The View from 100K
Short-term rentals are far from dead in DC — they are just evolving. What does that mean for affordable housing?
Meet the new king of the DC’s short-term rental business.
Bao Vuong knocked on the door and opened it a crack: “Housekeeping!” We waited a beat, then walked in. It was a pristine, empty room, nine hundred square feet of modish furniture in white and grey. Sunlight filled the space, and reflected off the building across from us — another tower of mirrored glass, filling our floor-to-ceiling window.
We were at 100K Apartments, where one-bedrooms start at $2,075 a month. Vuong’s company currently leases about a hundred units there. He is president of WhyHotel, a DMV-based start-up that, like Airbnb, turns apartments into makeshift hotel rooms. Rather than letting anyone with a spare room turn it into an income stream, however, WhyHotel works directly with developers to turn parts of new luxury apartment buildings into “pop-up hotels.”
Vuong is not the first entrepreneur to run a hotel out of an apartment complex. Most notorious in DC are the investors who buy up handfuls of units in various apartment buildings with no intention of finding tenants, knowing they can make more through Airbnb. In a city desperately in need of affordable housing, this feels perverse, and the DC Council just passed a short-term rental bill that outlaws using services like Airbnb in a unit that is not one’s primary residence.
This will wipe out all these wannabe Hiltons running unregulated hotel businesses through the app, as well as other start-ups more like WhyHotel that eschew Airbnb and partner directly with apartment managers. But, Vuong tells me, one business will not be affected: WhyHotel.
WhyHotel is only about a year old, and it’s limited to the Washington-Baltimore Metro area so far. 100K, which opened up this October, is only its third pop-up hotel and its first in DC proper. But on Halloween, before the Airbnb bill passed, Washington Business Journal reported that the company was closing in on a new $10 million funding round. Vuong says they are gearing up for a huge national expansion, and in the next couple weeks, they will be announcing new pop-ups in DC and across the country. And while he did not say that he supports the Council’s short-term rental bill, “from a competition perspective, [if the bill means] less Airbnbs and less short-term rental product out there, that’s good for us.”
The law transforms the regulation of short-term rentals, and WhyHotel is well-positioned to become a powerhouse in the market. So if we want to understand what is coming, we need to understand what looks to be the next evolution of the city’s short-term rental industry. Perhaps more importantly, we must understand why that evolution took place right now — a question that can better equip us to see what changes are bubbling under the surface of the housing crisis in the District of Columbia.
How did WhyHotel survive last month’s axing of the short-term rental market? Vuong says affordable housing is at the center of the answer. He explains that it is because they take a different approach to regulators than their competitors do. WhyHotel gets full regulatory approval to operate each of their pop-ups as a hotel. According to Vuong, one of the main reasons that they can get that approval is that in the eyes of regulators, WhyHotel does not raise concerns about eating up housing stock.
WhyHotel’s model is restricted to new developments, and this is what distinguishes them from similar startups like Stay Alfred that are soon-to-be-formerly in DC. Importantly, they commit to leaving the building within two years, even if they could be profitable for longer. The idea is that as the apartment building finds more tenants, the pop-up will shrink in size until it pulls out of the building. Vuong claims this means it will not take up housing stock that would otherwise be filled.
It may be too early to say whether pop-up hotels truly avoid the problems that led councilmembers to restrict Airbnb. However, either way, this signals a shift from a market that has historically been laissez-faire to one where thriving means being accountable to regulators’ concerns about affordable housing.
But WhyHotel’s relationship to the housing stock is also more complicated than that. The other selling point of the business model is that, in theory, it can help developers build more luxury housing while taking less financial risk. Vuong’s company cannot be understood outside of the larger, more complicated trends that formed it — trends that the District still needs to reckon with.
How WhyHotel Helps Luxury Investors
WhyHotel actually started as a research project at Vornado, a $13 billion real estate investment trust (REIT) traded on the New York Stock Exchange. But as WhyHotel CEO Jason Fudin, who was head of Vornado’s strategic projects division at the time, told Housing Wire, the project “beat all of our expectations financially.” With funding from Vornado, Fudin left the company to co-found WhyHotel with Vuong.
Fudin’s research project was meant to solve a problem Vornado was facing as it develops new areas. For the REITs like Vornado behind most luxury apartment developments, pop-up hotels are meant to smooth over the riskiest period in a high-end building’s lifespan: the lease-up. This is the time between when the building opens and when it has reached “stabilized occupancy,” meaning it has filled up enough units with tenants to be considered a safe investment.
This period is dangerous for two reasons. The first is obvious: the building is bleeding money until it has enough tenants to cover costs.
But just as importantly, at this point, developers take on massive amounts of high-interest debt during construction, and not until occupancy is nearly “stable” can they refinance this debt to a lower interest rate. Since debt is at the core of how corporations like Vornado are valued, these high interest rates are not problems for the future: they have immediate effects on investors. Even a particularly slow lease-up can have long-term impacts on the building’s value.
Luxury housing fills up much more slowly than affordable — a successful lease-up takes eight to twelve months. If a developer has trouble filling up a new luxuy complex that quickly, they generally offer deals, like comping the first month of rent (as 100K is doing at time of writing). They need to act to quickly get the building to a place where it is profitable in that timespan.
This is where WhyHotel plugs in. Fudin has said that in addition to providing income, pop-up hotels are meant to make it so that the lease-up period will not “necessarily affect the success of an asset.”
