Heartbreak Hotel: the sharing economy and the hotel sector
This is the first in a two-part piece that explores the opportunities and challenges posed by the sharing economy for real estate investors.
In September 2016 Airbnb raised US$850 million in new equity, valuing the company at US$30 billion dollars and subsequently crowning it the most valuable lodging provider in the world without owning a single room.
It is a particularly 21st century phenomenon that a company that started eight years ago, with no tangible product of its own, can overtake some of the most storied and well-known brands in the lodging industry.
During the last 12 months Airbnb grew its US listings by almost 70% and nights booked increased a staggering 125% to almost 40 million room nights1 . On these numbers, Airbnb has captured more than 3% of US lodging demand within the last eight years, and is gaining share rapidly.
Every month Airbnb’s impact becomes more pervasive, and its effects on lodging occupancy and pricing power become more visible. For publically-listed hotels, this will manifest in slower revenue growth, and weaker profitability.
This is the first in a two-part piece that explores the opportunities and challenges posed by the sharing economy for real estate investors. It’s worth SMSF investors understanding this dynamic when forming investment views.
The accommodation sharing economy refers to the growing number of property owners who are making their dwellings available for short-term rentals. These short-term rentals compete with traditional lodging providers by offering an alternative, often cost-effective, form of accommodation in major markets.
The accommodation sharing economy is facilitated via a number of internet platforms, most notably Airbnb, which have greatly boosted the viability of short-term rentals as an alternative to traditional hotels. These new platforms increase the ease of marketing properties, managing bookings and facilitating payment, and have led to an explosion in the use of short-term rentals.
Since it started in 2008 Airbnb has grown to have more than two million listings in more than 191 countries2 on its website. This compares to the 1.1 million rooms in more than 100 countries of the world’s largest lodging company, the newly combined Starwood-Marriott entity3.
The table below shows the top ten markets as ranked by active Airbnb listings. The average number of active listings as a percentage of existing supply is close to 10% in the top ten markets where the sharing economy has gained traction.
This suggests recent supply growth in these markets, as measured by traditional lodging data sources, underestimates the true degree of available accommodation supply that has come online in recent years. In many instances, the supply added by Airbnb and the broader sharing economy is often multiples of what is added via traditional construction in an average year.
Of particular note is San Francisco, Airbnb’s home market, where it appears that the success of Airbnb has largely been in response to a chronic lack of new supply.
While it is equally true services like those provided through Airbnb may have enticed more people to travel, thus adding to incremental demand, it is a stretch to claim new supply from the sharing economy is having no impact on occupancy levels and pricing power of the traditional hotel sector.
Recent research by commercial real estate company CBRE shows Airbnb hosts respond to incentives in a similar way to the traditional lodging market just with greater speed and flexibility. Firstly, when demand is strong and pricing can be set at attractive levels, additional supply is brought online.
The higher the rate that a host can achieve, the more pronounced the supply response. This highlights one of the key features of the sharing economy; that of an increased elasticity of supply where accommodation capacity can be added and withdrawn rapidly in response to changes in available pricing.
The same CBRE report confirms the fluidity of this shadow supply. It illustrates how shadow supply waxes and wanes during the course of the year in line with peak travel times. While it is difficult to separate the structural growth from the more seasonal patterns, the path of the data suggests peaks around December, most likely due to Christmas and New Year’s Eve, and the warmer Northern Hemisphere months, which coincide with the summer school holiday period and peak travelling season.
Quantifying the exact impacts of Airbnb is a difficult task because there are so many moving pieces, and demand in the lodging sector is cyclical and sensitive to changes in the broader economy. However, it’s possible shadow supply from the sharing economy is reducing pricing power by acting as a release in times of extreme demand.
In the second part of this article series we explore the implications of the sharing economy for the real estate sector.
1 Airbnb update from AirDNA; Growth Ahead of Expectations, BofAML Research, September 2016
2 www.airbnb.com, May 2016
3 "Marriott International to Acquire Starwood Hotels & Resorts Worldwide, Creating The World’s Largest Hotel Company”, Marriott International merger press release, 16 November 2015