What is Multifamily Hospitality?

Apartment communities can meet the demand for furnished on-demand housing?by adding a Multifamily Hospitality Program to their revenue management strategy.

In my article for the May 2021 issue of ABODE published by the Houston Apartment Association (HAA), we explored changes accelerated by COVID-19 in work, life, and travel, and the challenges and opportunities this creates for the multifamily industry.

Specifically, we identified the opportunity to convert vacant inventory into furnished, on-demand housing to cater to today’s consumers looking for flexibility and convenience.

In this article, published in the June 2021 issue of ABODE, we explore the different options available to communities to capitalize on this market opportunity and the operational considerations.

Tomorrow’s renters want flexibility and convenience so that they can be focused on experiences and not things

What is ‘multifamily hospitality’?

Renting furnished lodging in apartment communities isn’t new. For decades, corporate housing providers housed company employees and expatriates. More recently, sites such as Airbnb popularized short-term rentals in urban markets as an alternative to staying a hotel for leisure travelers. Today, the lines are increasingly blurred between business and leisure travelers, with the rise of a ‘work from anywhere’ remote workforce. That’s why we call this segment ‘multifamily hospitality’: allocating a portion of a community’s inventory to furnished lodging rented flexibly.

Is your community a fit? Are your apartments desirable?

But what are these renters looking for? Firstly, the golden rule of real estate “location, location, location” applies even more strongly to multifamily hospitality customers. Is the neighborhood desirable and convenient for business and leisure travelers? A good rule of thumb is to see if there are hotels nearby and their respective flags (the more expensive, the greater the opportunity). In Houston, key areas of demand include Downtown, Midtown, the Museum District and Texas Medical Center, and Galleria. Secondly, the communities should be recently built or renovated to high quality, and include desirable amenities such as a swimming pool and gym. Finally, the apartments themselves should offer conveniences such as parking, a dishwasher, a washing machine, a clothes dryer, and fast internet access. And of course, everyone loves quiet units with natural light, nice views, and high ceilings. The only difference we’d note is that temporary residents won’t usually pay a premium for a larger floorplan since they travel light and don’t need the additional space.

Communities with hotel-style amenities such as pools and 24/7 gyms will attract new residents looking for flexibility and convenience

Setting up the furnished apartments

The items that you buy to furnish, decorate, and equip the apartments will have the greatest impact on the revenues that you generate. Our proprietary research shows that how an apartment looks is the greatest determinant of a customer’s willingness to pay. Furthermore, how it is equipped and its overall comfort will impact their review scores which is the second most important revenue driver. On average, there are 125 purchasing decisions that go into equipping a typical one-bedroom apartment: knowing how to allocate each dollar judiciously will help to maximize returns on investment. The three most common mistakes are overspending, sparsely furnished spaces that are uninviting, and not using professional photographers.?

Marketing the furnished apartments

Once you have your listing photos, you will need to write enticing copy and price your listing properly. Data providers such as AirDNA and Transparent can help with market data. Revenue management tools such as PriceLabs and BeyondPricing can help to save time and increase income through dynamic pricing tools that automatically adjust rates according to local market supply and demand, seasonality, day of the week, and special events. These tools also allow for custom rules governing the minimum length of stay, length of stay discounts, and advanced customizations based on building or portfolio occupancy. Alternatively, a number of companies provide revenue-management-as-a-service, such as Rented.

If great interior design and photos are key to creating a desirable listing, then distribution is key to getting bookings. This means having your listing appear across the multiple different websites that people use to find and book accommodation. The 800-pound gorilla in this space is Airbnb. It is an incredibly powerful tool to find both short and extended-stay renters in urban markets and will initially help buildings to acquire the majority of their bookings. But there are multiple other mainstream online travel agencies (OTAs) to consider such as Expedia (Hotels.com, Travelocity, Orbitz), VRBO, and Booking Holdings (Booking.com, Priceline, Kayak, Agoda). And there is an ever-growing set of niche sites such as Misterb&b and Furnished Finder, corporate-focused sites such as Reloquest and AltoVita, and furnished rental sites such as Kopa, 2nd Address, and Anyplace. You will need a property management system (PMS) and channel manager to upload your listing information and photos, availability, and prices to each channel. This will save you time and avoid the risk of double-booking.

OTAs will help you rent your units typically within 24-48 hours of going live. They are an incredibly powerful customer acquisition tool, however, the commissions for using these sites can get expensive, up to 15% of the booking value. That’s why having the ability to directly take bookings is important to reduce costs. Over time, direct bookings should drive the majority of your bookings. This can be achieved through search engine optimization, digital marketing, and remarketing to past customers. Larger operators will also want to have a sales team to directly approach relocation companies, corporates, and convention organizers.

