A $70 Billion Difference
A manager at one of the three big global listing platforms recently told me, “There is no doubt that rent-by-owner has become much easier during the last 10 years.” On the face of it, it’s an obvious statement: Without the help of a property manager, 10 years ago, I would have been largely relegated to market my property on my own, and I would have struggled. Today, in a few minutes, I can list on Airbnb, Vrbo, or Booking.com, which collectively generated about $70 billion in bookings in 2019.
The listing platforms have been responsible for much of the value creation in our industry in the last decade, and much of that was due to Airbnb’s success. Today, Airbnb’s brand supports a market cap of more than $100 billion. That market cap is also supported by a belief that Airbnb alone will add another $60 billion in bookings in the next five years while also significantly improving its own economics.
Crudely simplified, this can be good or bad for property managers (PMs). If those incremental bookings drastically shift the mix of direct versus indirect bookings for PMs, thus making PMs less relevant, it would decrease their appeal and their take rate.
Also, if the listing platforms improving their own economics is a zero-sum game shifting take rate from PM to the listing platforms, then over time the economics will deteriorate for PMs. The industry will continue to be massively fragmented, with small PMs increasingly eking out a living in the shadow of the listing platforms.
If, on the other hand, the listing platforms drive the growth of the entire market rapidly, then worsening unit economics for PMs might well be more than made up for by the increase in volume.
Our industry is thus at an interesting juncture: Does the rising tide lift all boats, or are PMs relegated to wane in influence and take an increasingly smaller commission for their services as more bookings come from the listing platforms?
Which Model Is Winning?
The market has been abundantly clear about which model it favors: Airbnb and its peers trade at a much higher multiple than PMs.
The largest vacation rental (VR) business in the world, Wyndham’s European portfolio (today Awaze), with some 110,000 listings, was sold in 2018 for a reported $1.3 billion. Stripping out other businesses included in the sale, the VR segment at the time likely generated about $200 million in sales. Assuming a 35 percent commission, this would imply gross bookings of about $600 million. Skift reported that the entire business sold for 10 times Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), and assuming Wyndham’s VR business generated an EBITDA of 15 percent of revenues, the VR business would have been valued at $300 million, or 0.5 times gross booking value. These are rough estimates.
Conversely, Airbnb is today valued at approximately three times its 2021 forecast gross booking value, and that’s despite the fact that Airbnb’s current take rate is less than half that of a typical PM, and Airbnb is not profitable yet. So clearly, the market believes that Airbnb and other listing platform’s business models are superior to that of a PM, likely on three counts.
1. Scale versus Size
Listing platforms have demonstrated they can scale. Conversely, PMs have largely been hyperlocal businesses that struggle to develop economies of scale beyond local markets.
Indeed, successful PMs typically run highly local businesses that thrive because of the dominance of a local market and favorable local economics due to local density. They tend to have a large percentage of direct bookings from returning guests and from local feeder markets where they have built a local brand often over decades.
Exceptions to this rule are few and fall into two categories. First, there are those that grew by acquisition and strung together collections of hyperlocal markets. However, it’s unclear they derive any scale effects beyond these local markets. Arguably, they have achieved size but not scale. Even large PMs tend to hit a “sound barrier” at 20,000 listings. AJL’s Simon Lehmann attributes this “natural law” to the founder of Interchalet, who decades ago observed that PMs struggle to grow beyond 20,000 units. It will be interesting to see if this law applies to Vacasa after its purchase of Turnkey.
Contrastingly, there are those that have partially or fully let go of the non-scalable local parts of the business and focus on marketing and guest support, leaving the on-site operations to the owner or partners. Arguably, the latter looks more like listing platforms than PMs and might well scale, but the proverbial proof is in the pudding, and their long-term success will be defined by what percentage of bookings they generate directly and whether their unit economics improve as they grow.
Listing platforms, in comparison, clearly scale, which is reflected in improving unit economics as they grow. Analysts expect Airbnb’s gross booking value to sustain a compound annual growth rate of more than 20 percent over the next 5 years; critically, this growth is organic.
