The hotel industry has experienced a major disruption in recent years due to the meteoric rise of Airbnb. The California startup mushroomed into a $38 billion business in less than a decade. The company did it by capturing a significant share of the vacation-rental market.
Airbnb was initially started by two San Francisco roommates in 2008 as a way to pay the rent. The now globally used platform enables people to rent space in their homes in 191 countries, giving overnight travelers a flexible alternative to traditional short-term lodging. Commercial mortgage brokers should pay attention to Airbnb’s rise as the company’s success reveals much about the evolving tastes of travelers. Airbnb and similar companies, such as HomeAway and FlipKey, can put pressure on a hotel’s room rents, occupancy rates and bottom line, potentially affecting its financing options.
But this isn’t a case of a Silicon Valley upstart wiping out an old-line industry, like we’re seeing with the internet taking over print media. The hotel industry has taken a blow, but it has adapted and has even expanded its influence in some segments of the market.
Shifting tastes
Airbnb and the hotel industry each have their own advantages, but it is clear that Airbnb has made strides in the vacation-rental market. Clever Real Estate surveyed 1,000 users of hotels and Airbnbs. Some 60% of vacationers preferred Airbnb over a comparable hotel, although in terms of satisfaction, the surveyed participants ranked hotels and Airbnbs almost identically. Vacation travelers gave an average satisfaction rating of 4.2 stars for hotels and 4.3 stars for Airbnbs.
Experts also have found that pleasure travelers rapidly flipped preferences in favor of Airbnb. A 2016 Goldman Sachs survey of 2,000 U.S. consumers found that, among people who used peer-to-peer (P2P) lodging in the previous five years, their preferences shifted from hotels to P2P accommodations almost immediately after they tried it. The likelihood that they would prefer hotels to an Airbnb or similar P2P accommodations fell from 79% to 40%.
The Goldman Sachs survey also found that consumer familiarity and use of Airbnb-like companies was increasing, and that nearly 70% of the respondents between the ages of 18 to 24 had used a P2P service within the previous year. Far fewer people ages 45 and older reported using Airbnb, according to the 2016 study, but the numbers were rising.
Surveys suggest, however, that Airbnb only holds an advantage with those traveling for pleasure. When it comes to business travelers, hotels still have a big advantage. The Clever Real Estate survey found that 68% of businesspeople preferred staying in a hotel over an Airbnb when traveling for work. Surveyed business travelers were twice as likely as pleasure travelers to describe Airbnb as dishonest. Additionally, 57% of them reported having a negative Airbnb experience, compared with only 35% of pleasure travelers.
The reason for this gap is simple — business travelers have dramatically different needs than pleasure travelers and those needs are best met by hotels. Clever Real Estate also surveyed business travelers who use hotels and Airbnbs for the amenities that they value. The top amenities were almost exclusively found at hotels: 85% valued Wi-Fi, 70% valued free parking, 69% valued complimentary breakfast and 59% valued housekeeping. Other amenities on the list included an on-site restaurant, a gym and a 24-hour front desk.
Changing market
With the rise of Airbnb and its competitors, the market has split roughly along two lines. The majority of pleasure travelers prefer Airbnb, while business travelers prefer hotels. So, how do commercial mortgage brokers use this information?
There should be little doubt that mortgage lenders will view hotels as a reliable asset class going forward, as they retool and adapt to Airbnb. But when considering whether to finance a new hotel project, it’s important to realize that lenders will evaluate a hotel or traditional lodging in the context of its competition with Airbnb. The footprint of the P2P industry is likely to continue growing. Clever Real Estate, for example, found that more than half of homeowners surveyed would consider renting out their homes through a third-party app like Airbnb.
It’s not enough anymore to simply build a nice hotel and open the doors. Hotels must leverage their strengths going forward. That means, first and foremost, catering to business travelers with amenities like an on-site restaurant, a 24-hour front desk, a spa and free breakfast. Does the hotel cater to vacation goers or business travelers? You will increasingly need to know this in order to evaluate a hotel’s competition and bottom-line riskiness, as well as its ability to service debt, particularly as more vacationers make the shift to Airbnb.
Another unique advantage of hotels is their location. If you look at a map of vacation rentals on a site like Airbnb, the properties are usually in a ring around the city center, scattered mainly in residential neighborhoods. One of the strengths of the typical hotel is its central location. Any new hotel project should be in or near the densest and most accessible area of a city.
Playing to strengths
Service is another edge that hotels should showcase going forward. With one-third to one-half of Airbnb users reporting negative experiences, hotels have a major opportunity to play to their strength in the hospitality department, with around-the-clock attention, concierge service and attentive staff. This contrasts with the dirty towels, mysterious odors and wonky Wi-Fi of the worst Airbnbs. Any new hotel projects must have a robust hospitality program in place to compete with Airbnb.
A hotel’s accommodations should be evaluated to match the preferences of travelers. In New York City, for example, 35% of Airbnb offerings include two or more bedrooms, and Airbnb users often look to rent entire homes. These preferences apply to hotels, too, in which two-bedroom connecting suites are booked 3.3 times more frequently than traditional suites. New hotel projects should take these evolving customer preferences into consideration.
Lenders and brokers also should do their own research into local markets. European analysts looked at more than two years of data from San Francisco hotels and Airbnbs, and found that there is a correlation between hotel revenue and the average price of Airbnb accommodations. To put it simply, the better the Airbnb offerings, the worse it was for the hotel business.
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When commercial mortgage brokers are analyzing how to finance a new hotel project, they should closely examine the Airbnb offerings in the subject market. If they are mostly spotty or low-quality accommodations, then the hotel project has a decent chance at success. If the local Airbnb offerings have high prices and high quality, however, any new hotel in that city is likely to face an uphill battle.
