Last week, we had a chance to attend the Short-Term Rental Summit in New York organized by Skift. 

For a bit of background - Skift is an industry site for the travel space and they do a pretty phenomenal job on their coverage of the travel space. It was interesting to see them organize a standalone summit focused on short-term rentals as it’s a bit of a reflection of the growing interest in the short-term rental space, as well as the distinction that it has from the general, run-of-the-mill hotel business.

While there were quite a few different panels and speakers, instead of recapping each one, we just wanted to share some of the most noteworthy trends, as well as reflections on how these things apply to STR investors.

Takeaway 1: New Hospitality Class - "The Air-Hotel"

Over the last couple of years, there’s been a rise of new type of hospitality class - part Airbnb, part-hotel. Examples of those are Sonder, StayAlfred, Lyric, Domio. They are built on the premise that today’s guest is looking for the experience and uniqueness of an Airbnb with the reliability and consistency of a hotel.

These companies typically operate by partnering up with developers on new, large buildings and doing a master lease on multiple floors or the entire building.

Then, they send in their design team to decorate and spruce up the units, combine it with technology to create a seamless check-in process (oftentimes fully virtual, sometimes with a front desk), and promote it both through Airbnb and traditional hotel channels to prospective guests.

The end result are apartment-like units that are booked like a hotel. Main difference with a hotel typically has to do with locations, design, the fact that there’s usually no daily cleaning, and that oftentimes, check-in and check-out does not include a front desk.

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These companies have been featured in multiple talks within the summit. Our takeaways are such:

• There’s an incredible amount of money in this. Sonder raised $360M and has 3,500 units. StayAlfred has 2,500 units and operates in 30 cities. Lyric was invested into by Airbnb and has 500 units. Domio has 500 units and operates in 7 cities. All of them have raised millions.

• None of these companies are profitable. That’s not much of a surprise, but given the recent WeWork fiasco, it’s more concerning. The model works while there’s investors’ confidence. If the confidence dips, the business becomes much more exposed.

• They do believe that there are two significant differences between WeWork and their model:

- WeWork has to compete with the landlords locally for the same tenants. So, a building owner can technically turn around and pitch to the same tenants. These companies, however, compete for global guests, which is hard for property owners to match and master.

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- WeWork’s margins - before overhead - were just 15%. Very small. (it would be curious to see what the margins are for these)

• They do some interesting things with the leases. Some of them state that they put in a clause that lets them get out of a lease or lower rent if a recession comes.

• Some of their projections seem to be a bit unrealistic. Domio’s CEO claims that they are on track to sign 1,000 new units per month. Given that they currently have 500 units, it’s a far stretch. Other ones are equally ambitious. However, these claims are a tad concerning because they are a bit detached from reality.

• Frustratingly, we begin to hear a lot of the same slogans being used - “we’re a tech company, not a hotel company”. This allows them to get valued at tech-company valuations vs. real estate company valuations - but I think we also need to be careful not to drink the KoolAid.

• Most of these companies claim to spend virtually nothing on marketing. While it's not entirely true (they do pay a commission to the booking engines which is a marketing expense), it also means that they are heavily relying on channels such as Airbnb and the like. If that was ever to go away, it would be much harder for them to generate business as none of them have the household awareness yet.

• On a more positive note, there’s certainly very real demand for what these companies are offering. The truth is that their product is actually quite good - especially when you’re traveling in groups, looking for a more leisure-focused experience, and are already used to the experience of an Airbnb. 

• These companies do pose a very real threat to hotels. The truth is - they are already de facto hotels themselves. Sonder, for example, is looking to build a contemporary brand to rival the Hilton. The main difference, in our view, is that their focus is on larger spaces for groups and less involved check-in process which does reflect the changing guest needs. Domio, for example, has an average of 2.5 bedrooms per unit and 5 guests per booking.

• Simultaneously, most of these companies have very little among themselves that differentiates them from one another. They typically point to design and aesthetics - but they all generally follow the same design tactics. Beyond that, they all are developing virtually the same tech, use the same channels for marketing, etc. Hard to imagine how they’ll all be able to build a sustainable brand in the long run.

• If you want to see more, check out the Sonder fundraising deck here that they used to raise hundreds of millions.
  

As the market matures, we can expect competition both from hotels, as well as these companies. Fortunately, we have access to the same marketing channels, virtually the same technology as far as automation and pricing, and - oftentimes - significantly lower overhead.

Takeaway 2: We Are at the Late End of the Real Estate Cycle

Towards the end of the summit, we got to hear a bit from the former Airbnb CFO and the current investor into Sonder. He was probably among the most insightful folks at the event, so we wanted to share a few of his comments.

He generally believes that we are at the late end of the real estate cycle, so we should make decisions accordingly.

Looking at the Short-Term Rental market as a whole, leisure market will always remain fragmented . It’s tough for large companies to get enough concentration to reach the scale they need. On the other hand, institutional capital will typically flow to fund urban markets more, which is why we’re seeing so much capital flowing to Sonder and the like.

As an investor, we always have to underwrite properties in two ways - as a traditional rental and as a short-term rental. While the profits of the short-term rentals are such that it's easy to overlook the fundamentals, the property should still make sense as a traditional rental. Economics need to work for both.

On a personal note, we're big proponents of this approach and always aim to ensure that any property we're thinking about acquiring works as both short-term rental and a long-term rental.

Takeaway 3: Some Insights from AirDNA

• Two-plus bedroom properties are growing much faster than studio or 1-bedroom units.

• How to explain benefits of STR? Flexible supply that can expand and contract with demand. Distributed economic impact - that goes beyond the downtown core. Better utilization of space.

It's likely that most of us would benefit most from properties that are not directly competing with a hotel. So less focus on studio and 1-bedroom units and more focus on 2-bedroom and larger spaces that can cater to larger groups and offer something that hotels cannot. Alternatively, you can still proceed with a single room / studio / 1-bed units, but then you're mainly competing on price.

Takeaway 4: VRBO Might Be a Good Option for Whole House Rental

VRBO is planning to focus primarily on family travel. To do that, they are rolling out a number of features such as trip boards to help familiar collaborate.

If you have a large house listing - especially over 3-4 bedrooms - in a leisure market, VRBO deserves a closer look.

In Conclusion

It's really quite great to see this sort of content and events take place around the short-term rental space. While most of the conference was focused a bit more on macro trends and the larger, VC-funded players, I think it was a very strong reminder that the short-term rental space is not going anywhere, it's growing well, and there are opportunities to be had at every level.

In fact, I'd argue that smaller investors who are looking to build a portfolio of 1-10 STR properties are actually at an advantage, as their overhead is significantly lower than for the larger players.

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If you have any questions, feel free to email us at hi@buildyourbnb.com. We would love to hear from you!