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Not All Short-Term Rental Companies Will Weather The Pandemic Recession Like Airbnb

As the rousing success of Airbnb’s initial public offering has shown, the short-term rental market hasn’t suffered as deeply as the greater hospitality industry. But one type of short-term rental business may not survive this recession.

A rendering of the pool at Sonder's 2 Washington St. — dubbed Sonder at Battery Park.

Some companies founded in the previous growth cycle have built their portfolio of rooms by leasing blocks of apartments from multifamily landlords, furnishing and managing those rooms for stays averaging a couple of days. These “master lease” companies have faced a similar problem with their business model as WeWork has in the office sector: long-term liabilities against short-term revenue streams.

That model has suffered in the coronavirus pandemic, leading to swaths of apartments returning to the standard multifamily market. At least two national companies that used the master lease model, Stay Alfred and Lyric, have shuttered their businesses. Stay Alfred went under completely in late May, while Lyric has pivoted away from its direct rental model to providing software and analytics services to other professional short-term rental companies.

Domio underwent a “financial re-engineering” to stay in business in November, while Sonder has had to pull back business in some cities.

While Airbnb and competitors like Vrbo and Vacasa provide third-party management and listing services for owners of short-term rental properties, Stay Alfred, Sonder and others like them used the master lease model to exert more control over the look, feel and location of units on their platforms. Another motivation for the master lease model is speed of growth — of utmost importance when funded by venture capital, market analytics firm AirDNA Vice President of Research Jamie Lane said. But the model always had flaws and concerned market watchers.

“We weren’t bullish on the master lease model before this, and it started with sort of the [decline] of WeWork showing the cracks in the master lease model,” Lane said. “That was already causing the master lease rental companies to rethink that model, and COVID has really accelerated that. So as these companies look to start growing again, I doubt the master lease model will be the main way they grow supply.”

A rendering of the conversion of the Heid Building from an old hat factory into an apartment building with a block of units master leased to Sonder.

Representatives for Domio, Lyric and Latin America-focused competitor Selina didn't respond to requests for comment for this article, while representatives from Sonder responded to a request for comment with a statement from Senior Vice President of Revenue Shruti Challa.

“We've seen that COVID has accelerated the desire for a contactless and technology-driven experience, which we've been offering from the very beginning,” Challa said in her statement. “Less than a month after the first wave of travel lockdowns, we launched discounted long-term stays to better meet the needs of guests, and have been grateful to keep average occupancy above 70%.

“We've continued to open new properties across the country, and last year launched in six new markets,” the statement read. “We believe our unique model and contactless approach are well-suited to travel now and in the future, and we're planning for strong growth in 2021.”

Overall, short-term rentals may be able to use post-pandemic travel and tourism preferences to their advantage, given how consumers may prefer to avoid the density and higher-touch service environment of traditional hotels. Short-term rentals may recover a year or two faster than hotels as a result, Lane said.

“Yes, they’ve been hurt just as bad, but once people start traveling again, if you have an option between an apartment where you can cook or heat up food, that will be popular again, and I believe that the recovery will be stronger than what we see for hotels,” Lane said.

Two factors that have buttressed Airbnb and other management-based platforms are the increased popularity of more remote locations as an adaptation to social distancing and an increase in average length of stay, according to data from AirDNA and hospitality analytics firm STR. If working from home remains prevalent, professionally managed short-term rentals might solidify that gain, since longer stays mean less unpredictability in tenants, Avalara MyLodgeTax  Director of Compliance Pam Knudsen said.

“If you think about it, the increased average length of stay will only have a positive impact,” said Knudsen, whose company has assisted Vrbo and other short-term rental companies stay in compliance with each jurisdiction’s distinct regulations. “Because if people say they’re going to work or bring their kids to have [remote] school here, [party houses] are less likely to happen because that’s not what people are doing. Rather than just having a party, they’re thinking, ‘I just need to get away, even if I still need to live my life.’”

Master leases by nature haven’t been able to share in that positive news, since they depend on multifamily buildings in cities, which still have months to go before tourists begin returning in large numbers. Companies like Sonder instead have been reaching for customers with even longer stays, less for a vacation and more into the realm of a furnished, short-term home.

BET Investments President Michael Markman, Korman Communities CEO Brad Korman and RSM partner John Rilling

Patrons of Korman CommunitiesAKA brand of urban furnished apartments average stays of weeks or months, Korman CEO Brad Korman told Bisnow. Korman owns and manages its properties, but its contemporaries who have either signed master tenants like Stay Alfred or considered doing so may have soured on the prospect by now, he said.

“Most [multifamily landlords] were getting paid by our residents, but the ones who weren’t getting paid were the ones that had these [master leased] units,” Korman said. “Their keys were getting returned and they weren’t getting paid back, and those landlords were the ones that couldn’t pay their debt service. 

“So going forward, I’m not sure how many lenders are going to give owners full credit for occupancy. I think you’re going to see a lot of pressure by lenders to not be so interested in giving credit to owners who give master leases to these groups.”

Some master lease-based operators may look to pivot their business model like WeWork is attempting, as a partnership with the landlord or with a revenue-sharing agreement rather than a sublease, Lane said, but that may not translate to multifamily as readily as it did for office. For one, a partnership model may prove too much of a headache for landlords.

“Your Sonder or Domio would be managing the day-to-day, but the revenues would only come in if the asset is successful under the management agreement, so you’re much more attentive to the day-to-day success of the asset,” Lane said. “They need to make sure that the asset is managed as well as possible, so owners would have to be much more involved in a management agreement rather than master leases, and in terms of selling it, hotels have a higher cap rate than multifamily.” 

Although cities are in the process of re-evaluating how they regulate short-term rentals within apartment buildings, there will certainly remain a place in the city fabric and the market for Airbnbs and such, especially if they pay hotel taxes, Knudsen said. Where an additional challenge might lie for companies that want to control a substantial portion of a building is if they run afoul of local zoning or building safety codes that could be applied differently if one were to argue that such buildings would effectively become hotels, Korman and Lane agreed.

But if companies like Sonder are willing to put in the work to grow at a slower pace and in such a way that can make multifamily owners and lenders comfortable, there remains a place for them in the market.

“I think apartments have been slow to react to the need for optionality in the industry, slower than other forms of real estate,” Korman said. “And one of the ways could be revenue-sharing, but we’ll have to see.”