Flexible-Stay Demand Can Fill Empty Apartments. Here’s What To Look For In A Reliable Flex Operator

While the troubles of the office market have dominated headlines in recent years, other building types are battling headwinds too.

Multifamily — and Class-A properties in particular — are experiencing slowing revenue growth due to an oversupply of available units and flattening demand. Rent growth in 2024 is forecast to remain below long-term annual averages, while vacancy rates will likely be 40 basis points higher on average than they were two years ago, according to the Freddie Mac 2024 Multifamily Outlook.

Meanwhile, Sun Belt growth markets Austin and Nashville are expected to grow their inventories of apartment stock 15% and 9%, respectively, in the next 24 months, according to CBRE Econometric Advisors.

These trends have owners of multifamily properties looking at options to fill their vacancies and boost revenues.

“A lot of apartments are being delivered into a market where there is downward pressure on occupancy as landlords compete for the same renters, and then compete on concessions,” said Jordan Calaguire, head of real estate and growth for Kasa, a nationwide operator of flexible accommodations and boutique hotels. “In reality, there are just not enough tenants to go around.”

Calaguire said owners are increasingly open to revenue sources that aren’t dependent on traditional 12-month leases. Instead, they are borrowing some practices from the hospitality industry, which can accommodate a variety of shorter-term occupants, including leisure and corporate travelers, transient guests and groups that are in town for training or project-based business.

“Hotels use that business mix to create the most compelling revenue picture on any given night,” he said. “Kasa thinks the same opportunity exists in the multifamily business because more and diverse demand creates higher and more durable income.”

Along with helping to fill otherwise vacant apartments, flexible-stay rental properties can generate more net operating income for the building owner than unfurnished 12-month rentals. In a recent white paper, Kasa founder and CEO Roman Pedan estimated that the difference in monthly NOI can be greater than 30%.

That is a figure likely to get the attention of owners who are beginning to feel it is time to take action, Calaguire said.

“They may have taken the view historically of ‘Let's just wait and see what happens with the market,’” he said. “But now, they don't have that luxury because they are looking at gaps in their capital structures or are having challenges servicing their existing debt due to the hawkish interest rate environment we are in. The market itself is forcing them to adopt a more creative strategy.”

Many apartment owners might be wary of the flexible rental model because of past bad experiences with poorly managed flex properties. Calaguire said this is the No. 1 concern Kasa hears from owners, and as a result, the company has devoted a great deal of effort to serving as a trustworthy gatekeeper for its clients’ properties. This involves educating tenants, using machine learning to screen renters and remotely monitoring behavior such as noise, smoke and door lock activity.

Kasa operates with an owner's mindset, an approach that has allowed it to emerge as an industry standard for flexible living since it was founded in 2016, said Greg Materdomini, senior director of sales and marketing strategy for Kasa.

Bisnow asked Calaguire and Materdomini to share the qualities that multifamily owners should seek in a flex-stay apartment operator that will contribute to their bottom line without risking losing what Calaguire called the landlord’s “golden goose,” 12-month renters. 

Multifamily owners and operators find themselves at an inflection point in the market that is changing how they think about demand and revenue generation, Calaguire said. In this environment, Kasa can facilitate an optimal mix of short-, medium- and long-term demand to create a more robust and durable income stream, he said.

“Concepts like leveraging online distribution channels, such as Booking.com or Kasa.com, or taking advantage of pricing dynamics are not the core business of the average multifamily owner, and they may not understand how this new revenue stream works,” Calaguire said.

Because revenue generation is one of the biggest differentiators among flex-stay operators, he said it is important that multifamily owners ask questions such as:

• How many distribution channels are they on?
• How much direct revenue contribution will the multifamily owner get?
• What is their pricing software?
• What segment of customer are they going to attract on any given date that translates into their highest willingness to pay?

“These are key decision-making criteria that sometimes get overlooked, but the flex operator needs to have good answers to them,” Calaguire said.

The flex-stay operator’s business model and daily operations need to be clear at all times to the building owner or manager. This is to ensure they remain confident in having a third-party operator at work in the property.  

“We make sure our performance is very visible to our landlords, which include blue-chip companies like Starwood Capital Group, AMLI Residential and Berkshire Residential, to name a few,” Calaguire said. “We work hard to be accountable to our property owner clients.”

Building owners and tenants, long- and short-term, can learn a lot from online reviews and ratings. Materdomini encouraged people to check out these posts because a flex operator’s online reputation is something it should take seriously. Kasa’s reported incident data rate is nearly 90% better than comparable publicly available data, Materdomini said.

“It is important to demonstrate our track record from a trust and safety perspective because it is the thing that people are most concerned about,” he said. “I encourage people to check out the online comments among the communities we operate in and for the guests we host because we are very focused on maintaining a favorable reputation for both the flex-stay and long-term resident perspective.”

A flex-stay operator needs to understand real estate inside and out, including knowing what keeps the owner up at night. That is why it is important to ask whether the flex-stay team has actual property management or ownership experience, said Calaguire, who spent 15 years at Walton Street Capital and is experienced in the hospitality and apartment sectors.

“The fact that we have been on the landlord side and have walked a mile in their shoes means we understand the things they care about,” he said. “We also have deep relationships in this industry, which is important because initially you're relying on your reputation, to a certain extent, to earn their trust and business.”

If a problem or question arises, the owner or guest needs to be able to reach an actual person quickly via text, email or phone call. Materdomini said online reviews and scores give a sense of how responsive a flex-space operator is.

“We maintain a very tight feedback loop with the customer,” he said. “Is the room clean? Are they having access issues? We can step in to provide service quickly to meet the guest’s needs for a safe, reliable place to stay.”

The information collected about guests shouldn’t just sit on a cloud. Kasa uses that data to learn about significant events that might be occurring during their stay.

“Having a digital relationship with the guest might seem less personal, but it allows us to do much more to please them on a personal level,” Materdomini said. “Say you're coming to town for an anniversary or it's your 40th birthday. Or you're going to the Taylor Swift concert. Using that knowledge, we can drop a Taylor Swift T-shirt in the room and create a magical moment that the guest did not expect.”

Overall, the flex-stay operator should add value to the owner’s operations while not decreasing its profit margin, Materdomini said. 

“A property that contains some flexible-stay units should be worth not a dollar less than what it would be worth as a multifamily property with 100% of its apartments on long-term leases,” he said. “We are committed to maintaining that standard at a time when multifamily has to be much more dynamic than in the past if an asset is to remain relevant.”

This article was produced in collaboration between Kasa and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to [email protected].