Of course, says Vuong, there are many more important factors than lease-up income driving what developers choose to build and why. But insofar as WhyHotel affects the decision calculus, “if we can help derisk the riskiest period [of the development process], developers are more apt to build more, faster.”
Pop-Ups in a Crisis
How does this relate to the state of housing in DC? WhyHotel is, at most, a push in a certain direction for developers, and just one incentive among many larger ones. But WhyHotel’s relationship to the affordable housing crisis becomes clearer when we ask why WhyHotel sprung up right now. The startup is the outgrowth of several deeper, darker trends in housing development that have taken hold in the past five years or so. These trends set the ground for such innovations, and these innovations, if anything, exacerbate them.
In a period where gentrification has sent rents skyrocketing — along with the number of low-income residents spending over half their income on rent and the number of unsheltered homeless people — most of the new buildings that get built are high-end. This is a national trend, and the imbalance is getting worse. According to one study, in 2012, 52 percent of new apartment buildings built in the United States were high-end. In 2017, the number had jumped to 79 percent nationally; in D.C., it’s 88.
Furthermore, as economist Yesim Taylor demonstrated in a magisterial study of DC’s affordable housing crisis earlier this year, as new areas are developed, luxury and affordable housing remain geographically segregated. Taylor says this is due to a combination of bad District policies and the difficulty affordable developers have competing with luxury developers for land. The District becomes increasingly economically and racially segregated. Taylor points to NoMa, where 100K is located, as a recently developed neighborhood where housing remains homogeneously high-end.
If WhyHotel makes developers apt to build more luxury apartments, faster, what should we make of it? Some argue that any new housing decreases competition and thus ameliorates the crisis. But Ramon Jacobson, director of the DC outpost of the nonprofit lender Local Initiatives Support Corporation, says this overlooks the fact that there is a separation in the sets of tenants that luxury and affordable housing draw from. While he does not view luxury and affordable developers as inevitable antagonists and says the two can be made mutually supportive, all that can be said about adding more luxury housing is that it “will bring down luxury housing rents.”
This stratification is one of the defining characteristics of the distorted American housing market in which the pop-up hotel model was born. WhyHotel CEO Jason Fudin recently predicted that “in five years, developers without a plan to make money during lease-up will struggle to find underwriting.” Startup founders are not known for the humility of their predictions, but it does seem that a change is underway. While WhyHotel was the first company to fixate on the lease-up period, a lot of similar startups — Stay Alfred, Global Luxury Suites, The Guild — have popped up in the last few years to help high-end developers fill empty units. Stay Alfred partners with older buildings as well as new ones, but when I asked CEO Jordan Allen why developers partner with his company, accelerated lease-ups were on his short list. But lease-ups have been a problem for developers for as long as there have been developers — why now?
Bao Vuong can think of a few reasons that the stage is finally set for his company. Part of it is technological advances, and part of it is that the “sharing economy” has made people more comfortable with novel arrangements. But it is also, he says, due to a shift in the way that apartment complexes are designed: increasingly, new buildings hitting the market are giant, glamorous buildings that “look and feel more like hotels.”
This change in design warrants attention. The four-star-hotel style of 100K Apartments — the sprawling lobby, decked out with gilded art and enough $1,000 furniture to fit two wedding parties; the rooftop pool and lounge; the chairs around a fireplace in the “graffiti”-covered outdoor courtyard — reflects what developers call an “amenities arms race” that has taken hold in competitive markets like DC in the past several years.
Once-extravagant amenities like fitness centers have become the norm, and as apartments compete for wealthy residents, there is an oft-remarked trend towards more in-room services like housecleaning, and towards larger, nicer community spaces — “community,” in this case, not extending beyond the apartment walls. Segregation has many scales, and homes designed like hotels are not unrelated to high-income residents that live like tourists.
But the amenities arms race points to an even more critical phenomenon. Reflecting more than just a change in taste, it is a response to the very same economic trends that shaped WhyHotel.
The high-end apartment market might be reaching saturation. In the past several years, luxury’s share of the new housing built has rapidly climbed. But recently, in DC and other competitive cities across the country, high-end rents have started to flat-line or even decline, while affordable housing rents continue to rise unchecked. Despite this, factors like the price of land make high-rent apartments the most desirable option to investor-backed developers. The imbalance between high- and low- income markets has become so stark that one national high-end developer told CNBC earlier this year, “I believe there’s an acute crisis headed our way.” In a market where it is becoming harder to find people to fill the luxury buildings that continue to open their doors, extravagant amenities are one of the chief tactics developers have adopted to cope.
Pop-up hotels are another such tactic; we should expect more innovations to come. Developers would have always benefited from income during lease-up, but it is no coincidence that Vornado leaders pursued the idea at a moment when the need was becoming more dire.
Aja Taylor, advocacy director for Bread for the City, tells me that it is important to remember that as developers begin construction on a high-end project in a gentrifying neighborhood, “it is not clear people will be there” to fill it when it is finished: “For developers, it is a gamble. They are hoping that it will change.” Measures like WhyHotel attempt to make that gamble a little less risky.
Taylor says that developers are building in “black and brown communities with the expectation that [the community] will change. They are counting on it.” Sometimes, the change comes slower than investors expected — turning half the building into a hotel for two years may just buy them a little time.
