The effects of the coronavirus pandemic have been felt keenly across the hospitality sector, but nowhere more so than at Airbnb. SAN editor George Sell looks at how it has been affected and the potential implications for the serviced apartment sector.
Up until March this year, things were going swimmingly for Brian Chesky and his fellow Airbnb founders. The company was gearing up to launch its Initial Public Offering (IPO) and analysts were valuing it at anywhere between US$35 billion and $42 billion.
Chesky, a 37-year-old former designer, came up with the idea for peer-to-peer apartment rentals after struggling to find a hotel room in San Francisco for a conference. After a slow start it raised $600,000 in seed funding in 2009, but as the potential and rapid growth of the platform became clear, Amazon boss Jeff Bezos weighed in with $112 million of venture funding in 2011. More funding rounds followed, including $1.6 billion in 2015 and $1 billion in 2017. More than 500 million people have used Airbnb since it launched, the company became a household name, as well as a generic term for a property rental, and Chesky, his fellow founders and early investors were looking to liquidate the astonishing value they had built in their shareholdings.
That was until coronavirus took the world in its grip, global travel came to a standstill, and Airbnb bookings fell off a cliff.
Airbnb is particularly vulnerable to the economic and health policy shocks of the coronavirus outbreak, and since late February it has been fighting fires on numerous fronts. The firm faced a major backlash from hosts and guests in March over its perceived abruptness in cancelling bookings. It performed a U-turn over its extenuating cancellation booking policy to allow guests to be fully refunded for bookings made during the coronavirus outbreak period. Shortly afterwards, it set up a $250 million relief fund for hosts who had had their income streams wiped out by Covid-19 cancellations, but has been criticised by hosts for a perceived lack of progress with payments from the fund.
It has also launched its Enhanced Cleaning Initiative, which comprises two voluntary sanitisation and Covid-19 spread prevention programs, one of which could block reservations between stays over a proposed 72-hour period.
The results of all these factors have been hitting the company’s finances hard, and it has moved quickly to shore things up. In late March it announced a hiring freeze and the suspension of its marketing function. The company’s founders will be taking no salary and its executives will take a 50 per cent pay cut for six months, while employees were told they are unlikely to get their 2020 bonus. In early April Airbnb announced a deal to raise $1 billion through a combination of debt and equity from investment firms Silver Lake and Sixth Street Partners. Just one week later, it secured a further $1 billion loan in senior debt, reportedly through the same private equity firms, as well as Apollo Global Management, Oaktree Capital Management and Owl Rock.
Chesky said: “I deeply appreciate the confidence and trust that so many have shown in our company even as every sector in travel is going through the storm of the pandemic. We know travel will return and rather than merely hunkering down, the support we have received will allow Airbnb to continue moving forward as we invest in our community. All of the actions we have taken over the last several weeks assure that Airbnb will emerge from the storm of the pandemic even stronger, regardless of how long the storm lasts,” he added.
One of Airbnb’s strategies in response to the Coronavirus epidemic was to increase its focus on longer stays, and by implication business travel. A company statement said: “From students needing housing during school, to people on extended work assignments, Airbnb is a place where many have found longer-term housing.”
The strategy was motivated by a 20 per cent increase in extended-stay bookings on its platform compared to the same period in 2019. As more hosts warm to the idea of longer-term stays, the company has launched a number of new tools, including a new alert and on-boarding process to make their listings more widely available to long-term guests and new visibility settings when it comes to displaying local listings in the search results. Around 80 per cent of Airbnb hosts now accept longer-term stays and about half of the company’s active listings now provide discounts for stays of one month or longer. The company said that one in every seven nights booked in 2019 was for a longer-term stay. It also said it is seeing more people, such as students, doctors and nurses in residency, or others in long term work assignment turning to Airbnb to find housing for six- to nine-month stays. Already in 2020, it said it has seen bookings for more than 600 days; the longest booking made so far this year was more than 700 days.
So will this move in to business travel, particularly for project work, have an effect on what has traditionally been a core market for the serviced apartment sector?
Adam Lowenthal, co-founder and director of Saxbury, says: “Although Airbnb may have a new focus on medium to long term stays, some of which may be suitable for the business traveller, I’ve always felt that Airbnb is more of a leisure alternative to a hotel or an aparthotel and therefore believe that business travellers will remain loyal to the ‘fit for purpose’ professional operators who can provide assurance that safety, hygiene and service standards are met within legitimate buildings. Furthermore we understand that a lot of individual unit landlords are giving up on Airbnb as a platform and returning to long-term residential letting, and we therefore forecast that the professional serviced apartment and aparthotel operators will be well placed to pick up the ‘stay local’ demand from both leisure and business travellers when they return.”
The question of whether Airbnb can meet duty of care requirements is one that has continually hampered its efforts to grow its blue chip corporate business.
There are some exceptions. Ernst & Young has incorporated Airbnb into its lodging programme in some countries. The average age of the EY traveler is 27, according to meetings and events leader Karen Hutchings, and they are staying in Airbnbs: “You could ignore it, but it would still happen. We’d much rather embrace these things.” In 2018 Airbnb accounted for only about 0.4 per cent of EY stays, said global supplier leader Tim Nichols, but that is still a seven-digit figure and the company expected it to grow.
