A couple of weeks ago, before coronavirus took over our attention, we learned some potentially important news about the short-term rental (STR) sector. The story was about Airbnb-backed Lyric's decision to reduce its workforce by 20% as part of a "downsizing and restructuring." We were disappointed to see a rising star in our industry falter on its growth path, but encouraged by the decisiveness of their action and hope that it will leave the company in better shape to capitalize on the opportunity that we know it has.
The decision may tell us a couple of things about the state of STRs in the multifamily industry. Remember, Lyric was one of several STR platforms funded during a heady 18-month period from 2018 to 2019. With the staggering growth of Airbnb, the might of Booking.com (especially in Europe), and Expedia's commitment to becoming a force in this space, the STR industry and market have been thoroughly validated. So what's holding back the organizations who are trying, like Lyric, to define the STR business model for multifamily?
Follow the Occupancy Trend
Before I go on, I should share that we at D2 Demand have long been proponents of STRs for multifamily operators. To us, they are another part of the demand mix for a multifamily community, and it is easy to imagine the kinds of demand problems that they readily solve. For example, we have previously spoken about the all-too-familiar end-of-year situation where shortfalls in occupancy cannot easily be filled with conventional long-term leases. The gap in conventional multifamily demand coincides with a traditional uptick in leisure demand (think pre-holiday shopping in big cities), making STRs an unusually attractive demand stream for smart revenue managers.
One possible explanation for why some operators are not grasping this opportunity lies in our recently-released 20 for '20 white paper. We interviewed 20 senior multifamily executives about their priorities for 2020 and beyond - in particular, we asked where some of the new technologies and processes rank among executive priorities. In the case of STRs, we learned that they were assigned a relatively low priority by those we interviewed.
When asked to explain the low scores assigned to STRs, the interviewees suggested that the time wasn't right as that occupancy was high enough at their properties that they did not feel the need to "figure out" STRs. The impression that we described in the 20 for '20 paper is of an industry that is "hitting snooze" on STRs. Companies are not saying no to the opportunity, just not right now.
Don't Forget the Capital
Another over-arching observation that we made in 20 for '20 was the current state of venture capital in our industry. It is relatively easy to get startups funded - often lavishly - leading to multiple new and well-funded companies competing to deliver the same benefits. In few places is this clearer than in the funding of STR platforms with raises of $160m by Lyric, $210m by Sonder and $20m by WhyHotel all completed in 2019, following Stay Alfred's $47m raise in 2018.
These circumstances may represent a curious confluence of events. Up to now, the industry has sustained high occupancies (and rent growth) for more than a decade. The resulting high returns, in turn, increase the appetite for technology investments in the sector. The sharing economy and the appeal of highly localized travel experiences make STRs a natural recipient of funding. But the high occupancies are themselves a headwind for STR providers who are trying to secure precious inventory from multifamily operators.
As we noted in 20 for '20, these circumstances will change at some point; and given the events that have unfolded since we completed the research, those changes may be with us sooner than expected. In the meantime, STR platforms must learn to weather the storm, seek sustainable growth and continue to make it as easy as possible for companies and individuals to participate in this exciting market. The industry needs providers like Lyric, and the trends that make STRs appealing to consumers are here for the long-haul.