Short-term stay operators blur the line between apartment and hotel

Sometimes, market disruptors shake things up so much, they settle right back to where they started. That’s why a recent trend is leading to the hybridization of the short-term stay and traditional hospitality sectors, settling in a niche within multifamily.

When Airbnb and similar sites came on the scene, some wondered how much they would cut into established hoteliers’ businesses. That question may become moot as more and more multifamily properties set aside units specifically for short-term stay. In some cases, entire buildings become apartment-hotel amalgamations.

“Developers are trying to de-risk a little bit as it relates to lease up of traditional multifamily properties,” said Jon Morgan, co-founder and managing principal, Interra Realty. “We’ve seen existing landlords that are … doing their own Airbnb units within their building because they get more rent than they would under a traditional annual or month-to-month lease.”

In fact, a unit set aside for short-term stays can bring in two to three times the revenue of a standard rental unit in the same building, according to Morgan. For many owners and operators, it’s a simple method of enhancing their NOI.

While a handful of units can optimize a building’s performance, for the right properties in the right locations, a grander design can lead to even better results. While municipalities continue to wrestle with the idea of how to define, legislate and tax short-term stay properties, a cottage industry has grown up in the confusion.

Domio is one such operator. The company manages units in buildings all around Chicago, from the Loop all the way to Edgewater. Sonder is another operator, with options clustered mostly in Wicker Park, Lakeview, Lincoln Park and the Loop.

These underlying tenants take on the management costs and duties, reaping the higher returns of a short-term stay, compared to a traditional multifamily tenant. They also can drive the design aesthetic and achieve brand continuity, even down to choosing local soaps, coffee and other offerings to give out-of-town visitors an authentic experience.

“We have a building that we’re selling that Sonder happened to be a tenant of,” said Morgan. “It was a unique, vintage, recently renovated building that had been turned over as a vanilla box to the tenant. They took it from there and elevated it by adding their FF&E package.”

Interra is actively marketing a property at 747 N. May Street in the River West neighborhood, with Jeremy Morton and Ted Stratman acting as the listing agents. The property is master-leased by Ginosi, an international short-term stay and hotel chain based in Yerevan, Armenia. Because Ginosi operates all 22 studio units in the building, it has been flagged for hospitality use by the city of Chicago.

The property, recently gut-rehabbed with high end finishes, is master-leases to Ginosi through 2023 with a five-year option at a 15 percent rent escalation. Ginosi is responsible for all management and maintenance of the property.

“What we’re finding is that a lot more developers are starting to go down this path,” said Morgan, “exploring doing a full master lease of an entire, newly developed building to a tenant like this. There are a multitude of them in the marketplace right now.”

These operators are bound by the demands of their guests in terms of location. Hoping to cater to business as well as leisure guests, the majority are locating where most short-term stay guests do, in core neighborhoods. For Chicago, that means the Loop, River North, Fulton Market, Lincoln Park and Wicker Park.