Institutional investors have been making waves in the U.S. real estate market lately, reentering the market with force starting in the first quarter of 2021.
Now, experts say a similar wave of institutional investors may be coming for the country’s short-term rental market soon. And it could have some interesting impacts on the industry.
Rich Ford, co-founder of investment property platform Roofstock, told Inman that the short-term rental market has been growing in very similar ways to how the single-family rental market grew in the past, prior to institutional investors jumping into the market with enthusiasm, which leads him to believe that institutional participation in the short-term rental market is just around the corner.
“I think it’s inevitable that they will [enter the short-term rental market],” Ford told Inman. “I see incredible parallels to the single-family rental space — the long-term rental space — a decade or so ago. It’s a big asset class which has yield associated with it in an environment where people are starving for yield.”
“There’s some questions around revenue optimization models and how to operate,” Ford added. “But all of these things were in front of folks when the single-family rental industry became institutionalized. I think now we’ve got the benefit of people seeing the parallels of that and I think it’s just a matter of time before institutional capital will come into the space.”
How institutions will manage large portfolios is an unanswered question
A short-term rental is a furnished space that is available to rent for a period of time shorter than a typical lease; it could range from a few days to weeks to a couple of months. The short-term rental market has seen an increase in regulations in a number of geographical locations over the last few years as it has rapidly expanded and grown in popularity. This type of very specific regulation that often varies from city to city could make investing in short-term rentals at-scale pretty challenging for institutions.
That’s one reason why institutions may need to work with existing short-term rental companies at first while they get their feet wet in the market and learn how to manage short-term rental properties at-scale.
“I think they’re going to have to partner [with existing short-term rental platforms] to start,” Scott Shatford, founder and CEO of short-term rental analytics company AirDNA, told Inman. “To test the model before they sort of build out a whole internal property management platform. That’s what I would imagine would happen.”
But after an initial foray, it’s unclear whether it would be more beneficial for institutions to create their own in-house management processes, work with companies or individuals who can handle property management and dealing with vendors, or if a new type of platform will emerge altogether that provides services to institutions wanting to invest in the short-term rental market.
“I think it’s still a little bit of a conundrum and a riddle people are trying to solve right now,” Shatford added in regards to how investors will be able to scale.
But because operating short-term rentals is so different from managing long-term ones, Ford said he thought that an entirely new class of short-term rental management companies that works with both institutions and individual investors is going to be necessary in the long-run.
“Obviously there are considerations around being able to turn these properties [around] really quickly,” Ford said. “So, that is a whole different system, and I think another degree of service that’s required. I think it’s a different type of company that will be servicing both the retail and the institutional.”
It could have a positive impact on pricing and availability
As demand for short-term rentals has reached record levels during the summer of 2021, average daily rates of rentals have also risen substantially. The good news for short-term renters is that if — or when — institutional investors enter the market, laws of supply and demand indicate that those prices should come down in a palpable way.
“It would drive down rates on the existing vacation rentals, which I think is fine, consumers would love [it],” Shatford said.
As institutions buy up properties, it should also provide a slight boost of inventory to the short-term rental market. Although, institutions will also likely need to adapt their buying strategies since desirable vacation properties tend to be much different than the typical single-family rental.
“Many people like uniqueness when they rent a vacation home — something that they want to feel like, ‘I own this house for a week’ and has the comforts of that with their family,” Shaun Greer, vice president of sales and marketing at Vacasa, told Inman. “So I think the strategy for institutional investors to purchase vacation homes would likely have to be somewhat different than just purchasing the same type of home all over the place, because that’s not what drives the guest experience and guest demand.”
“I think the guest will have more options, hopefully, because there will just be more available, but it really depends on what that product is,” Greer added.
Developments built specifically as short-term rental communities may pop up
Ford noted that the developing trend of homes being built to rent is also a likely eventuality if institutions enter the short-term rental market. In fact, it’s something he’s seen already in Charlotte, North Carolina.
“I think there’s going to be development that takes place,” Ford said. “I viewed 23 homes that were all purpose-built, all in a row, in an area in Charlotte that were all for short-term rentals with different themed homes and such. I think we’ll see a lot more of that because, as more institutional groups pay more attention to this, it may be more efficient for them to operate and to own a cluster of properties all in a place where folks have their own separate unit.”
With people continuing to work at home and have the flexibility to travel while working remotely, demand for short-term rentals should remain strong for a while, experts told Inman. Ford said that he thought that kind of demand also might persuade some institutional investors to convert existing single-family rental properties into short-term rentals.
“Not every year-lease property is going to convert over to a short-term rental; I think most won’t,” Ford said. “But I do think there is a cohort of properties that can, and I think there’s a need for those properties. I think nobody really wants to stay at a Motel 6 anymore.”
He added, “It’s probably going to be the retail players that lead the charge here a little bit because they’re everywhere. I think they’ll be the folks saying, ‘hey I’ve got a property that has been appreciated, it’s a property I’ve been leasing annually, so maybe this is one that I should turn into a short-term rental property.'”
From an investment standpoint, it also makes sense to convert those properties, Shatford said.
“The way to actually bring yield back to these single-family rental investments is short-term rental,” said Shatford. “In a lot of these markets, especially right now in the pandemic, these properties are earning a killing. Investors are going to earn three times more on a short-term rental basis than they would in a long-term rental basis in a lot of markets.”