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Flex Rentals webinar review: The death of the master lease model?

Worldwide: In the latest webinar in our Urban Living series, attention turned to the topic of Flex Rentals: Investing in innovation.

The webinar was one of a regular series hosted in the run up to URBAN LIVING FESTIVAL 2020: stay-live-work, which takes place on 25-26 November at Tobacco Dock in London.

This time, ShortTermRentalz editor Paul Stevens took the reins as guest host, and he was joined by Mickey Kropf, founder and CEO of Vector Travel, Steve Lowy, CEO, Anglo Educational Services, Susan Tjarksen, managing director of Multifamily Capital Markets at Cushman and Wakefield, and Michael Chang, partner at BV Real Estate Partners.

The flex rentals discussion centred around how unique accommodations and differentiated products can drive increased demand, the asset types and locations that are creating most value for owners, how flexible rentals can meet the evolving needs of digital nomads, and finally the types of operators who will be best positioned to come out on top and take their share of the market post-Covid.

Flex rentals were brought to attention last year at the Flex Rentals Investments Conference [FLEX] in San Francisco last year, at which ShortTermRentalz was represented.

To kick off the conversation, the panellists were asked to define flex rentals from their understanding, given the term is still relatively nascent and niche within the hospitality space, more commonly known in the United States, and it can refer to anything from multifamily businesses to lease arbitrage and master lease models, and even to flexible office space.

Mickey Kropf described how the landscape had changed dramatically since the beginning of the global lockdown, with the weakness of rental arbitrage models becoming exposed for valuing speed over efficiency, leading some firms to pivot towards revenue-sharing.

From an investor perspective, Michael Chang shared Kropf’s feelings over lease arbitrage but reiterated that there was still a lot of interest in investing “opportunistically” in markets such as tech-focused vacation rentals, despite the contraction of the marketplace with the closing of Stay Alfred and Lyric. He also predicted more activity in the coming months.

Meanwhile, Steve Lowy, while being less familiar with the denomination of ‘flex rentals’, said the pandemic had highlighted the significance of flexibility and adaptability to switch on different models and markets as the vacation, corporate and youth travel segments have come to a standstill.

From Cushman and Wakefield, Susan Tjarksen said she believed the success of the flex rental space would be driven by greater indifference to length of stay and a prevalence of personal stays compared to professional stays, that will contribute to the long-term health of short-term rentals. However, she admitted that the master lease model, typically employed by operators who have struggled since the start of the pandemic and from which others have pivoted, is “dead” and will revert more towards a management agreement, though it depends on the ability to attract regular business travel once more.

Looking ahead, Chang expressed optimism for investment within the vacation rental space, given its ability to cater to a continuing trend in group travel as millennials and families seek to stay together in a private apartment. Unlike Tjarksen though, he said the master lease model was not a thing of the past yet, but those operating with hybrid models could flourish if they are able to pivot effectively and integrate technology to differentiate their products.

The capability to differentiate and innovate flex rental products was a recurring theme throughout the conversation, with Kropf saying that his company, Vector Travel, had been able to open up increasingly to mid-term stays as the likes of Airbnb have invested more in that segment [including its acquisition of Urbandoor]. Furthermore, he shared his experience of returning to a hotel as being “uncomfortable”, with rental companies well placed to capitalise on surging demand with the increased attention on remote and self-check-ins.

Placing an emphasis on business model simplicity, Lowy said his brands had actively sought to keep services to necessity and maximise efficiency by preventing Covid parties with “far more vigorous pre-arrival checks”.

As time goes on, he added that he expects more businesses to adapt their accommodations for mixed use purposes. While students are prioritising strong Internet access over traditionally essential amenities as they “cocoon” if their studies go online, demands in corporate housing are set to become more and more prescriptive so that employees can work well from their accommodation, not just sleep in it.

Moving on to the topic of asset types and locations that are set to drive increased value for owners in 2020 and 2021, Chang intimated that the traditional vacation markets within two hours of major cities / working hubs were “white hot” as ADRs go “through the roof”. Other opportunities for investment over the next 12 months look set to include businesses coming from a tech angle [noise sensors, software-focused, pricing optimisation, IoT, safe locks], although much of this will also depend on how the near-term plays out with the possibility of a vaccine and the threat of another lockdown.

Remote working was another overriding topic during the session, as the pandemic continues to accelerate a number of digital nomad trends.

This was noticeable in the words of Cushman and Wakefield CEO Brett White, when he hinted that the remote workforce in the United States has doubled since the early nadir of the pandemic.

Building on this, Tjarksen was more skeptical about the long-term work-from-home phenomenon, even if she expects it to evolve into a “very acceptable working format” from now on, meaning workers can live and work from anywhere, especially if they can be in close proximity to their office in any case. She indicated that there would be a gradual return to working in an office space [albeit not a permanent return] as employees still crave that culture and camaraderie that they cannot hope to achieve through a Zoom call, while professionals will move about to decide where they feel they work best and when they want to put roots down.

In the meantime, Lowy offered an intriguing insight into the London market, with East London set to be a beneficiary of increased demand and West London suffering from a drop in tourists and a lack of a tangible community vibe. He also concurred with Tjarksen when it came to people wanting to be in walking or easily commutable distance from their office, although the feeling of community and identity would have a greater impact than ever on accommodation choices.

To conclude, we asked our contributors to assess what types of flex rental operators were most likely to come out on top and take their share of the market as the pandemic recedes in time.

Tjarksen: Flex rentals and short-term rentals are here to stay as building owners will not want to let that change in income go. Operators will differentiate and facilities such as remote check-ins and keyless entry have become more widely accepted by the public and cemented in the multifamily space. She added it would be interesting to see who catches “institutional attention”, pinpointing larger players such as Greystar and Bazzuto as developers that will not want to “sit on the sidelines and let it go to someone else”.

Lowy: It is mostly about flexibility, rather than technology, as tech stacks are so accessible now and quite easy to implement. Some brands have become too stuck in their own ways about lifestyle; you have to be able to manipulate changing times and the pent-up demand will allow for a shift back to short stays. Apartments will have a much wider market appetite as people will appreciate their own personal space, and people who have flexed it will be able to adapt and be open to opportunities that others who are too fixated with putting into their brand will not be able to replicate.

Kropf: Profitability over revenue is important but it all starts with the model and executing it well. Flex rentals will have to optimise their models in terms of guest experience and constantly innovate the channels they are listing on, the technology they are innovating and how they are servicing their guests. While profitability is important, it has to be in context of values and they have to think about why their model got adapted in the first place. It will not necessarily be a “winner-takes-all” situation, but those that can balance all of these factors, potentially in the shape of a percentage lease or fixed rate model, will be best placed to take their share of the market.

The next Urban Living webinar takes place this Wednesday 9 September at 2pm BST, on the topic of The anyplace workplace: Office of tomorrow v office of yesterday.

IHM editor-in-chief George Sell will be joined by Bruce Daisley, ex-Twitter VP, Shelley Reiner, director, Suited ID, Charlie Rosier, co-founder, CuckoozNest, and Tom Wordie, marketing and partnerships, AndCo.

You can register for the next webinar at our Urban Living Festival website here.