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The pandemic’s impact on commercial real estate has been profound, accelerating demand for flexibility in office and industrial leases. But the persistence of remote work is also beginning to disrupt the multifamily sector, with more renters now asking for flexible lease terms, particularly in core urban markets.
An estimated 20 percent of the U.S. workforce is expected to continue working remotely post-COVID-19, which is also driving demand for flexible and short-term apartment rentals, as remote workers take advantage of their freedom to experience new places or travel abroad. AirDNA, which tracks the short-term rental market, reported that short-term apartment rental demand in September was 105 percent higher than during the same month in 2019. Additionally, short-term rental income in the third quarter of 2021 set a new record, up 24 percent compared to the same period in 2019.
Driven mostly by demand from younger professionals, the short-term rental market last year saw the launch or expansion of start-ups that allow tenants to rent apartments for less time than the typical 12- to 18-month lease term, says Geraldine Guichardo, global head of hotel research and director of living sector research with real estate services firm JLL.
There are twin dynamics driving this trend, according to Guichardo—a shift in renter preferences following the disruption caused by COVID-19 and landlords’ desire to maximize revenue potential. “This is a phenomenon we are seeing across all of real estate with a term we are coining as the ‘hotelization of real estate.’”
From an apartment perspective, renters, particularly those in urban centers, want more flexibility in the length of their leases given shifts in lifestyles and the increased flexibility in their working arrangements. According to Guichardo, as 48 percent of the global workforce is expected to remain in a hybrid/flex office arrangement, shorter apartment leases allow some workers to avoid feeling tied down with a long-term commitment.
On the landlord side, short-term leases can benefit landlords by allowing rental rates to be adjusted more frequently in response to market conditions, she adds. “This creates a hedge against inflation because as operational expenses increase, rental rates can be increased in real time. In essence, operationally, short-term apartments resemble a hotel’s operations.”
There are currently about 1.1 million short-term rental listings nationally, down 11 percent from 1.2 million in 2019, according to AirDNA. But the firm is forecasting an increase to 1.4 million listings this year. Two flexible, short-term apartment start-ups, June Homes and Blueground, raised millions in funding rounds last year and might account for a significant portion of this growth.
New York-based June Homes, a proptech start-up focused on providing flexible rentals in urban U.S. markets, raised $50 million, led by Softbank Ventures Asia. Tenants can tour and rent a shared or private apartment, furnished or unfurnished, at fair market rates for one to 18 months, complete the process entirely online and move in within three hours. For credit-qualified tenants, there is no upfront security deposit.
On the landlord side, Daniel Mishin, June Homes founder and CEO, says his company built an algorithm to identify apartments that are often units in disrepair but in desirable locations. June Homes is a turnkey partner with owners that guarantees occupancy and provides marketing and management of buildings at no charge, which eliminates broker and management fees. It has vendors in cities where it operates that create video tours of the units, upload them to the company server and renovate the units if needed, among other services. June Homes makes it money on the rental rate premium generated from unit improvements. The firm’s portfolio currently includes 2,500 units in Boston, Los Angeles, Philadelphia, Austin, New York City, San Francisco, and Washington, D.C., with plans to expand to Chicago this year.
In New York, Mishin says that June Homes’ units rent within seven days of the listing list.
Meanwhile, Blueground, a New York-based start-up with international operations, launched in 2013, but raised $180 last year, including $140 million in equity capital, from investors led by WestCap, and an additional $40 million debt facility from Silicon Valley Bank. The firm plans to expand into 10 new markets this year. It currently has 6,000 units under lease contracts in nine major U.S. and nine major European cities. Greece-based Apostolos Foteinakis, Blueground chief financial officer, says the company plans to add 3,000 to 4,000 new units by the end of 2022, entering new markets across the United States, Europe and Asia.
Since its inception, Blueground primarily served business travelers, according to Foteinakis, but now there is a significant number of remote workers entering the sector. “We have observed over the past couple of years people experiencing new ways of living. They are traveling more and want to be flexible—live life on their own terms,” he says, suggesting that the move from unfurnished long-term rentals to flexible furnished rentals represents a shift that over time might disrupt the traditional apartment market.
Blueground rents its apartment units from landlords, redesigns and furnishes them, and then sublets them at flexible terms of one month or more for a premium rate. Occupancy of Blueground averages at 95 percent, according to Foteinakis, with an average stay of several months.
The U.S. market represents 65 percent of firm’s business and Blueground often leases units from property management companies that are located in the most popular neighborhoods of cities where it has a presence. For landlords, a deal with Blueground guarantees occupancy, Foteinakis notes. And as an added bonus, the tenants often fall in love with the building and the neighborhood and end up signing long-term leases directly with the building’s owner.
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