Rethinking Flexible Lease Regulations In Post-COVID Urban Development
“Gateway cities face an uncertain future, as consumers reassess their love affair with urban living. Local stakeholders should consider relaxing by-gone regulations on short-term rentals, to help bring people and businesses back.”
Are short-term rentals a threat or remedy?
The word ‘Airbnb’ once stoked heated debate among big-city planners, administrators, and special interest groups. Short-term rentals were blamed for all manner of urban challenges pervading modern cities. Affordability. Gentrification. Corporate greed.
That was then. This is now.
The heavy-handed policy response to Coronavirus has ushered in a whole new set of challenges for today’s cities. Chief among them is a reprogramming of popular urban culture and consumer sentiment toward urban living.
In short, people are now dubious of everything that was once great about cities. Museums, bustling restaurants and markets, crowed bars & pubs, buzzing stadiums, busy movie theaters, vibrant hotels, and city parks are now officially deemed as no-go zones.
The magnitude and coordinated global response to the pandemic has further eroded the likelihood of a speedy return-to-normal for big cities.
As urban destinations get put to the test, cities should start re-thinking how the sharing economy and flexible real estate plays into the post-COVID vision and the recovery of their respective visitor economies.
Resilience By Design: Flexible Rentals Buffer Cities Against Economic Cycles (Better Than Single-Purpose Hotels)
The debate over short-term rentals has a lot to do with design and the types of accommodations cities embrace as the bedrock for their visitor economy. Tourism is an export industry and a boon to cities - at least when times are good. But travel demand is fickle. People stop coming and spending for a variety of reasons: economic, demographic, technological, cultural, even biological.
COVID-19 has shown how fickle the tourism economy can be. When they do stop coming, hotel rooms sit empty. Local economies will naturally ebb and flow. Neighborhoods decline and are reborn. Rather than ban short-term rentals outright, cities should work with local developers and the real estate community to envision a new urban design protocol that is universal and adaptable over the lifetime of a building.
Affordability: Gateway Cities Need More Apartments, Less Hotels
Short-term rentals are blamed for rising rents, particularly in gateway cities where living wages have not kept up with rising costs. The central argument is that for every unit put on Airbnb, one unit goes off market for local residents. Meanwhile, the hotel industry has boomed over the past decade. There are now 144,000 hotel rooms in New York City, 65 percent more hotel rooms than in 2010.
Developers are now pushing increasingly into the outer boroughs. Much of this is infill development and comes at the expense of existing housing stock. In Los Angeles, developers are demolishing affordable homes to build upscale hotels. Recent research has shown that new apartment construction - even in high-end categories slows down rising rents. Embracing flexible housing stock could add to a city’s all-purpose housing supply, help slow rising rents, and allow neighborhoods and locals to benefit from the visitor economy, instead of corporate non-local hotel owners.
Unit Economics: Competition Drives Real Estate Innovation
Those with a surface-level understanding of the business model assume that professionally managed short-term rentals in urban markets are profit-generating machines. Earning additional income by hosting a private bedroom or apartment while away is one thing. Scaling up a network of full-time rentals into a profitable and sustainable business is an operational challenge with relatively high costs.
The daily premium charged on a traditional long-term lease or mortgage is quickly eaten up by housekeeping, marketing, furnishings, guest services & support, utilities, fees, repairs and replacements, taxes, and technology costs. While some of these line items are passed on to the guest, most property management groups are happy to break margin above six percent.
Apartment owners and investors (in today’s market) are also happy with the unit economics that traditional long-term leases generate. In other words, flexible rentals’ biggest competitor is the traditional unfurnished rental. Convincing owners to transition units in rent-stabilized buildings is a central challenge to the business model. In short, why bother when long-term leases deliver stable income at minimal risk to the value of the real asset?
This is more of a clarification rather than an argument, and it speaks to market realities. With regard to competition between flexible rentals and hotels and the impact this might have on the local built environment, the concern here is that the consumer will choose the rental over the hotel - but this is only in certain cases.
Price is a top consideration when choosing accommodation type. In other words, rentals compete with hotels and vice versa. Competition quickly drives up the cost of doing business for both sides. These market forces push local real estate stakeholders to innovate and find new ways to utilize underutilized urban spaces.
Hotel groups get pushed to create unique spaces that integrate local culture - for instance. Flex rental managers are pushed to reduce costs while improving the product - etc. etc. This cycle of innovation is arguably good for urban economies.
Responsiveness: Flexible Rentals Recession-Proof Local Real Estate Markets
The United States is currently enjoying the longest economic expansion in modern history. In good times, real estate groups are less concerned about rental income, and more interested in driving asset value. It’s all about building or buying, upgrading properties, adjusting rental rates to what the local market can support, and selling that asset at attractive returns three to five years from build or acquisition.
This process leads to rent inflation and eventually cycles out at the market level. As vacancies creep up and rents decline, real estate stakeholders start worrying more about operating revenues. These are natural market swings. Bigger shocks to the global economy can also impact demand for rental housing.
Apartment communities with a certain share of flexible rentals can stabilize incomes by tapping a wider spectrum of renter demand i.e. short and long-term renting. Instead of imposing harsh bans, cities might consider 1) leaving it up to the building owners to decide 2) foster programs focused on promoting innovation and sophistication in how local real estate stakeholders assess risk and return 3) reduce the burden on developers to build better, more resilient housing stock.
PropTech Innovation: Growing Real Estate Technology Exports
Those cities interested in promoting PropTech as an export industry should also embrace short-term rentals and flexible leasing as the catalyst that will drive local real estate innovation.
Real estate is still a local business but the technologies and apps spinning out of these local ecosystems are increasingly consumed in other markets. The injection of tech and venture capital into real estate is accelerating the growth of high-value ‘PropTech’ companies.
New buyer and rental marketplaces, city operating systems, property management systems, location analytics, construction tech, new asset classes e.g. co-living and flexible office space, and other innovations are helping cities become more efficient and competitive on a global stage.
In short, there is huge demand for innovation in real estate 1) because real estate is a relative latecomer to tech (as previously discussed) and 2) because real estate is the world’s largest asset class. City leaders now have an opportunity and responsibility to take the lead in fostering innovation in the real estate industry.
Embracing, rather than banning, flexible rentals outright sends a message that a city is open for business and that it understands the trend for what it really is i.e. a natural evolution of a rental market long overdue for an injection of tech and innovation.
Talent Attraction: Flexible Rentals Are Popular With The Modern Mobile Workforce
Remote work is going mainstream. What started with freelancers and entrepreneurs has moved into full-time work. Top employees are negotiating flexible ‘work from anywhere’ terms into their contracts. Luft research shows that over 15 percent of the U.S. workforce can effectively do their job from anywhere. These individuals hold well-paid senior positions and account for more than 30 percent of the U.S. workforce purchasing power.
As work culture shifts further towards remote work, cities focused on talent attraction should make their communities more accommodating to these individuals. People that come and visit are those that end up staying, starting companies, and investing in a community.
Without a doubt, Airbnb and other rental platforms have raised the bar on what mobile professionals now expect in ‘short-term’ accommodations. Here we’re talking about units that are above and below the 30-day mark - a common line used in city planning to regulate the lease length. Cities should ensure competitive flexible housing options that cater to these individuals.