December 19, 2019
Vacation Rental Industry Year-End Insight
Looking back, 2019 will be seen as the stampede of the unicorns. A “unicorn” for the uninitiated, is a privately held company valued at more than $1 Billion. This name was initially given to these supposedly mythical companies because it was such an uncommon occurrence. They were supposed to be the rarest of creatures.
However, as far back as 2015, Reid Hoffman, the co-founder of PayPal and LinkedIn, pointed out that if there is a “herd of unicorns,” how rare can they actually be?
The very phrase, in very Hoffman-esque speak, he labeled an ontological oxymoron. 2019 saw these beasts invade our own industry of vacation rentals. What did that mean at the time, and what does it mean for us looking forward?
Looking Back To Understand the Landscape
Specifically, 2019 saw the first two “new” property managers obtain this unicorn status. Sonder was the first, raising $225 million over the summer. Vacasa was not far behind. They joined these mythical ranks later in 2019 with its own $319 million financing round. It was no coincidence that these monster rounds and their accompanying monster valuations coincided with the two companies reaching almost unprecedented scale.
Sonder supposedly signed up 3,000 new units in a single quarter. This was right before their unicorn funding round. Never one to be outdone, Vacasa timed its own round of funding with the acquisition of Wyndham Vacation Rentals, taking its total unit count to ~23,000, and making it the largest short-term rental manager North America has ever seen.
All of this is a vote of confidence, not only in these two companies but also in the short term and vacation rental space more broadly. An industry that existed long before Airbnb or Vrbo, much less before Vacasa or Sonder, continues to gain attention and respect from sophisticated financial investors. That is a good sign for their assessment of the health of our industry, and its future growth prospects.
The Vacation Rental Industry Doesn’t Operate In a Vacuum
Even as these two companies swallowed more than half a billion dollars of outside money between them, and others, like Sykes Cottages with its $480 million sale and Domio with its more recent $100 round showed that this is an industry of global proportions and importance, there were more macro indications that not all was well.
With almost immediate precipitous drops in their share price as soon as they started publicly trading, two of the most well-known unicorns of their time, Uber and Lyft, showed the public markets are not nearly as frothy as the private ones, nor as forgiving of huge financial losses. Even as I write this in December, both companies are down >40% from their respective 2019 peaks.
The Biggest Unicorn To Go Bust
Closer to our own industry, the WeWork debacle was the soap opera / train wreck none of us could tear our eyes away from. A company that private investors once gave a $47 Billion valuation found that the public markets would not touch it at any price.
This was true even as they kept slashing their proposed valuation, reportedly to as “low” as $12 Billion before giving up the idea of going public entirely. You read that right. Even when they cut their valuation by an astounding $35 Billion, no one in the public markets thought it was a good investment. Clearly there was and is a disconnect between the public and private markets.
Given the unicorn craze seems to have come to our industry just as the party is coming to an end, what does that mean for you, and our industry more broadly, as we enter 2020?
Looking Forward Shows That Small is BIG Business
My first major prediction of 2020 is that we will see our first “failure” of a megamanager. I am not necessarily saying it will be Vacasa or Sonder. With $500 million to tap into, it would be almost impossible for either of them to go under on that timeline. That being said, those two are far from the only ones who have heavily relied on outside investors to fuel their operations and continued growth. The thing with outside investment is that as great as it is while it is flowing freely, when it dries up it almost always proves fatal. For at least one of these companies who have raised $10 million or more, 2020 will be the year that the music stops, and they are unable to find a seat.
This coming failure will then having a chilling effect on the industry, and further outside investment into it. Investors’ blinders that have enabled them to focus solely on topline growth to date, margins be damned, will begin to fall away. The cutting off of the investment spigots will force companies to prove they can make money from their customers, not just financial investors. Not all will be able to do so.
As the former Vacation Rental Management Association (VRMA) President, Mike Harrington, pointed out earlier in 2019: “Maybe the vacation/short-term rental industry is “fragmented” for a reason.” Indeed. Is it possible that the people who have been doing this for decades know something more about the fundamentals of this industry and what it takes to make money in it, than those that thought it was a cool space to enter based on Airbnb’s exponential growth?
The Local Revival
To say there will be a revival is to suggest it went away at some point. That is not actually true. In this industry, local always has and will thrive. It is just that now those who missed it, or who intentionally wrote it off, will begin to see the merits of the local manager. Despite the media, conference, and investor attention heaped onto a handful of unprofitable relatively new entries into the space, these local managers have always managed, and thus controlled, a majority of the vacation rental industry. In fact, given the enormous losses generated by the bigger players, these local managers have actually accounted for more than 100% of the profits generated in the vacation and short-term rental industry over the past several years!
So What Does This Mean For You?
On one hand, it means and changes almost nothing. The core business of delivering superior service to homeowners, and superior and unique experiences to guests, has been the same for decades. The beauty of your business as a self-funded local manager means you were always dependent upon making money as a real company in order to keep your doors open. The media attention heaped on the new model new entrants never distracted you. In this way, you will continue to do what you do, and do it well. That being said, the macro situation will create two bigger shifts that will impact you and your business.
Macro Vacation Rental Industry Shift #1
The first is that as investor money dries up, fewer companies will be capable of running perpetual losses. This means that these players will be unable to continue flooding the market with venture capital-subsidized rentals. No longer will you be undercut by companies who don’t have to earn a profit over the course of the year, much less on each rental they book.
The behavior generally reminds me of a trip I took to San Francisco several years ago. I met a person just out of business school who was job hunting. When I commented that San Francisco must be an expensive place to be unemployed he demurred. “Are you kidding?” he responded. “My entire life is subsidized by venture capitalists. I took an underpriced Lyft Line to this event [down >40% since going public], got breakfast and lunch at this event hosted by a venture capital firm, and tonight will have a free dinner from Sprig based on my referral bonus that I got for just sharing it with you [Sprig shut down in 2017 after having raised more than $56 million].”
2020 will see far fewer “free lunches.” This should mean higher Average Daily Rates (ADRs) for you, and higher Revenue Per Available Night (RevPAN) for those who manage to stay in business. Stick it out; good times are ahead.
Macro Vacation Rental Industry Shift #2
The second big shift we will see is that outside and investor attention will begin to move away from loss running new model Property Managers, to profit-making technologies and services that support local Property Managers.
The reality is there is still a lot of “dry powder” in investors’ pockets, and they will want to find a place to deploy it. They will just be more cautious in understanding the economics and the fundamentals of an industry and a particular company before writing that check going forward.
Like the first shift that should increase your revenue and profitability, this too should help you and your business. More and better technologies and services focused on supporting you and your business is a good thing. When done well, these will allow you to focus on what you love (i.e., hospitality), and to automate and/or outsource those things you do not love (e.g., data analysis and technology management).
One thing is for certain; the pace of change in short-term and vacation rentals will do anything but slow as we enter 2020.
The good news is that most of the changes are to your benefit. As we enter the holiday season, here is yet another reason to cheers to the New Year.