Risk management

Keeping your community safe from bad actors is critical, whether you’re renting to long-term tenants or short-term travelers. If you’re struggling with your occupancy, the last thing you want is for your current residents to be unhappy. Short-term rentals sometimes have a bad reputation, however, this is primarily due to amateur hosts, illegal listings, and unprofessional operators. That’s why risk management and customer due diligence are essential elements of a multifamily hospitality program. It’s not sufficient to trust that the OTA has verified the customers they’ve sent you. At my company, we employ a four-step process to keep communities quiet and safe:

1. Deter bad actors. Fraudsters, criminals, and partygoers go for easy targets. The best defense is to avoid these bookings through deterrence, for example, premium pricing, strict house rules, publicizing your security procedures, and using fraud prevention tools through your payment processor.
2. Screen renters. In the same way that you need to leave a copy of your driving license to tour a community, renters must supply their ID to book accommodation. Software tools exist to verify the ID’s authenticity and even to employ facial recognition technology to match a selfie to their photo ID. And of course, once you’ve verified a guest’s ID, criminal checks can also be performed.
3. Secure the property. Self-check-ins grew in popularity during the COVID-19 pandemic, however, these can present risks if controls aren’t put in place. Only screened guests should receive check-in instructions and codes to pick up their keys. Traditional realtor lockboxes are not sufficiently secure, since codes are infrequently changed. We recommend smart solutions with unique codes for each guest. It’s not sufficient to only screen renters: staff and service providers also need to be vetted and have their access carefully managed. Finally, proper commercial insurance must be in place to protect for liability and damages to premises.
4. Monitor compliance with rules. It’s important to monitor properties to ensure compliance with house rules. There are smart devices such as privacy-compliant noise monitoring and tobacco/marijuana sensors that can send alerts to notify a property manager of infractions. Entryway cameras can also be used to verify that guests comply with occupancy limits and pet policies.

A hospitality mindset in operations

One of the biggest shifts communities need to take to run a successful multifamily hospitality program is around the increased expectations of these renters. Emails and messages should be answered fast: within minutes for high-priority requests. Maintenance issues should be addressed the same day ideally, or as soon as possible for lower priority fixes. Information should be readily available about the community and the surrounding area - similar to a hotel’s guest information book or concierge, but ideally in digital format. Arrival at the community to check-in should be simplified as much as possible: easy parking, 24/7 key pick up, and clear instructions to get to the unit itself.

A hospitality mindset is a critical amenity to create a great resident experience in multifamily communities

What are your options to capitalize on this opportunity?

So far we’ve discussed how to run a successful multifamily hospitality program, but not considered how this should be delivered. There are fives approaches that property owners can take:

1. Ignore. Some communities may decide it’s not worth the effort or risk, especially if they have very high occupancy rates. If you do, make sure to monitor for illegal subletting by checking lodging websites such as Airbnb, outsourcing to a third party, and checking for lockboxes on site.
2. Allow residents. Some communities have allowed residents to sublet, however, we do not recommend this because of the inherent risks posed by amateur hosts. Plus, consider if you want tenants that need this additional income to afford their apartments…
3. Master lease. For decades, communities have rented apartments to corporate housing providers and more recently to short-term rental brands. While this can give you a boost in occupancy and rents, there are good and bad operators - size is often not indicative of professional operations. A corporate lease can also give an illusion of stability for owners: the COVID-19 pandemic resulted in multiple operators going out of business.
4. Do-it-yourself. This enables operators to maximize potential revenues and control but requires a different set of skills and technology to implement since traditional property managers don’t offer this service. The learning curve and costs may not make it worthwhile.
5. Partner with a specialized manager. Working with a specialized property manager to manage the furnished lodging can provide a better balance of risk and reward versus a master lease or DIY approach. It can generate more revenue in good times versus a traditional lease and eliminates the risk of a default in bad times. Working with a partner instead of a corporate tenant also provides greater transparency into performance.

A final note on regulations and other things to consider

In a follow-up included in the print article, I was asked about some additional considerations property owners may wish to consider:

• Regulation. What you can and can't do varies immensely based on where you are. Cities such as Houston have very little in the way of ordinances regarding short-term rentals, but stays of 29 nights or less have to pay hotel occupancy taxes to the city, county, and state (currently these total 17% in Harris County). Other localities may have restrictions or licensing requirements,?although?Texas is pretty?strong?on property rights with?the City of Austin being knocked back by the Texas Supreme Court?in trying to enforce restrictions. Homeowners Associations (HOAs) typically have restrictions or bans, but some traditional vacation rental developments may allow them.
• Documentation. The standard Texas Apartment Association (TAA) leases prohibit short-term rentals from tenants (and again I can’t emphasize how strongly we recommend that communities do not allow subletting by residents). Some property managers such as Greystar have corporate lease rider documents for commercial operators governing additional conditions and requirements (from occupant screening to insurance).
• Financial. The key one for?building?owners is likely to check with their bank. Certain financial institutions may have caps on the number of corporate housing or short-term rental operators. Typically the cap is around 10% of units, but occasionally as high as 20% (and I've heard as low as 6%). Some of the caps may have gone down in the wake of a number of short-term operators going out of business such as Stay Alfred, Lyric, and Domio. And of course, appropriate commercial insurance should also be in place - there may be exclusions on your standard property insurance. To be very clear, Airbnb and other booking channels do not provide insurance.

About the author

Sébastien Long grew up immersed in his parents’ hospitality business before spending a decade traveling the world digitizing banks and their operating models. Looking for a new challenge, he earned an Executive MBA from the University of Cambridge and helped two Silicon Valley unicorns enter the European market. He moved to Houston in 2018 and launched?Lodgeur, a company that helps apartment building owners boost their cash flow and property value by converting vacant units into furnished lodging and managing them to attract renters looking for convenience and flexibility.

Find out more about partnering with Lodgeur.