Whatever hospitality trends for 2020 were predicted at the start of the year no longer stand.
While the short-term rental industry was expected to grow exponentially – it’s now plummeting at rates we’ve never seen in our lifetimes.
Most operators have and will continue to see severe losses in cash flow.
Some companies – by sheer luck – were patient, weren’t riding the wave of growth, and put cash aside. Those hosts (and the ones who are staying focusing now, grabbing opportunities and building foundations) are the ones who are going to make it out of this.
The opportunity, now, is open to hosts who are going to be innovative and take the time to research and study where the opportunities are.
2020 Hospitality trends: losses in operations and transactions will continue
Losses in operations and transactions.
Anton Zilberberg, CEO of Autohost, shared his expert predictions based on his data with some of the top short-term rental companies in the world.
For starters, his business saw a 95% loss in operations and transactions.
They had 550 cancellations within a week and a half.
It only went downhill from there.
These numbers are reflected proportionally across the entire industry – whether hosts have 1 listing or 500, cash flow and revenue have been wiped out.
So Anton quickly pulled out his cash sheet and balance sheet and projections “I looked at everything and asked ‘is this making money? No – bye, bye, bye’” he told Eric.
The good times were so good for most hosts, that they could operate like a fat company with a lot of expenditures.
If they had invested it better, or opened up a different market, or opened up a different vertical, or used the capital in any better way, things would’ve looked different now.
Failures in operations and expenditures
Most companies in the hospitality industry have been operating on the premise that things would keep growing. That the cash flow would keep coming in.
Watching WeWork crumble should have been an eye-opener for us. Seeing the lease arbitrage giant famously fail and have its valuation drop by $42 billion woke Anton right up.
“That’s when I realized that I needed to look closely at all of our books and all of our expenses and really make sure we have some form of IP – and our IP is our operations, our brand, our employees, our expenditure, relationships with clients, contracts and all that.”
It’s not necessarily cash flow that they were generating. That’s just a bi-product.
At the end of the day, it’s the master lease models that are the most capital intensive and that are going to get hit the hardest by this crisis.
It takes so much money to open up a single unit. You need to acquire the unit, there’s a sales process, you pay commission on that, you need sales people, you need to furnish the unit, by the time you’re actually furnishing it you need to pay rent.
By the time you actually get that money back, Anton calculated with the current conditions and ADRs, the payback period increased from 6 months to a year.
That’s huge.
The short-term rental models that are less capital intensive are going to find more opportunity.
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Borrowing against assets instead of cash flow
Every time Anton used to approach banks, they loved Autohost’s cash flow.
They were giving out loans like candy. But Anton quickly realized that borrowing and leveraging against a cash flow is that it’s problematic if cash flow stops
This development is now a financial risk for companies.
If you’re going to fundraise or borrow and focus on the master lease, the payback period is much longer.
Anton says this model won’t disappear, but it’ll change.
It’s going to combine with some form of revshare with some form of commitment, depending on the inventory holder and how desperate they are to fill the space.
Airdna’s data on European destination reservations for this summer
Current hospitality trends: companies will need to focus on profitability
This was a trend that Simon Lehmann already predicted in our last Airbnb industry trends report. But now it’s happening far faster than we thought.
Companies in the hospitality industry will need to focus on the most profitable revenue streams and give up the rest.
That means partnering with hotels or developing revshare or management models that can benefit both parties.
Those with the least overhead will win.
Anton thinks we won’t see the multiplier of 5x – 10x growth for the next 5 years. Operators who are the most innovative and creative will most likely come out stronger than before.
There will be an abundance of commercial real estate
It could just be across the street – it could be in the retail space or the gym that closed down.
“You could convert it into a work and live environment. That’s an opportunity. You’re going to have an abundance of commercial real estate” Anton continued.
All the WeWorks and office spaces that are going to close down – because more people are going to work from home, that’s going to be on the market now.
It’ll continue that way for the foreseeable future.
Converting that opportunity into hospitality places is going to be pretty big in the next couple of years.
A swap in business models
Master lease companies are going to model hotel business models. Hotels are going to model short-term rental businesses.
What will that look like?
if you look at all the contracts that the big companies are signing, the Sonders of the world – they’re making commitments of 10-15 years under commercial agreements.
They’re not making 1-5 year commitments. The arbitrage that they’re going after is: I can lock in a 15-year lease at a significant cost reduction, and I’ll make that money back over the course of 10-15 years, which is the same model hotels operate on.
