Airbnb Supply Problem
|Sachin Kesiraju||Mar 26|
Based on my past experience working with Airbnb hosts at my last startup and recent changing market conditions affecting the travel industry, I figured I’d take a jab at Airbnb’s impending supply-side crisis. Contrary to general belief, the archetypal Airbnb host is not a middle-aged housewife with an extra guestroom rather majority of rental inventory on Airbnb is managed by semi-professional property management companies. These companies are part of a vast economy created by Airbnb’s growing supply that started by managing the operational overhead of renting out dormant properties on behalf of homeowners in exchange for 20% of rental revenue. Over time many of these companies have started to take on the daring approach of a WeWork-style rent arbitrage scheme by taking out long term leases on residential properties and making margin on the short term rental market. This strategy has been sold to aspiring local entrepreneurs and passive income enthusiasts as a low barrier get-rich-quick-scheme. But unlike the hotel industry in the past, these businesses are run by individual private investors dabbling in hospitality who lack the corporate reserves or cost-cutting flexibility to handle major downturns.
Short term rental arbitrage businesses are intoxicatingly attractive in bull markets but are fundamentally flawed — they have high working capital requirements and are poorly leveraged in that scaling consumes more cash. Instead of protecting cashflow many of these companies re-invest “float” into acquiring more long term leases into their portfolio. So in curveball scenarios such as in present day, management companies who were leveraged to expect 90% occupancy rates are staring at a mounting wall of debt in the form of monthly lease obligations. As a result, even large venture backed short term rental companies such as Sonder, Wanderjaunt, Lyric and the Guild are all experiencing significant layoffs. These companies should still have the cash reserves to be relatively better positioned to weather the storm compared to mom & pop management companies and co-hosts who are personally liable for the debt payments.
To clarify this isn’t necessarily a bear case for Airbnb as a business long term. Airbnb’s real business is in being a one-stop shop travel platform for their niche consumer. Airbnb will succeed as long as it remains demand-side defensible — consumers still believe in the brand and return for its various services (stays, experiences, hotels, even airline?). In adverse economic conditions, Airbnb will exercise its power as a managed marketplace to increase this customer loyalty by creating flexible policies that favor guests at the expense of hosts. At this time however, management companies seeking liquidity will look to dump their properties into the long term rental market. This along with their recent bitter taste of the downside risk will make it unlikely for them to return to Airbnb’s short term rental market soon. This has the potential to leave a gaping hole in Airbnb’s rental inventory supply even after coronavirus tensions settle.
What I’ve been consuming recently
Dawn of Def Jam: Rick Rubin Returns To His NYU Dorm (h/t Saketh)
sittin my ass at home in quarantine cause some mf ate a fckn pangolin