Short-term rental market faces consolidation as start-ups and small landlords offload properties

Consolidation is hitting the market for short-term home rentals as the coronavirus pandemic has curtailed travel dramatically this year.

Small landlords and venture-backed companies that collected properties to rent out as short-term vacation rentals are offloading them in an effort to cut their losses. Meanwhile, large property owners and managers are seeing opportunities to expand as desperate sellers and landlords seek new business.

These deals come as the coronavirus pandemic and the shelter-in-place orders that followed have devastated the travel industry. The U.S. travel economy has lost more than $195 billion since the start of March as a result of Covid-19, according to a Thursday report from the U.S. Travel Association. 

Although numerous states are starting to re-open their economies, the damage has already been done for many of these businesses that rely on a steady flow of travelers from Airbnb and other short-term rental sites to pay their monthly mortgages and leases. 

Although Airbnb does not own or manage properties, the coronavirus pandemic has taken its toll on the company as well. Airbnb raised $2 billion in new debt funding at a valuation of $18 billion and announced major cost-cutting initiatives, including plans to lay off 25% of its staff, or nearly 1,900 employees. Airbnb competitor TripAdvisor has also undergone layoffs as a result of the coronavirus. 

Nonetheless, the company remains optimistic as travel slowly begins to return.

“There are more hosts on Airbnb today than there were on January 1, and the vast majority of Airbnb hosts have only one listing,” a spokesman for Airbnb said in a statement. “We have announced our industry standard-setting Enhanced Cleaning Initiative and are seeing demand and bookings for shorter trips continue to increase.” 

Many venture capital-funded apartment rental companies have endured layoffs, lost properties or seen their valuations cut since the coronavirus pandemic hit. These companies typically rely on master leases to secure numerous units from apartment buildings. They pay landlords set leases for those properties and capture the difference they earn from guests who book the units for short-term stays. 

For example:

• Stay Alfred, based in Washington state, announced on May 21 that it will shut down. The company had raised $62 million in funding, according to Crunchbase.
• Zeus Living, which counts Airbnb as an investor, raised $15 million in equity and debt in May at a valuation of $110 million, according to Short Term Rentalz – a down-round that cut its previous valuation of $205 million nearly in half.
• Lyric, also partially-backed by Airbnb, has gone through multiple rounds of layoffs and had to get rid of units in its portfolio, according to The Real Deal.
• Sonder, based in San Francisco, laid off or furloughed more than 400 employees, according to The Information. Sonder also decided to offboard numerous units after reviewing its portfolio in the wake of the Covid-19 pandemic, a source familiar told CNBC. 

Individual landlords are also feeling the pinch.

Lynn Prehm has been in the short-term rental business for six years, renting her properties in Cave Creek, Arizona, and La Porte, Indiana. After the coronavirus hit in March, Prehm said she lost most of her bookings. That made things particularly difficult for the Indiana property, which gets most of its business in the summer. 

Facing uncertainty as to when the vacation market would resume, and with looming mortgage, utilities and maintenance payments, Prehm and her husband decided to put the property up for sale. The home was sold within a week, along with the furniture Prehm used to house guests. Though the sale was quick, Prehm and her husband lost money on the sale.

“We put a lot of work into making it perfect,” Prehm said. “To walk away and not make anything, it’s devastating, but at some point you have to be happy that you’re walking away and not losing a ton.”

In Vero Beach, Florida, Sonya Carp decided to sell one of the two properties she uses for short-term rentals after the state temporarily banned them during the coronavirus crisis. (That ban was finally lifted last week.)

Ideally, they will sell the property to someone who is interested in doing short-term rentals, Carp said, then apply the money to their own home. 

“Someone who wants to do short-term rentals and doesn’t want to have to lift a finger and just be able to go ahead and start booking people,” she said. 

The downturn has presented an opportunity for others in the market. 

Vector Travel, which provides services for short-term rental owners, has expanded during the economic downturn, said CEO Mickey Kropf.

The company operates with a revenue share business model. Instead of owning units and leasing them out directly, it provides services to landlords who want to do short-term rentals: Vector furnishes the properties, handles marketing and takes care of guest communications in exchange for 25% of revenue from bookings. The property owners keep the rest.

“It hit me that this was going to be a massive problem for the other operators with a different business model who had leased their inventory,” Kropf said. “I knew that was going to create a lot of problems and test their balance sheet.”

Vector Travel survived April by pivoting toward a focus on mid-term rentals. Prior to the coronavirus, the company capped stays at 29 nights, but now, Vector Travel is allowing guests to book properties for up to 90 nights. The company also received support from multiple federal government relief programs, Kropf said. 

The company was able to expand by reaching out to property owners who have been struggling to find tenants, Kropf said. This includes running Google ads targeting landlords as well as reaching out to landlords near college campus. 

Prior to the coronavirus, Vector Travel managed hundreds of units, Kropf said. Vector Travel expanded its portfolio by 10% in May, and Kropf predicts the company will double if not triple its portfolio in 2020. 

“First it was frankly survival mode,” Kropf said. “But parallel processing with that, we tried to identify where we could expand and grow.”

In Milwaukee, Wisconsin, FrontDesk has also capitalized on the downturn in the short-term rental market.

FrontDesk has been around since 2017, and it leases or manages approximately 500 units across 28 markets, said Jesse DePinto, co-founder of FrontDesk. The majority of those units are on master leases, but the rest are revenue share units. All new units that FrontDesk acquires are under revenue share agreements, DePinto said. 

Although the company laid off 35 employees in April, or about 16% of its workforce, it was also able to raise a $6.8 million funding round, DePinto said.

DePinto said FrontDesk has been able to weather the coronavirus due to its focus on maintaining operational profitability throughout its existence, meaning that the company ensures each individual market remains profitable. The profits from those markets are then reinvested into the company in the form of new furniture which the company buys for the units.

That focus on operational profitability and its timely funding round has allowed FrontDesk to expand its portfolio. This month, the company acquired 18 units in Pittsburgh that had previously been a part of Stay Alfred’s portfolio, DePinto said. It acquired an additional four units in St. Petersburg, Florida, from a property management company. 

Ours “peers followed the traditional Silicon Valley scaling and growth-at-all costs playbook. We followed a more sustainable approach toward growth,” DePinto said. “We’re a Midwest-based startup. We just see the world a little differently than our peers on the coasts do.”

As the coronavirus shakes up the market and some companies offload properties while others expand, DePinto said he remains bullish on short-term rentals and he expects more change.

“We’re still coming out of the eye of the storm. It’s still very early into this,” DePinto said. “We’re starting to see the deck being reshuffled right now. It’s only begun.”