Why Multifamily-Hotel Hybrids are Gaining Traction with Developers

The thought of vacant units can strike fear into the heart of many in the real estate industry.

"In the United States, at any point in time, there are hundreds of thousands of vacant, newly-built apartments," explains Jason Fudin, CEO and co-founder of WhyHotel, an alternative lodging service that operates in newly built, luxury apartment buildings as a pop-up hotel.

As a multifamily property owner, developer, or investor, there are numbers you watch closely. The vacancy rate and the percentage of units that aren't occupied during a given time is usually one of them.

A high vacancy rate can show several red flags, from supply and demand issues to economic trouble ahead. One thing is for sure—they will need to be improved as quickly as possible.

For high-end and luxury apartment developers facing that very challenge, there's an interesting option on the horizon.

Digging Into the Building Boom
Take a walk through virtually any city across the country, and you'll see cranes dotting the skyline. For the last few years, a building boom has been underway. CBRE found that there were over 290,000 multifamily units delivered in 2018, with another 280,000 forecast for 2019.

Luxury apartments are helping to drive the push; Projections show that close to 80% of all new units built across the country over the last few years were high-end.

Thousands of these units are going up in the top metro markets, including New York, Boston, and regions of Southern California. But it's not always the usual suspects seeing building growth. Driven by urban revitalization projects coupled with tax breaks, some cities, including St. Louis, Seattle, Dallas, and Charlotte, are also experiencing a rise in these luxury developments.

So, what's driving the shift?

For some, it's purely economic. After the boom and bust of the 2000s, younger generations—namely millennials and Gen Z—aren't buying homes at the rates of their parents and grandparents.

Others find apartment living increasingly attractive, especially when it comes to incorporating lifestyle elements. More people are staying in cities or close suburban metro areas. They want to live near work while still being near dining, shopping, fitness, and nightlife options.

Developers have been building with these customers in mind. Most high-end units today feature increasing amenities that include cafes, co-working spaces, gyms, package storage, and dry-cleaning delivery. For many apartment seekers, it's those amenities that make the difference.

The Rise of the Hybrid Hotel
While overall growth is a positive sign in any industry, there is always the risk that supply will overrun demand. That's especially true during the lease-up stage, when it's critical a property reaches a stable level of occupancy. Traditionally, it can take upward of 24 months for a building to reach occupancy.

This is where WhyHotel, and others like it, are looking to offer a unique solution. WhyHotel works with developers in new high-end luxury buildings to create a temporary pop-up hotel during that critical lease-up phase. As the building brings in more traditional long-term residents, WhyHotel slows down, and then eventually leaves the building.

With WhyHotel, Fudin helps remove some of the risk associated with the lease-up phase. "From the perspective of a real estate developer, we de-risk their projects with significant found income during lease-up and early activation of the building and surrounding area."

Developers who have been working with WhyHotel are seeing additional benefits, too. On the property management side, teams can use the fully-furnished units to showcase an apartment. Also, some local businesses are using the units as short-term housing for employees who are new to town versus signing a longer-term corporate lease. The difference matters; it's especially true when it comes to getting construction loans.

Because the setup is only temporary, says Fudin, it helps ensure that the apartment building reverts to its intended long-term use, which is unfurnished residential use. "WhyHotel does not have the negative effect on long-term financing that having master, corporate-style, leases (3-5 years) in the building does," he explains.

Tenants are embracing the concept for their own needs, as well. "We have been pleasantly surprised to see how much the long-term residents embrace temporary WhyHotel use in the building and view WhyHotel as an on-site amenity," says Fudin.

The company has found that many tenants will recommend staying in the pop-up hotel portion of their building for visiting guests, while others take advantage of cleaning services.

The Future Looks Hybrid
These hybrid trends are likely to continue. In fact, Fudin is betting on it. His company is already focused on a new strategy to capitalize on the success of the pop-up hotel. This concept is called "Hospitality Living," and they are already scouting locations to build flexible use assets that can optimize between apartment and hospitality use, he explains.

As the housing needs of people continue to change, new developments that can offer solutions that blend work, home, and lifestyle might be at an advantage.

"I think we will continue to see the lines blur between hospitality and home, with the traditional hotel industry and multifamily residential industry seeing more and more overlap."