Airbnb, VRBO, Homeaway, Tripping.com, Homestay and Wimdu: the proliferation of home-sharing services is undeniable. Airbnb alone proclaims itself to be present in 191 countries with an excess of four million listings worldwide – more than the top five hotel brands combined. Recent estimates assume home-sharing will reach about 155 million room nights in the US in 2018.
The impact on the hotel industry is real. In high-density cities, compression – a common industry measure of demand driving rates – is elusive. Now add to the mix extensive hotel development across major markets, plus high-cost union expenses that show no signs of abating. Just last year, the Standard Hotel in New York City sold for over $50 million less than it went into contract for in 2014, and the James Hotel sold for $20 million less than it sold for in 2013.
Whether these prices are reflective, in part, of the evolution of home-sharing services is subject to debate. But any private real estate investor evaluating an investment in hospitality assets has to ask the question: ‘Is this the new reality or is this temporary?’
While over-development can and will be absorbed, the home-sharing business cannot. Indeed, home-sharing is an undeniable headwind for the industry and must be taken into account when assessing the valuation and potential for repositioning assets.
A recent Morgan Stanley report indicated that the industry is factoring in 40-50 basis points of negative impact for the US’s lodging industry revenue per available room growth in 2018 and 2019, coupled with an approximately 25 basis point drag on occupancy. This is the formula for a deterioration in compression, which has been a significant trend across the US from 2016 to 2017. Occupancy deterioration tends to feed rate deterioration as hotels compete for business.
While a contrarian view is that home-sharing and online travel agencies (OTAs) introduce more travelers to the industry, the downward pressure on performance and valuation of hospitality assets is an objective fact. And these numbers may very well grow as the younger generations, which use these services in far greater numbers than older generations, age up. Furthermore, in cities like New York – by far Airbnb’s largest market – the impact is greater and investors will have to evaluate that impact on a regional as well as local basis.
An added layer of complexity to the private equity model is timing. With typical funds focused on a five- to seven-year window for their investment cycles, and the concurrent ever-shifting nature of the digital economy, predicting the impact of home-sharing and other factors such as the proliferation of OTAs is a tricky game. In just the last 10 years, these market influences not only emerged but became a major factor affecting the industry. How can we possibly predict where home-sharing and OTA influences will manifest themselves five years from now? Perhaps there is a technology out there that we know nothing about that will emerge in the next 10 years.
OTAs present a conundrum for hotel owners and managers. They bring a lot of volume, but they tend to be highly discounted rates and furthermore, the associated fees for taking those reservations make these OTA reservations by far the most expensive type of business. And there is empirical evidence that lower-cost reservations tend to spend less on ancillary services such as spa, food and beverage and retail shopping. Simply put, OTAs are a fact on the ground with real impact on investment strategies – cost structures and gross revenue being directly affected. Further impacting underlying asset value, OTA reservations may not fit the profile of guests that ownership is shooting for – a factor which may cause the property to stray from the established business plan and impact long term profitability.
Private equity analysts evaluating hospitality assets have no choice but to incorporate a predictive value for the impact of the digital economy on their prospective and existing assets. Where it goes from here? Well, that’s why we all play the game.