Startups Help Landlords Turn Apartments Into Hotel Rooms

A handful of startups are betting they can help apartment-building owners convert empty units into hotel rooms, a controversial practice that could help landlords generate more revenue.

The rise of home-sharing services such as Airbnb Inc. has been a boon for owners of single-family homes looking to make extra money by renting out their properties.

But so far the services have been met with fierce resistance by local governments and some tenants worried that large residential buildings could morph into hotel-like properties brimming with tourists and other transients.

Yet some startups contend they can navigate these potential pitfalls.

Arlington, Va.-based WhyHotel aims to turn apartment buildings into pop-up hotels, complete with front desks and maid services, to help owners generate revenue while they are in the midst of finding full-time tenants. of Miami leases sections of apartment buildings or even entire properties, bringing in designers to transform the units into hotel rooms.

Pillow Residential, which last month raised $13.5 million in funding, offers a platform that allows building owners to access information about Airbnb guests, and see which units in their building are being rented out and when.

The services are sprouting up just as the red-hot U.S. apartment market is beginning to cool.

In all, there are roughly 29 million apartment units in the U.S., according to the National Multifamily Housing Council. Nearly 800,000 new units have been built since the beginning of 2014, according to CoStar Group Inc.

But the vacancy rate for apartments in downtown markets rose to 8.1% in the first quarter from 6.8% a year ago, according to CoStar. Some 45% of buildings completed in the first quarter of 2016 were more than 10% vacant after a year, compared with 38% for those built in the first quarter of 2015, suggesting properties are taking longer to lease.

The startups, which are expected to typically operate eight to 16 months in a building, see potential in helping the developers of those buildings wring revenue out of units that aren't yet leased.

WhyHotel piloted its concept with 50 empty units in a Vornado-owned building in Pentagon City, Va. Prices were $179 to $329 a night on units that otherwise wouldn't have generated revenue until they were rented to long-term tenants. The service ran from January through May, when there were enough tenants to bring the building close to full occupancy.

"They're very easy conversations to have because there's a lot of product coming online," said Jason Fudin, co-founder and chief executive of WhyHotel and a former vice president of strategic initiatives at giant landlord Vornado Realty Trust. Mr. Fudin declined to disclose what percentage of the nightly rental fee Vornado received, saying it is different for every deal.

Mr. Fudin said his team hammered out an agreement with local officials that permitted it to operate the hotel for no more than 24 months. He said the business model makes sense only in buildings that are 200 units or more, where significant structural modifications aren't needed to bring the buildings up to hotel-like codes and they can get enough scale to make it worthwhile to operate as a hotel for only a short time.

While WhyHotel carefully avoids converting apartment units permanently to hotel rooms to help dodge controversy of local housing becoming tourist lodging, other companies are embracing that model.

YouRent takes control of a block of units in high-end apartment buildings and re-rents them as hotel rooms. Brian Ferdinand, YouRent's chief operating officer, said the company is hoping to take advantage of the glut of luxury apartment inventory at the moment and demand for hotel rooms in hip urban cores.

The company is expanding in Miami, Austin and Nashville and plans to fan out to San Diego, Denver and Boston. Mr. Ferdinand said a two- or three-bedroom unit rents for about the price of a hotel room on a nightly basis.

Mr. Ferdinand said in some cases YouRent pays landlords 20% above what they could get from a typical tenant because the short-term rental business is so lucrative. The company's average guest stay is 3.5 nights.

YouRent is aiming to provide a more structured alternative for landlords, Mr. Ferdinand said, offering detailed screening to weed out people with criminal records or sexual predators, paying applicable local taxes and obtaining permits and buying rental insurance.

These new services aim to get around an issue that Airbnb has increasingly been confronted with: Historically, landlords have been reluctant to allow their tenants to rent out their units because they didn't receive any of the revenue. Most apartment leases forbid tenants from subletting their units without permission.

Airbnb has been trying to recruit owners of big apartment buildings, which represent a crucial growth opportunity for the company because the sleek modern buildings with doormen, fitness centers and modern finishes are likely to appeal to business travelers. Airbnb rolled out its own program last fall that would give landlords who allow their tenants to rent units a cut of the revenue.

The initial reception was cool. Landlords are wary of liability, disrupting the sense of community in the building and having the risks of having tenants who hadn't gone through the full screening process.

Airbnb didn't immediately respond to a request for comment.

Pillow Residential is aiming to make it easier for landlords to allow tenants to rent units on Airbnb. Blake Hayunga, chief operating officer at Virtú Investments, said the company is using Pillow's services in two buildings and plans to roll it out in 11 more.

Tenants who use the platform typically give 10% of the rental revenue to their landlord, as well as a 10% to 20% commission to Pillow.

Though the upside for landlords, Mr. Hayunga said, is mostly in marketing the perk to potential tenants and helping tenants afford higher rents.

"You've got millennial residents who travel several weeks a year and are struggling to pay the rent," he said.

Mr. Hayunga said when tenants are considering renting a unit, he shows them a matrix of how much they can offset their rent by using Airbnb.

Short-term rentals are already happening, he said. "This just allows us to take control of the process."

(END) Dow Jones Newswires

July 11, 2017 07:14 ET (11:14 GMT)