The Demand Solutions Blog

The Supply and Demand Sides of Short Term Rentals

Posted by Dom Beveridge on Dec 10, 2018 10:26:00 AM

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Sometimes new technologies and strategies change the way that we do business. More frequently, though, things that have worked in one industry find their way into other sectors, leading to fresh innovation. In multifamily, it is often the hotel industry that supplies some of the most plausible new ways to sell, market and deliver the experiences that define our industry.

In the weeks since OPTECH 2018, there has been much discussion about short-term rentals. An array of vendors has emerged across the value chain - from apps that make it easy to rent out your apartment to platforms that run entire apartment buildings as if they were hotels. Demand for short-term rentals is growing rapidly, and business models are changing as we see shifts in both the demand and supply sides of the business.

A few years ago I wrote a piece for Multifamily Insiders on the rise of Apartments.com and the parallels I saw with the growth of the Online Travel Agents (OTAs) like Expedia and Priceline and their impact on the hotel industry. At the time, an unprecedented escalation in spending on apartment marketing was raising the profile of the sector (including buying ad spots in the Superbowl!). Multifamily Internet Listing Sites (ILSs) seemed to be taking greater control of the customer. As I argued, it reminded me of the dynamic in the lodging sector, where OTAs had developed a value proposition that competed with traditional hotel companies and their websites.

Since I wrote that piece, the ILSs have consolidated further, and their role in distribution for the apartment industry looks even more similar to the OTAs’ role in hotel distribution. In both cases, the supplier and the intermediary compete to own the customer. But that is not the end of the story. The desire to own the customer characterizes the demand-side of the equation, and anyone with any experience of selling either apartment units or hotel rooms is familiar with that dynamic. However, it is the supply-side that will probably have a greater impact on our industry.

Why there’s more to this than just the demand-side

One of most exciting narratives at OPTECH was the acquisition of both Pillow and ApartmentJet by OTA giant Expedia, which was announced just before the event.  (Note: Expedia also owns HomeAway, of which Pillow and ApartmentJet are now part). The two vendors solve two different problems in the short-term rental value chain. Pillow enables residents to make their apartments available for rent while giving their landlords transparency of what they are doing - an amenity to residents and a risk-management measure for landlords.  

ApartmentJet helps multifamily operators to take vacant units and distribute them in the short-term rental market.  What both providers have in common is that they remove friction from the distribution of apartment units to the short-term market.  In other words, they solve a supply-side problem. And this is what makes Expedia’s decision to buy them so intriguing.

Another lesson from the lodging industry

I remember when the OTA market was still new in the hotel industry. Sites like Travelocity and Expedia originally provided as a web-based “front-end” to the global reservation systems that were previously only accessible to travel agents. By putting the booking capabilities in the hands of customers hotel companies - like all travel providers - had a new way to position its products to potential customers.

Everyone in the industry saw the demand-side possibilities. What many failed to see were the changes that the OTAs drove on the supply-side of the industry. OTAs modified their business models from a retail (i.e., taking a commission on bookings), growing substantial wholesale businesses, meaning that securing the supply of discounted rooms became the key to growth. In the post-9/11 travel market, with hotel owners fretting about softening demand, the OTAs became an appealing way to fill rooms.

Armies of Market Managers were hired to work with hotels to secure hotel inventory at deeply discounted rates so that it could be sold - at a markup - on OTA sites. Consumers voted with their feet, booking more and more rooms through sites like Expedia and Priceline, that seemed to offer the most extensive choice and the best deals. It was by changing the dynamics of supply that the OTAs came to dominate the demand-side of their business.

What this could mean for multifamily

Of course, that was nearly 20 years ago and a different industry. Getting thousands of owners and residents to make individual apartment units available is more complicated than selling hotel rooms, but - as we have seen - technologies have emerged that make it a lot easier. The popularity with consumers of short-term rentals has exploded, providing real competition to hotel rooms. Sites like Airbnb and HomeAway/VRBO are continuing to grow from already dominant positions.

The scene is set for changing business models and strategies. Today ApartmentJet solves a short-term problem for operators (i.e., vacancy), that over time can start to look more like a long-term business strategy: changing the mix of renters and hence revenues in a given property. Nobody knows how the market will shake out, but we should keep the hotel example in mind. We must understand both the supply and demand side of the market in order to understand which suppliers will come to dominate it.

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Topics: Multifamily Trends, Short-Term Rentals