2. Shifting Take Rate
When listing platforms generate tens of billions of dollars of bookings and add tools to make it ever easier for owners to list directly with them, this will shift the take rate from PMs to listing platforms. Many industry observers agree that PM commissions will continue to be challenged.
This effect will, of course, differ by market. As former PM Richard Vaughton points out, the effect will be much more pronounced in urban markets—that exist because of the listing platforms—than in traditional VR markets where listing platforms are still less important as a source of bookings. But due to powerful global brands, billions of dollars invested in digital marketing, an increasing share of business from millennials that grew up with the listing platforms, and an increased ability to leverage hotel traffic for VR, these effects of scale will increasingly be felt in traditional VR, too.
Urban markets may be interesting case studies of what’s to come. As science fiction writer William Gibson said, “The future is already here—it’s only unevenly distributed.” Urban managers that depend largely, or exclusively, on one or two listing platforms have in general not fared well. They very much depend on the listing platforms, and although the listing platforms may see them as attractive enablers to get an owner listed (until the listing platform builds better DIY tools), it’s unclear how much long-term value they hold to the listing platform. What is generally clear is who holds the better cards in that relationship and who will extract more value from the guest over time.
PMs fundamentally do three things: they put heads into beds, they manage guest relationships, and they turn and maintain properties. Interestingly, some European PMs charge the same commission whether the homeowner chooses to deal with turns and maintenance or whether the PMs manage those. This is a clear indication of where they see the value: Although there clearly is value in dispatching cleaners and maintenance, a future of “glorified housekeepers” and erosion or disintermediation of the guest relationship is probably not in PMs’ interest.
As marketing power and more pieces of the guest relationship transition to the listing platform, the take rate will shift with it. Analysts expect Airbnb’s take rate to increase from 13–15 percent to 21 percent in the next few years, and it’s unlikely that this will come out of the owner’s pocket: Everyone needs supply to grow. A manager at a listing platform said to me years ago, “PMs take too much money for what they actually do.”
Not all listing platforms are profitable today, but all have clearly shown the ability to be drastically more profitable than PMs.
It is estimated that hyperlocal PMs typically generate an EBITDA of around 7–25 percent of revenues. Conversely, analysts expect Airbnb to reach an EBITDA of about 45 percent by 2030 because it benefits from scale. This might seem like a pipe dream given that Airbnb has only ever achieved profitability once in its 10-year history, but it is not far-fetched at all given that the more mature Booking.com has demonstrated achieving EBITDA in excess of 40 percent already, and Airbnb looks even more scalable than Booking.com.
Can the “wave of consolidation” that we have so long expected make PMs drastically more profitable?
It is unlikely if consolidation continues to simply string together local markets without clear economies of scale.
As Sykes’s Graham Donoghue commented to Phocuswire’s Jill Menze on the Vacasa–Turnkey deal, “The key will be value creation and the road to efficiencies—you can’t just keep collecting stuff as eventually you’ll get found out.”
Evolve in the US and Sykes and several others in Europe are pursuing models that resemble the listing platforms more than US full-service PMs. If they achieve a high percentage of direct bookings and exclusivity on listings, this model seems to be more profitable over time than a traditional PM.
A Red Herring?
So, in summary, if PMs can’t scale, if their commissions erode, and if they slowly become less profitable (from an already low base), what will become of them?
The future is likely not as bleak as the above suggests; we are also in a period of unparalleled optimism about our industry. Several industry observers expect Vacasa’s unstoppable streak of acquisition to drive toward a SPAC or IPO at revenue multiples comparable to Airbnb—even if their economics and business models couldn’t be more different.
This optimism might be based on one of three factors. First, the rising tide lifts all boats, and the growth created by Airbnb and the other listing platforms as well as pent-up demand will either negate or more than compensate for any deterioration in unit economics. Second, the market believes that the “tech-enabled PM” indeed provides for superior economics. Third, Vacasa and Airbnb share at least one major investor, so before long, Vacasa, too, may well look more like Airbnb, or it may add highly scalable, unbundled services to its portfolio.
