By Dean Wehrli and Aaron Stubblefield
In only its 8th year, Airbnb is on pace to book 80 million nights this year, double that of last year. It is the third-largest unicorn (a start-up valued at one billion dollars and above) in the world with a valuation estimated at $25.5 billion. But will Airbnb migrate from challenging the hotel market to becoming a part of the apartment market? Will we see apartment developers plan for an Airbnb alternative?
Revenue will tell the tale. We recently conducted an apartment feasibility study for a proposed new building where the developer was considering including some units devoted to Airbnb users. Even at conservative assumptions on rental rates and occupancies, the Airbnb apartments were likely to generate more revenue per unit than the standard leased units. Regardless of additional expenses (e.g., household supplies, furniture), it was clear that Airbnb was a viable option to consider.
We sense a trend developing, especially if the apartment markets soften. Apartment developers—even those building large rental complexes—could set aside a portion of their units as a kind of Airbnb rental pool to maximize revenue and market flexibility.
But how about the downside? An Airbnb presence could, for instance, alienate regular renters. It would require different management skills and policies, necessitate regular cleaning and upkeep, and possibly come with insurance and tax issues. Some jurisdictions, as almost recently happened in San Francisco, could restrict Airbnb offerings.
These caveats, however, do not appear all that onerous. The key will be having a location that can tap into the burgeoning Airbnb user stream. The right location will appeal to tourists or business users, have an established Airbnb user pattern, generate strong rates and occupancy levels, not be oversupplied with hotel rooms, and have a favorable political environment.
If Airbnb becomes a fad that fizzles, or if you don’t have the right location after all, not a problem—fold those apartments back into the normal rental market. Airbnb units could even be added or subtracted annually as the market for them waxes and wanes.
Time will tell if this potential becomes real in the apartment world, but it is possible that someday soon your neighbor will be heading out the door to Disneyland as you trudge off to work.
