Rapid urbanization, rising home prices, and the digitization of most industries has resulted in a boom of real estate trends that favor flexibility. The mid-term rental market is quickly establishing itself as the next major market creating positive disruption within the real estate industry. This trend, partly driven by the ‘experiences over things’ mentality of younger consumers, is opening up an entirely new option for investors to diversify portfolios and maximize yields within the rental sector.
Defining the mid-term rental market
Often associated with corporate housing or subletting, mid-term rentals (or MTRs) are residential leases that are longer the 30 days but shorter than 1 year. Mid-term tenants typically stay for a few months instead of a few years. According to the Corporate Housing Providers Association, the average duration of a corporate renter's stay is 86 days. To compare to corporate rentals, the average stay for a short-term vacation rental is just under 6 nights.
The rise of mid-term rentals is partially a result of the sharing economy’s impact on the real estate market and the desire of both renters and landlords to stay ‘flexible'. Mid-term renting provides a happy-medium strategy for residential real estate investors wanting more yield than traditional long-term renting but less work than the short-term route. The mid-term rental strategy also mitigates some of the difficulties presented by short-term renting, such as local regulations and a heavy work load due to frequency of tenant turnover.
There is a variety of demographics that mid-term rentals serve, including but not limited to business people, students, traveling nursing, and locals relocating or remodeling homes. Mid-term tenants are typically a more transient crowd who don’t want to commit to a long-term lease, but also are hesitant to pay daily rates for hotels. Similar to long-term rentals, mid-term rentals bind tenants to formal lease agreements outlining the length of the lease, the price of rent, when rent is due, and any property rules.
The financial value of this market has particularly come to light over the last few months, as the demand for 1-6 month rentals successfully bolstered the businesses of many short-term rental operators during the COVID-19 travel draught. In mid-April, AirDNA—a data intelligence tool for the short-term rental market—reported that over 50% of the nights being booked at short-term rentals were for stays of over 2 weeks.
Rabbu's own rental portfolio averaged a booking duration of 16.5 days for reservations booked this March through June. That's compared to an average booking duration of 3.6 days in same season in 2019. Although this increase mainly happened at the hands of the pandemic, it also revealed the presence of a lucrative tenant market that many short-term operators weren't trying to reach before.
The key players of the mid-term rental market
According to Transparent's 2020 Mid-Term Rental Report, leading companies in the MTR space have raised over $265 million to bring investors new opportunities to capitalize on the growing market.
There are multiple roles through which investors and corporations are claiming stake within the mid-term market:
1. Aggregators/online platforms
These are online platforms that allow tenants and property owners/managers to connect and transact a rental agreement. Think of these as the Airbnb of mid-term rentals. Popular leaders in this space include Furnished Finder, 2nd Address, and Kopa.
2. Service companies
Similar to the Sonders and Domios of the short-term world, these companies rent apartments, furnish and equip them and then offer the apartments as corporate housing rentals. They may buy or lease the furniture for these properties. Consider New Jersey based Churchill Living, which just executed a 10-year lease for 104 corporate rental units at NoMa CNTR in Washington, D.C.
3. Apartment companies
These companies own or manage large apartment complexes. They use some of their inventory as furnished corporate housing units. They may buy or lease the furniture for these properties.
4. Management companies
These companies are real estate property management companies that manage properties owned and furnished by individual real estate investors. One example is Airbnb-backed Zeus.
5. By owner properties
These are real estate investors who provide their individually owned and furnished properties as furnished corporate housing rentals.
Over the past decade, the residential rental market has seen disruption on both the short-term end and the long-term end, by online travel agencies like Airbnb and HomeAway as well as the emergence of the co-living concept. The mid-term market presents a strong case for the middle ground between the short-term and long-term strategy, giving dedicated mid-term platforms with strong brands and technology the opportunity to generate massive edge on any other players in the market. The market is still in it’s infancy, but COVID alone has shown it’s power and growth potential.
More and more investors are incorporating short-term or mid-term rentals into their portfolio to serve as their high-yield assets while the long-term rentals remain their source of a stable, fixed-yield. As rental strategies become more diversified, investors who can shape shift their assets and allow mixed-use for short-term, mid-term and long-term stays will be the first to ensure their business model can sustain tenancy and maximize yields, no matter the market circumstances.