Why Brookfield Embraces Airbnb: It Wants $1 of Every $4 in Rent Tenants Earn

World's Largest Real Estate Investor Bets Tenant Sublets Can Be Profitable

The Olmsted apartments in Nashville, Tennessee, purchased by Newgard Development Group last month and rebranded as an Airbnb rental building.

Some landlords across the U.S. and Canada may discourage tenants from subletting on Airbnb. But not Toronto-based Brookfield Asset Management, which figures it can reap as much as an extra 3 percentage points in return, taking a share of the extra cash tenants earn.

Jonathan Moore, managing director of Brookfield's real estate group with responsibility for multifamily investments, told the Canadian Apartment Investment Conference this week his company will encourage the activity in two apartment buildings in Nashville, Tennessee, and Kissimmee, Florida.

It may seem incongruous that Brookfield, the world's largest real estate investment company with assets of $196 billion in U.S. dollars, is trying to take a share of some extra cash from apartment dwellers. But as a multinational corporation, those fees can add up.

"It's a bit of what some of my colleagues call a science experiment," said Moore about the partnership agreement that has seen Brookfield invest US$200 million in a joint venture with Niido, the multifamily development venture of Airbnb. "Not only will we not forbid it like most landlords out there, we are going to encourage it. We are actually going to attract that consumer by way of programming, technology and something called a master host."

The Niido investment is targeting millennials, and Brookfield's research shows on average millennials are only in their apartments 22 of 30 days a month. "Jobs take them somewhere," says Moore. "They are never in their apartments 30 days a month."

The incentive for renters is that if they sublet out their house for just five of those empty days a month and get the average daily rate of a hotel, they can cut their rent in half. The landlord receives the other 25 percent, and Airbnb receives a fee on top of it all.

Moore said it's hard to buy multifamily real estate with a projected rate of return of more than 4 percent and "everybody is looking for extra yield," which sharing profits with tenants delivers. "Our 25 percent scrape of that home-sharing income, if you do the math, creates an increase in the levered internal rate of return" of 2 percentage points to 3 percentage points, he said.

The move by Brookfield to invest in Niido comes as the company reconsiders investments in the multifamily sector, which it started buying in 2010, creating a portfolio of about US$11 billion mostly in the United States.

"Out of the financial crisis in the U.S. people needed to rent apartments," said Moore, noting U.S. rental growth has been climbing at 4 percent to 6 percent annually while wages have only climbed 2 percent to 3 percent since the company started buying multifamily units.

"A lot of institutional money has been chasing the sector," said Moore.

With returns at historical lows, Brookfield decided it was no longer a buyer of multifamily property in 2016 and started selling. Moore conceded he probably called the peak of the sector too soon, but Brookfield nevertheless has sold US$4.5 billion in assets.

"It just feels like the end is coming," he said to the audience filled with apartment investors. "It's just not sustainable, something will break, but we don’t know what will break it."

The issue for Brookfield was what to do with the US$4.5 billion. One of the benefactors of the recycling of capital was Miami-based Niido, a subsidary of Newgard Development Group that Moore called a "small startup" with about 15 people.

The first two assets are owned by Newgard and were both rebranded Niido Powered by Airbnb. The 324-unit Florida apartment building, previously called Domain, was bought six months ago. The purchase of the 328-unit Nashville location, originally developed as Olmsted apartments, closed last month. The two cities were chosen because Airbnb users heavily desire them as tourist destinations.

"These two locations were off the charts," said Moore on the demand for Airbnb product because of a lack of supply.

The downside risk for Brookfield is limited at both locations with rents locked down by tenants, who bear the burden if they are not successful at attracting Airbnb customers.

Moore ultimately said even if the "science experiment" to encourage tenants to sublet their units and give Brookfield a piece of the action, the company has a fallback plan.

"We'll just rip it up, kick Niido out, and I’ll have a great apartment building," said Moore, adding it's not something he expects to happen. "The sharing economy is here, and it's real."

Garry Marr, Toronto Market Reporter  CoStar Group