Short-Term Rental Survivors Positioned for Expansion

Buoyed by remote workers and returning travelers, operators are focusing on revenue sharing vs. long-term leases.

Image by ChaoTechin from Pixabay

In late 2019, short-term rental operators were working a groove. Companies like Sonder, Lyric, WhyHotel and Mint House, backed by tens of millions of dollars in venture capital, were building their businesses on a rising wave of popularity.

Still, questions lingered about the young industry, a hospitality alternative that harnesses technology to arrange apartment stays ranging from days to weeks. One of the most pressing centered on whether short-term rental demand would hold up during a downturn.

No one foresaw a pandemic and lockdowns. Players like Lyric and Stay Alfred shut their doors in 2020 as travel plummeted. But others shifted their focus to displaced students and traveling medical workers—typically offering deeper discounts for prolonged stays—by promoting their touchless stay process.

Then remote workers who wanted a change of scenery became a staple. More recently, leisure and corporate travelers have begun to return, and revenues in the industry, commonly referred to as flexible leasing, have rebounded.

In May, short-term rental demand was 17.4 percent higher than the same month in 2019, according to AirDNA, a Denver-based provider of data and analytics for the industry. Additionally, short-term rental occupancy rates rose to 63.7 percent in May, up about 11 percentage points over May 2019. All told, demand and occupancy trends indicate that the sector has transitioned to an expansion phase from recovery, said Scott Shatford, co-founder and CEO of AirDNA.

“For the survivors in the short-term rental marketplace, the future is going to be fantastic. The competition has been culled,” he declared. “Apartment owners that watched tenants flee to mom and dad’s are going to be a lot more flexible and creative about how to fill their buildings.”

Revenue Sharing vs. Long-Term Leases

One of the biggest shifts among operators has been a move toward sharing revenue with apartment landlords and away from long-term leases. Mint House, which began employing revenue-sharing agreements in 2019, took over 200 vacant units in four apartment buildings in as many cities in 2020 after short-term rental operators that were leasing them went out of business.

Mint House switched the units to revenue sharing agreements, which can provide apartment landlords with two to three times net operating income per unit, said Will Lucas, founder and CEO of New York-based Mint House. The deal included roughly 130 units at 70 Pine St. in New York, a former Lyric short-term rental property that has been named the No. 1 U.S. hotel in 2021 by TripAdvisor users.

“It has always been our opinion that a revenue-sharing agreement is a much better arrangement than a lease,” he said. “The model allows our owners to really participate in the upside that we create, and we’re also making an implicit guarantee that we’ll always be around, even during a downturn. The leases multifamily owners were agreeing to weren’t nearly as secure as the owners might have thought.”

Mint House’s plans for growth include buying apartment properties outright and partnering with apartment developers to create a number of dedicated hotel units during the construction or lease-up, said Lucas. The company revealed Dallas as its 13th market, and by the end of the year, Lucas anticipates operating in 20 cities and doubling the firm’s current unit count to 2,000.

Resuming Growth

Vector Travel, an Atlanta-based flexible leasing operator, has built its business on the revenue-sharing model, which typically provides landlords with 75 percent of a unit’s revenue. And while the pandemic disrupted business, it also provided the company with the opportunity to illustrate the strategy’s value.

Prior to the health crisis, Vector Travel lost many deals with apartment landlords to operators that leased units. But during the pandemic, the company was able to pay its landlord clients on time by rebooking cancelations—albeit at lower rates, said Mickey Kropf, founder and CEO of Vector Travel.

Once the market stabilized midway through 2020, Vector began investing in analytics and other innovations to resume growth. It increased its unit count by 30 percent by the end of the year, and it currently operates 1,500 units in roughly 25 markets as varied as Los Angeles and Branson, Mo. Some 1,000 additional units are about to come online.

“Multifamily owners had an entire infrastructure set up for leasing, so that’s what they did initially,” said Kropf. “But there are fewer short-term rental companies doing leases, and many that were doing them are now taking an approach that blends in revenue sharing.”

Combination Brings Confidence

The blended approach appears to be the route being taken by Sonder, which operates 12,000 units across 35 global markets. In April, the company agreed to a merger with Gores Metropoulos II, a blank check company, valued at $750 million.

Pre-Covid, Sonder leased units for five to seven years and had up to two renewal options. But in a recent investor presentation, Sonder indicated that it would transition to more revenue-sharing arrangements over the next three to five years.

“Starting in late 2020, we increasingly began signing flexible deals, such as revenue-sharing agreements, where payments are (tied) to performance,” said Martin Picard, co-founder and global head of real estate for San Francisco-based Sonder, in an email.

Sonder’s merger with Gores Metropoulos will give it an enterprise value of $2.2 billion, and Sonder expects to generate revenue of $4 billion in 2025 from 77,000 units—up from an expected $173 million in 2021. Coming off of a year of turbulence, the transaction underscores the flexible leasing industry’s resiliency and growth prospects, said Susan Tjarksen, a managing director at Cushman & Wakefield.

Large apartment managers will soon begin to enter the space, too, she predicted.

“I think the short-term rental space will explode because it was very user-friendly pre-Covid for business and pleasure travelers,” Tjarksen said. “Now that apartment buildings have adopted keyless entry and other technology, it makes it easier for the buildings to be a blend of uses.”

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