It’s going to be more professionalized and more calculated. Anton argues that risk modeling, specifically for that model, is going to become more prevalent.
“At the end of the day, when you come to an inventory holder/supplier who has 100 units, and you’re coming to them and say I will rent those 100 units from you because I can increase your returns at the end of the year – they’re going to ask ‘what will I do at the end of the next downturn? I’ll have to give you a discount’” Anton says.
On the other hand, hotels are going to have to start acting more like short-term rentals.
They’ll have to become more efficient.
Now, you stay in a hotel room in New York City and pay $250 – and get nothing.
Whereas you can rent somebody’s apartment for the same price and actually live there. Hotels will need to quickly grasp this value proposition.
Revshare/ property management model will see the largest opportunity
Anton recommends operators to find opportunities with hotel owners or inventory holders.
Short-term rental operators have a strength to offer: efficiency.
And until now, most hotel operations have not been working efficiently.
Maybe you they were paying heavy franchise fees to a big company. Maybe there’s a better way to operate their hotel.
Operators should offer revshare agreements with inventory holders.
Instantly, they’ll get access to a building.
Almost no hotel owners have just one hotel. They leverage and buy more and more and roll it into a conglomerate of hotels.
Major hotel chains will need support
The Marriott furloughed tens of thousands of employees last month. Other major hotel chains are laying off thousands of employees and will continue to do so as the crisis continues its destructive path.
It’s terrible for everyone involved.
But they are going to need support when they start operating again.
Many of these hotels are going to take years to replenish their staff, and they’re going to look for new solutions.
They’re going to look for efficiencies in operations, new processes, new technologies – that process is going to come from the short-term rental space.
What the largest operators in the short-term rental industry – Sonder, Domeo, and the rest – bring to the hospitality industry is operational efficiency.
Sonder is famous for having furnished hundreds of units at lightning speed.
They managed figured out the supply chain. They figured all that out to fill the units as quickly as possible with guests. That’s their biggest innovation – that kind of process, that kind of SOP and technology is going to be the biggest driver in the new age of hospitality.
Smaller operators can also participate
Sonder has over 2,000 units. But that doesn’t mean smaller operators can’t model what they’re doing, too.
Anton told me: “I came to the conclusion that whoever has the least amount of overhead and expenses is the person that’s going to come out of it.
If you have 50, 100, 200 units, it’s not a lifestyle business anymore – it’s your full-time job. You have processes. You can apply that process to a different building or different piece of inventory that will make it a lot more profitable down the line.”
The WFH market share will grow
While before the crisis, leisure travel was everything, the focus is now going to be on the work-from-home market.
There are opportunities everywhere.
According to the Bureau of Labor Statistics, a third of Americans can work from home.
And now, companies are hurrying to find solutions to get their employees back to work – remotely. Overheads for running huge offices are going to go down, and more businesses will see the value in letting their employees work at home.
What does that mean for the short-term rental industry?
People are going to work from anywhere – and when the lockdown ends, they’ll want to continue living with that freedom.
Anton predicts that subscription living will become a reality. A person could buy a subscription to a bachelor package and you have access to a bunch of 1BDs or 2BDs all over the world. But it’s all going to be within a single network.
When will people start traveling again – and who will go first?
These are Anton’s predictions:
The first people to start traveling will be business travelers. An engineer, for instance, may need to go inspect a mine in Bolivia.
That’s a must – that’s something that needs to come back.
Inspection, compliance, or something that’s resource-related: water, energy, gas, oil, etc. will be the first to start traveling.
The next thing that will come back after in the leisure side will be local travel – drive in markets.
According to Guesty’s data, certain markets that are traditional vacation rental markets that are booming now, doing even better than before: Upstate New York (the Hamptons, Hudson Valley and the Catskills), Napa Valley, Sonoma and Lake Tahoe, as well as mountain retreats, such as Boulder, Colorado. That’s a result of the exodus of people escaping the cities.
Secondary markets will be okay and continue to grow
We were chatting to short-term rental expert Simon Lehmann the other day and he mentioned something interesting.
Traditional vacation rental markets have been there forever, they’ve been through every single crisis that this world has seen and they’re still there.
They’re there for a reason.
In that vein, it makes sense that secondary markets will come back faster than the urban markets.
Things are going to keep changing, but we’re finally seeing the light at the end of the tunnel and predictions are starting to make more sense. Where do you see your business going?
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