But by and large, most corporate buyers are of a similar mindset to the London-based representative of a large financial institution who told SAN: “I don’t believe Airbnb is a viable proposition for us at the moment and it would need to make a lot of changes before we would consider using them. When we book our guests in to, for example, a Marriott hotel, we know more or less what we are getting, but with Airbnb the variables are huge. Until they can provide us with the necessary reassurances about consistency, accountability, legal requirements and duty of care obligations, we won’t be booking through them, and I think they are a long way off being able to provide that.”
Simon Lehmann of AJL Consulting, one of the leading analysts of the vacation rental sector, has been following Airbnb since near the start of its journey. He says: “Business travel will take a lot longer to recover than leisure travel and Airbnb would like to play on a wider front, to get in to new business fields. It’s not surprising that they want to enter that space, but I am not sure if the Airbnb brand is one that resonates to travellers for this kind of product going forward. It is still early days but I don’t think OTAs can dictate the future standards of cleaning and the like, which will have an impact on the service providers as well as the traveller, who might want to have assurance from the host instead. This particular Airbnb ploy is still in its early days and I see it more as an opportunistic action, than a thought-through strategy.”
Serviced apartments could even be among the beneficiaries of Airbnb’s woes. Marie Hickey, a director in Savills’ research team, told CityLab: “We might see serviced apartments, or so-called aparthotels, being the main beneficiaries of the situation. They’re similar to Airbnb listings but you have that confidence as a user that they’re being operated just like a hotel, with regular cleaning and health and safety precautions.”. There is little doubt that Airbnb opened up the concept of staying in an apartment rather than a hotel room to a huge new audience, and serviced apartments may well benefit more from that awareness in the future than it has to date.
Airbnb’s plans to become a serviced apartment operator itself have also been a victim of the pandemic. A year to the day after acquiring ten floors at 75 Rockefeller Plaza in New York to operate “high-end apartment-style suites with a diverse mix of amenities”, Airbnb cancelled its agreement with landlords RXR Realty for the proposed development. Plans to create 200 luxury hotel rooms and suites have been shelved at the 33-storey skyscraper in Manhattan, due to dwindling hotel revenues and rising availability rates, according to Business Insider. RXR CEO Scott Rechler told the publication: “Airbnb and RXR mutually agreed that under the circumstances it didn’t make sense to proceed with the project. It’s going to take some time for the industry’s occupancy rates to rebound enough where it justifies new supply.”
As Saxbury’s Adam Lowenthal alluded to, a further effect of the coronavirus-induced cessation of travel has been a rush by Airbnb hosts to reallocate their properties to the residential letting market, in many cities the very market that Airbnb has been heavily criticised for eroding.
Tom Rogers of Value The Market, describes it as “a reckoning of epic proportions. Cities have been struggling to find enough long-term rentals for the people who really need them. Rates are sky high and with so many rooms turned into Airbnb short lets, capacity is at an all-time low. It seems the disruptive company has disrupted too much. It has certainly broken housing markets.”
Edinburgh Live recently reported “a glut of former Airbnb properties appearing on the Edinburgh property market as long term lets – as the platform collapses across Scotland.” In April it said: “Last week saw new rental listings in Edinburgh skyrocket with a massive 62 per cent increase compared to this time last year. According to new figures given to Edinburgh Live by property portal Rightmove. And that rate is increasing, this week new rental listings are up 105 per cent in the city centre with more than 200 homes in Edinburgh added to Rightmove in the last two days alone, the Times reports. Previously the norm was five or six per day.”
The number of one- and two-bedroom apartments available for rent in Central Dublin hit a five-year high in March, with many of the listings being switched from Airbnb.
Many of these listings are owned by full-time, professional hosts, a far cry from the common perception of people renting out a spare room to earn some extra cash. Scott Shatford, CEO of AirDNA told Wired: “There’s a possibility that this business model – of master leasing properties, furnishing them and relisting them on Airbnb – is not going to be attractive for people now they understand how volatile this environment can be. There will still be people chasing yield. But will they get back into the one-bedroom apartments in London or New York? Probably not. People who were leasing apartments to put them on Airbnb in major metropolitan markets – those businesses are decimated and most of those companies will be out of business if not now then in the next few months.”
The coronavirus pandemic has caused a profound shock to virtually every industry in the world. But none more so than travel and hospitality. There will be thousands of companies who have their plans derailed, and thousands more who won’t even emerge the other side, but few will have suffered such a public and high profile disruption as Airbnb.
“Even before the coronavirus outbreak, investors were becoming deeply suspicious that IPOs were not really a great way for retail investors to get a slice of a major growth story,” says Tom Rogers. “Instead, vastly inflated IPO prices were actually just a way for preliminary investors to recoup their billions of dollars in early investments. It is ironic, really. That first seed of Airbnb’s idea, for local homeowners to rent out their rooms to businesspeople because hotel rooms were full? This collapsing market could be the very thing that postpones its IPO indefinitely.”