So what’s a PM to do? Whichever way one looks at the future of our industry, it’s highly likely that the pace of change will accelerate, which will require adjustments for all industry participants.
1. Focus on inventory acquisition.
Supply acquisition will be the key battle of this year and the years to come, and being local, PMs have a competitive advantage (more so than with guests). So every owner of a PMC should spend as much of their time as they can on inventory acquisition.
The RBO market (i.e., the 50 percent of homeowners/hosts who don’t currently use a PM) is more attractive than just poaching homeowners from your competitors, but you have to be creative on how to attract those who don’t want full service (yet). The homeowner relationship is the key asset of a local PM.
As Steve Milo of VTrips notes, as opposed to anyone else in the ecosystem, PMs have an exclusive relationship with owners, and once that’s in place, it’s a defensible competitive advantage.
2. Get a piece of as many homeowners as you can rather than getting all of a few.
The vast majority of the US market is focused exclusively on the full-service model. This is an unusual characteristic of the US market and is not shared with the rest of the world. Evolve has built a successful, scalable model unbundling this offering. Their success, and the experience in Europe, suggests that there is plenty of room for other models.
Why not offer owners a wide range of services and thus leverage the core local strength in owner acquisition across a wider menu of á la carte services? For example, you could offer 1 percent for a DIY (white-labeled) owner tool and 3 percent for some basic remote services, offer access to unbundled housekeeping at a subscription fee plus a per-job charge, offer unbundled marketing and guest management at 10–15 percent, and then upsell all the way to full-service management.
But each additional customer—even if it’s just a piece of full service—builds your local dominance and creates local scale on as much of the guest relationship as you can.
3. Diversify your channels; focus on the ones that matter.
In a world where increasingly more bookings come from channels, you should at least ensure you keep your channel mix diverse. In practice, focus on the ones that matter, and when practical, favor the challenger. If you are in Destin, give Booking and Airbnb a try; if you are in Tahoe, in addition to Airbnb, also list on Vrbo and Booking.
Expect an all-out war to break out because Vrbo and Booking. com, as well as the entire hotel industry, are salivating over Airbnb’s market cap as a public company. The opening shots in this battle have already been fired, with Vrbo taking the fight to Airbnb and Booking.com chasing Vrbo. There will be pressure on each to serve up bookings to newly signed listings, which should create an opportunity to diversify a PM’s channel mix.
In addition, consider new entrants. Homes & Villas by Marriott International has by all counts been highly successful. Their success will likely inspire other traditional lodging providers to throw their hats in the ring (as well as other travel providers, such as airlines). In the past, these offerings have had mixed success, but Marriott seems to have cracked the code, and others will likely follow. Successful regional or niche listing platforms may also round out your mix.
And then there’s Google. This currently requires more work, and success very much depends on where you are. But reaching your customers via Google may be more cost-effective for some, and doing do certainly diversifies your channel mix.
So, will property management really end? PMs provide highly valuable services to many homeowners, and that won’t change. But short-term rental property management as we know it may well change drastically over the next few years.
This article might sound odd this year, which promises to be the best on record for many PMs. Not only is the industry likely to benefit from both pent-up demand and longer-term favorable dynamics in 2021, but this year, at last it seems the power balance between PMs and listing platforms is shifting in favor of PMs. Many PMs are booked out, with some of the highest levels of direct bookings ever, and listing platforms are competing ferociously to woo PMs. PMs barely have time this year to consider the deals listing platforms are throwing at them.
But this year is likely to be an exception, and shrewd industry observers are setting their sights on 2022, when the battle for both guests and owners will escalate.
The biggest surprise of the last 10 years has been just how slow change in this industry has been for traditional PMs in traditional VR areas.
The pace of change is likely to accelerate sharply over the next few years.
Urban managers have seen this change more than their colleagues in traditional leisure VR. Although these two markets have fundamentally different dynamics, urban managers are an interesting case study of a market with high dependence on listing platforms.
There are few certainties other than that the pace of change will continue to accelerate. If I had to bet money, I’d bet that those PMs that get good at acquiring and retaining owners while maintaining a high percentage of direct bookings will fare the best.