increasing demand, rates will continue to rise for the foreseeable future, making single and multi-family rentals more and more attractive to investors. The drive to meet the housing supply needs will prompt more real estate development in suburban markets. Meanwhile, banks, insurance companies, pension funds, and mutual funds are aggressively looking to deploy capital in these assets in 2022 as they have significant dry powder ready to be invested.
In a constantly changing market, one slow step could be a missed opportunity. At Lever Capital Partners, our steadfast team of industry experts track the latest trends and understand how to source and utilize the best available capital. Whether you are looking for an equity partner, a lender, or a combination to fund your next project, Lever can advise you on obtaining the most attractive financing the market has to offer. Here at Lever Capital Partners, we pride ourselves on our wide range of experience in refinancing, recapitalizing, converting assets, ground-up construction, acquisitions, and our overall creativity in getting our clients the capital they need for any commercial real estate related transaction. Our industry professionals look forward to speaking with you about your next project.