The short-term rental industry has seen two big trends during the pandemic: a collapse in demand leading to liquidity challenges for urban operators, and a surge in demand for rural properties.
Airbnb-backed Lyric has shrunk to a single hotel in New York after slashing staff. Stay Alfred, one of the earliest venture-backed short-term rental companies, has shut down entirely.
But Sonder, the largest venture-backed short-term rental operator, and CorpHousing Group, a privately-owned operator, say they picked up more urban properties during the pandemic.
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It's become one of the classic images of the coronavirus era: city-dwellers renting an Airbnb in a rural area a couple hours outside of the city, looking to trade a cramped quarantine for open air and trees.
More recently, these same locations have seen another big bump, as vacationers look to more local rural and beach destinations instead of cities or international trips. Airbnb said on Wednesday that rural hosts in the US earned 25% more this June than they did in June of last year.
Meanwhile, rental operators focused on urban markets have struggled. Airbnb-backed Lyric, once one of leaders of the space, has shrunk to a single hotel in New York after slashing staff. Stay Alfred, one of the earliest venture-backed short-term rental companies, has shut down entirely.
Short-term rental operators run networks of professional Airbnb stays, providing accommodations with hotel-like amenities and trendy decor to tourists and business travelers. They are essentially property managers for vacation and travel properties, though many of them actually pay leases instead of being paid a fee for managing a property.
But with some downsizing their portfolios, landlords have been eager to offload those properties to other operators with experience running a short-term rental business. Surviving players say that's creating an environment where they can scoop up new locations to bet on an eventual comeback in urban-focused travel.
We spoke to the CEO of Sonder, the largest venture-backed short-term rental company, and the CEO of CorpHousing Group/SoBeNy, a private short-term rental company, about why they are doubling down in cities instead of heading for the country.
Growing in a pandemic
As the pandemic ground travel close to a halt, operators were forced to reevaluate their portfolios. Some, unable to pay their rent, negotiated with their landlords to reduce rents, change fixed leases to more fungible management contracts, or even exit leases.
Francis Davidson, Sonder's CEO and founder, told Business Insider that the ability to sign deals for properties that they wouldn't have had access to before the pandemic is one "silver lining." Davidson said that the company has signed some management contracts, but that it has mostly continued to sign leases.
Davidson said that the company plans to add hundreds of properties, funded by its recent $170 million fundraise. Sonder's $225 million July 2019 fundraise valued the company just north of $1 billion, while this June's fundraise brought its value up to $1.3 billion.
"We view the next 12 to 18 months as a really great time to grow," Davidson said. Sonder has been able to bring back or restore hours for over 100 employees since slashing staff at the height of the pandemic, he said.
The company is focusing its expansion on the European market, where it has properties in London, Edinburgh, Rome, and Dublin, and is also continuing to expand in US markets to locations that are able to be licensed as hotels.
Davidson said that Sonder had also dumped some properties during the thick of the pandemic, but many of them the company had already planned to leave because they were economic under performers, underwhelmed guest's expectations, or the regulatory environment had shifted.
The company is exiting every non-hotel-licensed property it holds in New York and San Francisco, where it isn't allowed to accommodate stays shorter than 30 days, by either declining to renew the lease or reaching an agreement with the landlord to exit early. Sonder sued one San Francisco landlord this week to exit a property that it began to lease last year, citing an early-termination clause because the city and state's response to the pandemic "crippled Sonder's efforts to draw potential tenants to the premises."
Brian Ferdinand, the CEO of CorpHousing Group and SoBeNy (the front-end and marketing arm of the business) said that the company has actually doubled the number of units it operates since the start of the pandemic, with potential to grow even larger because of partnership deals it has signed with 26 different landlord partners.
"We probably will be able to do in 10 months what we thought we would do in 10 years," Ferdinand said.
Ferdinand said that the company has grown "naturally" by finding properties that had not previously been short-term rentals and by acquiring properties that other companies had stopped operating.
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These newly-empty properties became targets for well-capitalized players looking to expand, setting off a wave of consolidation in the short-term market, according to Omer Rabin, managing director at short-term rental software company Guesty.
