Branded short term rental (STR) operators like WhyHotel and Sonder have emerged with different business models – branded STR apartments and temporary or pop-up hotels – that are indistinguishable to the average traveler.
WhyHotel, which runs short term rentals in buildings during their lease-up period, has continued to evolve since its inception in 2017. The company offers travelers a hotel-like experience with all the comforts of home and offering amenities to the full-time residents of the building its spaces are located in, such as linen services and a lobby filled with snacks and coffee.
It’s this appeasement of full-time residents that has helped WhyHotel grow beyond it’s Washington D.C. roots into cities like Seattle. Building owners are also a fan of the business model, as they are getting money for units they have yet to permanently rent out.
Venture capitalists are definitely on board. WhyHotel recently received $3.94 million in seed funding, which will be used to open as many as 12 new hotels in the coming year, as reported by USA Today.
Sonder, another company that rents serviced apartments akin to boutique hotels, recently raised $225 million, bringing their total raised to $400 million, from several high profile equity firms, including Tao Capital Partners, Fidelity and Spark Capital, according to TechCrunch.
Branded apartment companies like Sonder benefit from the pricing arbitrage between the monthly apartment rent and the nightly rate they charge. In recent years, they have benefited from the excess supply of luxury apartments in certain markets.
“The future of hospitality will be dynamic,” Sonder CEO Francis Davidson wrote in a statement. “It will demand flexibility.”
VCs have also pumped some funds into Lyric, a Sonder competitor that offers a “design-forward” approach to the concept, with “consistent amenities.” Lyric has attracted $19 million from investors like Fifth Wall Ventures and New Enterprise Associates, as reported by Skift.
WhyHotel CEO Jason Fudin attributes his company’s success to the fact that it offers a “home experience” with service akin to the traditional hospitality market.
“It feels like you’re hosted at a home and less like you’re running through a commercial machine,” Fudin said. “We’re blurring the line between hospitality and home.”
Chris Hemmeter, co-founder and managing director of Thayer Ventures, which has invested in Sonder, considers the market “increasingly dynamic” but also issued a warning to potential investors, noting that the traditional hospitality industry will not go down without a fight.
“What some investors fail to recognize, however, is the inherently local complexity of the space, the innovative capacity of the major hospitality brands that may compete more heavily here, and the multi-layered stakeholder ecosystem that has always dominated the lodging category,” he said. “Just because VC money is pouring in doesn’t mean all bets are good bets!”
To that end, Seth Borko, a senior analyst at Skift Research, had some harsh words for venture capitalists looking to jump on the alternative accommodations bandwagon, suggesting they were exhibiting a “herd mentality.”
Still, the trend continues unabated. Vacasa, a vacation rental property management service, recently began to provide its services to real estate developers and property managers, helping them temporarily fill vacant units in multifamily residential communities.
The Expedia Group has even gotten in on the act, acquiring two small startups, Pillow and ApartmentJet, which help multifamily building owners list and manage short term rentals while complying with local regulations.
For these operators, much of the focus has been on exploiting the inefficiencies of the property and hospitality markets. As more branded short term rental supply come to market, these brands have to achieve substantial points of differentiation. Many of these rentals currently are offered through the same online platforms like Airbnb and Booking.com and often, have similar design aesthetics and provide “hotel-like” amenities. Apart from brand-building, they will have to prove that the branded space they want to occupy between individual operators and traditional hotels is sustainable.