COVID-19 has shaken the initial uprise of Airbnb in urban markets. Regulations are more concrete and Airbnb has pushed off their IPO. What does this mean for Investors?
With the Airbnb market at a more mature stage, and with the reality of Airbnb’s risks finally felt by most hosts, the game has changed. During Airbnb’s initial rise, a variety of players jumped into the short-term rental game because of the “promise” of extra profits was simple.
In the last few years of 2018 and 2019, the market began to see profits marginalized by sheer supply. The market also began to become more standardized because of VC backed STR firms. While most hosts believed their profits would go on forever, COVID had other ideas. It’s now time for investors to re-think their Airbnb investments.
For Example…Chicago
For real estate investors in Chicago, Airbnb has typically been used as a extra cash flow supplement their multifamily portfolio — whether it be a single 3-flat or a large multifamily property. Since Airbnb is no longer a surefire bet, it’s time to start evaluating an Airbnb investment based on your risk appetite, location(s), and size of your portfolio.
For example, if you own a 24–50 unit portfolio near Wrigley, United Center, or near a major Hospital, than it may pay to keep 1–3 units as short-term rentals. You can start by utilizing the units that historically have the highest turnover to minimize risk. With Airbnb, you can house family/friends when they visit or house traveling nurses who have 4–13 week assignments. The key here is flexibility.
Rather than putting all of your eggs in one basket — as most did in the first wave of Airbnb growth — use Airbnb as a supplement in your portfolio for creative uses, and for extra profits when times are good. At the end of the day, if you are going to invest in an Airbnb, than it must be done in a strategic manner and with eyes wide open to the risks.
As of June 2020, AirDNA shows that Chicago Airbnb’s generate $2,138 per month in revenue ($1069 per bedroom) with 7,657 active rentals. The issue with this number is that this average is across ALL markets. In our operational experience, this is on the low-end for prime markets in Chicago — Lincoln Park, Old Town, River North, West Loop, Wrigley etc. As supply continues to go down, take advantage of this if you are in these markets.
Here are a few more changes we see for Airbnb investors in most urban markets:
A New Focus on Profits, Bye Bye to VC-Backed Master Leasing
The VC backed operators, including the likes of Sonder, Domio, and Stay Alfred, were a initially seen as a godsend for developers seeking to get the green light from their lenders. We don’t see this happening again, at least for a long time.
Stay Alfred has closed it’s doors because, like most of these firms, they overextended themselves. They seemed to focus on market share, rather than profits. With all of the emergency funding rounds raised by the VC-backed survivors, the new focus is profitability, and must always be due to the inherent risks of short-term rentals.
This is not to say that Master leasing units is not a feasible strategy. It just means that it doesn’t work when you are paying for new build, Class-A rents. The profit margin is too thin, and when a downturn hits, these units are bound to lose. The days of “guaranteed rent” for Landlords and the idea of “guaranteed growth” by VC-backed firms are no more.
A Push to Revenue Share & Medium-Term Stay Models
Many of the master lease players in this market are working to transition to revenue share programs (ie management or franchise contracts). Very few properties will be open to this because of the uncertainty it presents to Landlords and their Lenders.
If a short-term rental group plans to grow quickly in an urban market with this strategy, than they have to heavily securitize with a Landlord. This is because without a years worth of proven income the revenue from Airbnb is hard to prove to Lenders. This won’t work for most Landlords. This will create an overall slower growth curve, this time around, because of the lack of reliable income from short-term rental firms.
A workaround to this may be medium term stays, ie 30–180 day stays. We’ve seen Airbnb make this transition on their platform with their acquisition of Urbandoor in 2019, and during the COVID pandemic to help house frontline workers. The issue with this is that medium term stays are not as profitable. Corporate rentals and housing for travel nurses has been around a long time, and new groups like Blueground have already planted their flags in this medium-term stay space.
All this said, we don’t see larger STR firms having much success transitioning to revenue share or medium-stays in urban markets. This is more feasible in classic vacation rental or temporary worker markets.
Location is More Important than Ever
A great long-term rental location is not necessarily a great short-term rental location. Travelers have different wants/needs than residents. The idea that you can make more money with Airbnb than a long-term rental, irrelevant of the location, is going to be much tougher. Location is more of a key factor because travelers are now smarter, more frugal, and they want to be in locations relevant to their stay.
Locations like Wrigley and near United have been crushed because of no sports or events in Chicago, but they are going to rebound once Chicago fully opens up. While things may be different in the near future, these locations will continue bring in tens of thousands of people from across the world to the City.
With supply numbers continuing to decrease in Chicago for the near-future, it is an opportunity for Landlords in prime location to begin to create strategies to capitalize. Once the City, and Country, fully open up, there will be opportunity to generate 1.5 to 2x profits / month if Airbnb is strategically integrated into your portfolio.
More Compliance, Better Enforcement by Cities
Short-term rental regulations come in all shapes and sizes depending on the City, but the overall sentiment is that Cities are getting smarter. While Cities are in flux with COVID and political strife, Airbnb and short-term rentals have been in Cities long enough for politicians and stakeholders to have a more objective view.
With groups like HostCompliance partnering with Cities, Airbnbs are tracked more effectively and it is harder for hosts to break the rules. This is an overall win for Airbnb investors. It may take more upfront time to complete legal due diligence, but this helps tame supply going forward.
All this said, cities like Chicago, will have to weigh the economic benefits vs. the potential costs. If Hosts are kept to a high standard, there is a barrier to entry (ie license or STR fee), and enforcement is strong for the rulebreakers, than Airbnbs will bring more benefit to the Community.
Smaller, Local Investors & Neighborhoods Benefit
The true beauty of Airbnb is the unique and authentic experience it can provide for traveling guests. With the rise of Airbnb technology, short-term rentals became logistically feasible, affordable, and provide American families with options to earn extra income. For the first time, it allows small property owners to diversify into short-term rentals as well as long-term rentals.
One of the important benefits of Airbnbs in Cities is the extra economic activity that it creates outside of urban cores. While location is more important than ever, being near a University or Hospital can help benefit neighborhoods. Utilizing Airbnb is an opportunity for local stakeholders to benefit — if done with the neighborhood in mind FIRST — to help local restaurants, entertainment, grocery stores, etc.
Most of the supply that came onboard in the first wave was from professional hosting companies. The issue with the hosting companies is that they vary based on their styles and intent. When the authenticity and intimate touch of an Airbnb is turned into a standardized product, this goes against most of the ethos of an Airbnb experience. it can be even worse if their is no concern for the neighborhood(s).
As an Airbnb investors, use your neighborhood’s charm and provide intimate service to create long-term success.
