Airbnb has been a disruptor in the hotel industry though many may view it as just another technology marketplace or platform company like Uber. We’ll argue in this article why Airbnb is a disruptor not just in the hotel industry, but the overall commercial real estate (CRE) industry. Airbnb’s business model has ramifications that can echo past hotels and disrupt other property types in CRE in the years to come. As investors, we need to watch out for the Airbnb effect and how the industry responds.
Airbnb and its business model
Airbnb probably needs no introduction to many, but let us level set and review Airbnb’s summary from Wikipedia. The key points we will review are highlighted in orange.
Airbnb… is an American vacation rental online marketplace company… Airbnb maintains and hosts a marketplace, accessible to consumers on its website or via an app. Through the service, users can arrange lodging, primarily homestays, and tourism experiences or list their properties for rental. Airbnb does not own any of the listed properties; instead, it profits by receiving commission from each booking.Source: Wikipedia
Let us also look at the numbers to get an idea of the reach of Airbnb. As of 2020, Airbnb had grown to 4 million hosts and 800 million guests in 100,000 cities in almost every country and region across the globe. The reach of Airbnb blows away the reach of traditional hotel companies like Marriott. After all, Airbnb can operate anywhere there is a house with a room to spare.
Airbnb as yet another tech marketplace or platform
We can use two lenses to look at Airbnb as a company and its place in the markets. The first lens is that of a technology company and the second lens is that of a real estate company. Airbnb can be viewed as a high flying technology company that went public in 2020. In and of itself, there are probably tens of other technology companies in the platform or marketplace category. Notably, Airbnb can be seen as the Uber for guest stays. In essence, just viewed as a technology company Airbnb may not come across as a significant disrupter. Here is an opinion from 2013 during the early years of Airbnb.
Please hear me loud and clear when I say the following: disruptive innovation does not exist or apply as far as the real estate business is concerned, and it will not in the future, either. Not even in the case of Airbnb (explained below). Real estate product and its consumption are fundamentally different from non-real estate product and its consumption, and at this point in history, real estate markets are no longer likely to be disrupted.Source: https://www.getrefm.com/disruptive-innovation-in-real-estate-there-is-no-such-thing/
The significance of the disruption and further potential comes into play when one looks at Airbnb from a hotel or real estate lens. How big is the disruption? Let us look at the chart below from Professor Galloway at NYU Stern School of Business. As of October 2020, around the time Airbnb went public, the projected market cap exceeded those of FIVE major hotel chains and THREE major airlines combined. The battered hotel and airlines have recovered since October 2020, but you get the idea – Airbnb is worth many major hotel chains combined.
Airbnb’s disruption of the Hotel industry
In the previous section, we looked at valuations and reach and saw how Airbnb easily surpasses the valuation and reach of the largest hotel chains. In this section, we will look at exactly how Airbnb has disrupted the hotel industry business model and turned it on its head.
Asset light and Risk light
Airbnb is a marketplace platform and does not hold real estate assets. Hotels on the other hand hold the hotel’s real assets. What this means is that hotels (or their franchisees or partners) are responsible for buying, building, and running the hotel property. In Airbnb’s case, the hosts are responsible for buying and running the assets. This leads to Airbnb being asset-light which is a huge advantage. How come? The hotels hold the real estate risk whereas the hosts (not Airbnb) hold the real estate risks. In an ironic way, Airbnb is disrupting CRE without holding ANY real estate assets. This is similar to Uber which disrupted the car ride industry without holding any cars.
The above-mentioned asset and risk light nature of Airbnb vs Hotels have major implications for investors. The investor who invests in Airbnb stock takes limited or no real estate risk whereas an equity investor in a hotel asset takes the real estate risk. As it happened during COVID-19, the hotels faced a deep loss of revenue when stays come to a screeching halt. The hotels still had real estate expenses and loan obligations to run minimum operations. Airbnb stays also came to a screeching halt, but it didn’t have any real estate expenses or loan obligations. Its hosts had.
Agile, Lean and easily scalable
As we saw previously, Airbnb has no real estate obligations to build or maintain the asset, raise capital or get a loan. But, Airbnb has a powerful technology platform and spends most of its money on R&D and improving the platform. This makes Airbnb agile and lean. Airbnb can also scale up or down its business in little time as it has no real assets.
When the COVID-19 pandemic started, both Airbnb and hotels took a big hit. But, Airbnb was able to recover way faster. More so, Airbnb was even able to go to the public markets with an IPO. Airbnb has disrupted the hotel business model to such an extent that hotels are now providing Airbnb-like platforms i.e. the hotels just act as intermediaries but provide some basic branding and consistent service. The table below summarizes salient features of Airbnb and Hotels business models we reviewed.
More CRE disruption to come?
Disrupting hotels which is a major CRE property type is one thing, but disrupting the whole CRE is at a different level altogether. In our opinion, Airbnb has the potential to disrupt the rest of CRE as well. COVID-19 and Airbnb’s potential should be a cause for concern for many players in CRE. The CRE industry, particularly office and retail, is facing a big crisis with the pandemic. Will it provide an opening for disruptors like Airbnb or other players? It will be a mistake for the CRE industry to treat Airbnb as just a hotel company for the reasons mentioned below.
From hotel to other property types
We’ve argued so far how Airbnb has already disrupted the hotel industry. Why can’t it do the same for offices or retail or for that matter any property type? COVID-19 has actually accelerated the importance of homes. Which real estate player is better positioned to leverage the home as an asset than Airbnb? Let us take a few scenarios which may seem a stretch but quite possible:
- WIth WFH, people start using a part of their homes as a gathering place to work
- People start using their spare basement, yard, or other spaces for group exercises
- How about having dinner gatherings at someone’s home than restaurants?
Who can create and capitalize on these trends? Startups or established players like Airbnb that have a platform. The above will reduce the need for a traditional office or retail property type and increase the need for a technology platform that can facilitate the above. Let us take a couple of different scenarios:
- Can small office landlords share their existing space using an Airbnb like platform (similar to WeWork)?
- Can small retail shops share their existing space using an Airbnb like platform?
There is nothing stopping Airbnb from providing the conventional marketplace for office, retail, and other property types? In essence, it can become the Shopify equivalent for the CRE Amazons of the world.
Another key differentiator for Airbnb is that it provides a way for shorter leases or stays to guests across millions of assets. At the surface, this may not appear to be a big deal. So what? Most of Commercial Real Estate is built around leases that run into years. For e.g. you may have signed an annual lease for your apartment. Retail, industrial and office leases run into many many years. The penalty for breaking the leases are so high that many tenants hesitate to break the leases.
With this background, Airbnb provides pretty much provides short leases to tenants. Yes, hotels also provide short stays but their model has not been transferred to other property types because the business model cannot work. Airbnb can make that business model work for other property types like an office. For e.g. similar to WeWork Airbnb has the platform to provide shorter office leases to office goers. Airbnb has thus built a transferable platform to further disrupt CRE.
In this article, we’ve looked at Airbnb as a marketplace platform and how it has disrupted the hotel industry by being asset-light and easily scalable. We also looked at how Airbnb has the platform and potential to disrupt the rest of the CRE industry property types as well. As a real estate investor, one has to closely watch Airbnb’s entry into other property types as well as newer behavior and trends that are arising, accelerated by the pandemic. It may not be enough for an investor to just look at the numbers and evaluate deals. They also need to answer the question – Can Airbnb or a similar player disrupt this space to affect my bottomline?