Guesty's software helps short-term rental operators big and small manage their properties, acting as the digital connection between operators, guests, and the marketplaces like Airbnb that they operate on. As a result, the company has a close view on operators' inventory, pricing, and occupancy.
Rabin said that the fact that operators are willing to take over these empty properties is a sign that some players are betting that the asset will come back stronger than ever after the virus.
He also said that these properties may be cheaper now that the coronavirus is lowering rental prices and pressuring the sector.
Though Stay Alfred and Lyric are the most public examples of short-term rental companies that backed out of a large amount of properties, other companies have also released non performers.
Outlook for short-term rentals in cities
Rabin told Business Insider that urban markets are seeing a rebound of occupancy rates, but that the average daily rate charged for a unit has slipped substantially.
Ferdinand said that CorpHousing Group is continuing to focus on urban markets because they are operationally easier to run at scale, and because he expects their original strategy to hold true after a recovery.
Rural properties, by their nature, are less plentiful and further apart, making it a challenge to acquire enough to make it feasible for a larger operator to keep them clean and functioning.
Ferdinand focuses on new properties in cities that have major hospitals, universities, convention centers, and corporate headquarters that will draw potential guests in. As a result, the company was able to sign three national deals with nursing agencies at the start of the pandemic.
"The urban core, we believe, saved our business," Ferdinand said.
Read more: Hospitality startup Sonder is pushing ahead with plans to open its largest NYC apartment hotel yet
Playbook for surviving the pandemic
Of course, the companies first need to weather the pandemic.
One key strategy was to try to lure some of the only people traveling during the thick of the pandemic: nurses and other essential workers. While CorpHousing Group worked directly with nursing agencies, Sonder offered a 40% discount for traveling nurses.
This was essential to help pay the rent, Rabin said, even though many operators who did this saw their revenue compared to costs crater from three to four times down to less than one time the cost.
There is also something of a silver lining to less frequent travel: guests they do have are staying for a longer period of time. Ferdinand said his companies' average stay has increased to 63 days up from approximately 30 days before the pandemic.
To be sure, with money likely to still go out the door, the firms also had to think of firming up their balance sheet.
CorpHousing Group, which is small and self-funded, applied for and received a Paycheck Protection Loan in order to protect 58 jobs. PPP loans were part of the federal response to the coronavirus, offering forgivable, low-interest loans to small businesses. Ferdinand said the PPP loan kept the company from having to furlough or cut any employees.
Venture-backed competitor Blueground confirmed to Business Insider it had received a PPP loan, Lyric Hospitality was listed as having been approved for a PPP loan but didn't comment when asked by Business Insider about the loan. Zeus Living applied for and then returned a PPP loan.
Sonder is venture-backed and had too many employees to apply for a PPP loan. The company instead laid off or furloughed a third of its staff or roughly 400 employees.
How short-term rental companies renegotiated leases
Sonder, which mostly signs master leases instead of management agreements, has worked out a clause that lets them pay a lower cost during a recession into 80% of the leases they've signed since 2018, a time in which they've grown rapidly.
The company also includes a "mark-to-market" clause in lease renewals which allows them to renew at current market price, which has been beneficial as the residential markets in big cities are sliding. Davidson also said that the company signs shorter leases, which may require higher prices, but allow much greater flexibility.
Ferdinand said that CorpHousing Group is focused on signing revenue-share agreements with landlords instead of leases, which allows the company to grow at the speed it has. CorpHousing Group is a tenant in properties owned by some of the largest landlords and operators like The Related Companies, Vantage Management, and Boston Properties.
Ferdinand said that CorpHousing Group's private ownership also allowed him to operate the company in the way that he thought would be most successful, even if that meant the business taking high losses during the worst of the crisis while also spending money to expand. He said the business was profitable before the pandemic.
Sonder's Davidson said that the company's ability to survive and even grow during the pandemic indicated to investors that the company would be a safe place to put their money.
"I'm interested in building a company that's around in 100 years from now," Davidson said. "It has to be really antifragile."
Axel Springer, Insider Inc.'s parent company, is an investor in Airbnb.
Correction: The original article stated that Sonder has added hundreds of properties since the start of the pandemic. It has been amended to say that Sonder plans to add hundreds of properties,
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