With short-term leases and flexible stays, multifamily operators are finding new rent revenue streams by identifying new net operating income (NOI) strategies.
A historic period of rent growth ended last year, followed by several months of decline into 2023. Year-over-year rent growth continues to slow, according to Apartment List’s April National Rent Report. Multifamily owners/operators face significant headwinds, and their response to eroding market factors could determine their portfolio performance for some time to come.
Inflation rates continue to limit the effectiveness of expenses reductions, despite industry reactions to cut costs and batten down the hatches. Staff cuts and service cuts can help reduce budgets, but they can also hurt resident retention. In order to weather the storm, operators are focusing on resident renewals and identifying new revenue streams and operating income (NOI) strategies.
A budget cut allows owner-operators to survive economic challenges, but it is a reactionary measure. It is easier and more effective to generate new revenue streams than to cut costs, and it enables operators to maintain full-scale operations. The following are a few proactive revenue-generating tactics owner/operators can employ to thrive during rent growth.
Flexible Leases
In multifamily, short-term leases generate new revenue streams by commanding higher premiums.
They have, however, not been effectively leveraged in the industry historically. It is now becoming more apparent to savvy owners that any-length-of-stay management models, which offer furnished short-term homes alongside traditional 12-month leases, can be powerful revenue drivers, as they de-risk the asset by attracting an array of customers. By allowing flexibility in unit mix based on market and seasonal demands, variable-stay programs can boost upside revenue by as much as 40%, and increase NOI by 10% on average.
“Flexible stay models are effective because they cater to consumer demand, whereas communities with 100 percent traditional leases require the renter to conform to a pre-established structure with limitations on revenue,” said Lisa Yeh, chief operating officer with Sentral — a full-service, whole-community management and hospitality company that features any-length-of-stay leases. Many renters are no longer tethered to an office desk or a specific city due to the growing remote workforce. It’s not necessary for them to live where they work, so they’re free to roam. With that newfound flexibility, people want to travel and experience new places, and they’re willing to pay more for homes that can accommodate their lifestyles. Also, flexible leases accommodate those between homes and second homes.
Residents of communities with flex living models include traditional renters, business travelers, vacationers, and digital nomads. By diversifying a community’s renter profile, variable stay programs also mitigate operational risk by eliminating the dependence on a particular demographic. Defaults back to traditional leases are always possible for owners.
Repurposing Package Facilities
Apart from leveraging their homes, owner/operators have also found ways to repurpose former amenity spaces for revenue generation. In response to explosive e-commerce trends, third-party, off-site package management is rapidly replacing untenable package rooms and package lockers. Owners can now repurpose the space previously dedicated to package facilities by eliminating on-site facilities.
A multifamily community’s reclaimed space has the potential to generate revenue. Previously used package rooms have been converted into offices, podcast and recording studios, and storage facilities. Communities have even converted package rooms into short-term guest rentals or extra studio apartments based on the recovered square footage.
“If we acquire an asset that has a package system or package room, we talk about how we can repurpose that area into an income generator as part of our value-add projects,” said Dana Caudell, executive vice president of operations at Wood Residential. “There are all sorts of things you can do to repurpose a package room. You can turn it into work from home stations that you rent out, or even into an amenity like a dog spa to attract prospective renters. As a forward-thinking operator, there are so many things you can do with the former package room space to add asset value to the owner.”
Electric Vehicle Charging
In 2022, electric vehicle sales in the United States reached a tipping point, achieving a level of acceptance where new technology has become mainstream. There will be no decrease in the number of EV models being introduced, and annual sales records will continue to be broken. 23% of licensed U.S. drivers plan to buy an EV or PHEV for their next vehicle, with 65% stating that electric vehicles are the future of the automotive industry. In order to promote EV growth, the federal government is investing more in infrastructure for EV charging. Investors in multifamily properties are also beginning to realize that EV charging stations are becoming an integral part of their revenue streams.
“We asked our residents about EVs and other sustainability topics with a series of surveys. An overwhelming two-thirds indicated they had very high interest in making the switch to an EV,” said Thomas Stanchak, director of sustainability at Stoneweg US. “We’re confident our addition of EV chargers is helping us to attract and retain the best tenants. In a competitive rental market, amenities like EV charging can make your property stand out from the competition. EV charging is also a meaningful part of Stoneweg’s overall environmental strategy, which is to implement practical and effective solutions that support residents through this transition to a cleaner energy future.”
Not only does the early installation of reliable, well-placed EV stations provide communities with a competitive advantage for environmentally and socially conscious residents, but they can also share in the revenues generated by EV owners bringing their batteries to 100%. According to Xeal, an EV charging provider for the multifamily and commercial industries, EV charging stations enable owner/operators to provide a necessary service to residents while also achieving an ROI on each session by installing chargers at their communities.
Reduced Pet Restrictions
Most multifamily communities restrict breeds and weights, even those that are pet-friendly. However, this approach could also limit NOI across a portfolio. The removal of restrictions and allowing pets leads to more connected communities and boosts retention rates, thereby minimizing turnover costs and vacancy losses.
“Setting aside that many of the reasons for restrictions are based on long-held misconceptions and have been proven to be scientifically inaccurate, lifting them has proven to be of significant financial benefit for rental housing operators,” said Judy Bellack, Industry Principal for Michelson Found Animals. “Research shows that pet-owning residents build community through their shared love of pets and the activities surrounding them. This creates strong bonds that in turn create longer-tenured residents. And while many operators cite the potential for damages as a key concern, only about 9% of units report pet damages, averaging only $210 per unit – a number more than covered by the average security deposit.”
Upside revenue is available for owner/operators looking for a new approach and tired of negatively impacting operations through continual cuts to labor and services. Expense reductions aren’t the only way to balance the NOI ledger in times of rent growth decline. An emphasis on new revenue generation, either through subtle or wide-scale operational changes, could permanently tip the scales to the red.