Short-term vacation rental companies pivot to longer stays

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The living room of an Airbnb Plus property in Los Angeles.
The living room of an Airbnb Plus property in Los Angeles.

After more than a decade of unfettered growth, the short-term vacation rental industry has suddenly found itself in dire straits amid the Covid-19 pandemic.

"Our clients are vacation rental management companies, and a lot of them have gone from 80% or 90% occupancy to 10% or less," said David Jacoby, president and co-founder of property management software and digital guidebook platform Hostfully and board member of the Home Sharers Democratic Club of San Francisco. "There are the venture-funded exceptions, but most professional vacation rental management companies are just getting killed." 

That's not to say short-term rental players with deep pockets aren't facing their own set of challenges. Airbnb, the tech juggernaut long synonymous with the sector, has hit strong headwinds, including a major hit in valuation. The company -- which, pre-pandemic, was on track to go public this year -- was said to be worth as much as $31 billion as recently as 2017. Post-Covid-19, however, media outlets have reported that Airbnb's valuation has shrunk to anywhere from $18 billion to $26 billion. 

In early April, the group bolstered its business with a cash infusion of $1 billion from private equity firms Silver Lake and Sixth Street Partners. In a statement, Airbnb said the funds would support the company's "ongoing work to invest over the long term in its community of hosts."

Just a week later, the company took on an additional $1 billion in debt, though Airbnb did not disclose the institutional investors that are backing this second funding round.

Like its core short-term rental listing platform, the company's Experiences tours and activities arm has also taken a beating, with the entire operation suspended through the end of April. Airbnb has responded with the launch of Online Experiences, enabling hosts to virtually stream content for a fee.

"Their valuation's going to drop significantly, and obviously, an [initial public offering] is not going to happen in 2020," said Simon Lehmann, CEO and co-founder of AJL Consulting, a firm specializing in the private accommodations and vacation rental industry. "There are also a lot of staff members working for Airbnb who have accepted low salaries because they were teased by the equity plan. I'm not sure how the company is going to come out of this."

Airbnb's relationship with its hosts is also on the rocks. In mid-March, the company announced it would allow guests to cancel and receive full refunds for bookings made between March 14 and April 14, overriding any individual host policies. (Airbnb has since extended that refund window through May 31.)

That move prompted an outcry from Airbnb hosts forced to bear the brunt of the new policy's financial impacts. Airbnb sought to make amends, with CEO Brian Chesky issuing an apology in late March while concurrently announcing the launch of a $250 million fund intended to help offset some of the economic burden.

According to Jacoby, however, both moves came "a little late in the game."

"Chesky acknowledged everything and apologized, and I think it's better than nothing," Jacoby said. "But for many hosts, it still doesn't feel like enough. I think they're feeling like they're second fiddle, in a way."

As a result, Jacoby said, operators once loyal to Airbnb might seek to be less reliant on the platform moving forward.

"I think hosts and managers will be looking at how they can increase their distribution by having a multichannel approach, being listed on Airbnb, Vrbo, Booking.com, etc., and really looking at that long tail of websites," Jacoby said, citing growing host interest in corporate housing sites such as Second Address, which specializes in stays of 30 days or more, and month-to-month rental platform HomeAds.

Indeed, many hosts are turning to midterm or long-term accommodation options as demand for short-term lodging plummets. 

"In Europe, we're seeing this push toward midterm rentals, which are around the three-month range, and I think we'll be seeing similar in the U.S.," said Alex Nigg, founder and CEO of Properly, a vacation rental housekeeping and operations management startup. "These could be rentals for nurses and doctors who are relocating, people moving out of their homes temporarily to have a safer place to stay or people renting an additional flat to use as work-from-home space."

Airbnb has pivoted to garner its share of this longer-term rental market, recently encouraging its hosts to make their accommodations available for weekly and monthly bookings and highlighting accommodations that offer monthlong stays on its homepage. The company reported that long-term bookings on the platform were up 20% during the last two weeks in March.

"A lot of the short-term inventory will just disappear, especially in urban markets," Lehmann predicted. "No. 1, the margins are lower in urban than in leisure markets. No. 2, the competition is high. And while many urban property managers may have been running on 70% or 80% occupancy, which offers good recurring cash flow, they don't have a lot of cash on the side. If their business is seeing a downturn and they have to survive for a period of time, it's just not happening."

Also facing increased pressure are the many apartment-hotel and hybrid accommodation startups that have flooded the scene in recent years, many of which are heavily concentrated in major cities. While their business models vary, most in the sector have built their success on renting out floors in residential buildings and converting those apartments into professionally managed short-term rentals.

"Companies like Sonder, Lyric, Stay Alfred, etc.. have taken out huge lease commitments," Lehmann said. "Very few of them will survive, simple as that. None of them can service their debts. This model will disappear just as quickly as it evolved."

But while the urban short-term rental market is likely to face a steep road to recovery, most analysts agree that more traditional vacation markets, especially those in rural areas, could benefit from a post-quarantine boom.

"I'm actually optimistic about the category," said Nigg. "After the first wave of shelter in place is over, I think we'll see a pronounced exodus from the cities, and drive-to areas may become beneficiaries of this."

Jacoby echoed Nigg's optimism.

"I think vacation rentals are going to bounce back sooner and better than the hotels," Jacoby said. "As travel starts to get going, people are going to feel more comfortable staying in a place where you don't need to push an elevator button that everyone else is pushing. They're going to want to be somewhere a little more remote."

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