Home rental upstarts take bite out of hotels
HomeAway’s portfolio of vacation home rentals includes many varieties.
Fueled by a stronger economy and rising demand, the number of Americans booking lodging in people’s homes with firms like Airbnb, HomeAway and VRBO in recent years has more than doubled. The percentage of U.S. travelers who have stayed in a private accommodation for a trip rose to 25 percent in 2014 from 11 percent in 2011.
At the same time, business at traditional hotels is exploding. U.S. hotel bookings totaled $144 billion in 2015, up from $122 billion in 2013, reports Phocuswright, a Sherman, Connecticut-based travel industry research firm.
Lifting all boats?
“The total pie of travel demand has grown and that’s lifted all boats,” says Douglas Quinby, vice president of research at Phocuswright. But his optimistic outlook isn’t shared by all—there’s a fierce battle for market share between the upstart home-sharing companies and traditional hoteliers.
It is hard to pinpoint the exact impact home-sharing companies have had on the hotel industry, observers say. But the fast-growing short-term rental business raises the question: How much more business would hotels be picking up if it were not for these competitors?
The growth has created a conflict between both sides. The American Hotel and Lodging Association is calling on state and local governments to review a report conducted by researchers at Penn State University’s School of Hospitality Management. The lobbying group wants legislators to take action to, as they put it, protect their communities and ensure a fair and competitive travel marketplace by closing what they call the illegal hotel loophole.
Specifically, the report claims there are two overlapping groups of operators—multiple-unit operators and full-time operators—that are a growing percentage of total Airbnb hosts and generating a disproportionate share of the company’s revenue. Among the findings: Multiple-unit operators accounted for $500 million of $1.3 billion of Airbnb’s revenue in 12 markets that were analyzed between September 2014 and September 2015.
It contends hosts who rent more than one unit are the fastest-growing segment of hosts on the site. Plus, the report claims a growing number of full-time hosts are using Airbnb to operate as unregulated, full-time businesses. It claims nearly 30 percent of Airbnb’s revenue comes from this group.
The report was paid for by the American Hotel and Lodging Association, the hotel industry’s sole national association.
Vanessa Sinders, the senior vice president of government affairs for the association, says commercial operators that Airbnb and other short-term rental platforms facilitate ought to play by the same rules as the tens of thousands of lodging properties, including small bed and breakfasts, franchisees, independent properties, resorts and brand name hotels her group represents.
She said those businesses pay their fair share of taxes, obey zoning and licensing laws and abide by strict health and safety regulations that protect communities and the traveling public. “We welcome competition from newer players entering into the marketplace, but there needs to be a level and legal playing field,” Sinders says.
Based in San Francisco, Airbnb is among the world’s largest accommodation providers. It has over two million listings globally and over 80 million people have used Airbnb since it started in 2008. Airbnb reportedly has a market value of at least $24 billion and bookings estimated at $2.4 billion in 2015.
Airbnb counters the Penn State study is deceptive. “This study shows that the hotel industry gets what it pays for, which in this case is a specious study intended to mislead and manipulate,” says Christopher Nulty, an Airbnb spokesman.
“Airbnb is succeeding for the very simple reason that our hosts—the vast majority of whom are middle-class people sharing their homes in order to create supplemental income—provide guests authentic, transformative experiences.”
Airbnb’s growth in recent years is not expected to slow down. The Cowen Group, a New York-based diversified financial services firm, predicts that bookings for Airbnb will rise from about 79 million “room nights” last year to about 500 million the next five years, and an eye-popping 1 billion a year by 2025.
But Cowen’s analyst note contends Airbnb’s growth should not have a catastrophic effect on the hotel business. Airbnb’s bookings nearly tripled year-over-year in 2012, but have slowed over time to an expected 70 percent growth rate this year.
The Cowen note adds legal obstacles could pose a risk to Airbnb’s growth. For instance, Airbnb faces regulatory challenges in almost all of the major cities where it operates.
Cowen added many cities have regulations limiting individuals’ rights to rent out apartments on a short-term basis.
HomeAway spokesman Adam Annen said his brand’s customers require the added value and space of a whole home, rather than the alternative of renting multiple, pricey hotel rooms. That’s true for Vacation Rental By Owner (VRBO), a unit of HomeAway. Booking revenue brought in by owners listing their homes on HomeAway was $10 billion in 2013, $12 billion in 2014 and $16 billion in 2015.
“HomeAway’s sentiment is that there is plenty of room in the travel industry to provide accommodations options for each individual’s vacation needs,” Annen says.
Quinby of Phocuswright says his firm expects to see rentals make more of a dent on hotels, particularly in some key markets like New York and Los Angeles. He adds that will be true especially in their ability to “yield up,” meaning raise rates during high demand periods and put downward pricing pressure on hotels.
Quinby says another concern for hotels is Airbnb’s appeal to millennials. He says Airbnb is meeting their demands to connect with local people and culture to enrich their travel experience. He says hotels are struggling to appeal to millennials and are not getting them involved in loyalty programs like they once did with their parents.
For hotel giant Hilton Worldwide, net unit growth is driven by what the company believes is the best brand portfolio in the business, according to a company spokesperson who would not supply a name. Every one of the chain’s brands has a growing pipeline and over half of its pipeline of rooms are under construction. The hotel organically launched four brands in the past few years to address incremental market segments and further its network effect. The four brands include Home2 Suites by Hilton, Curio – A Collection by Hilton, Canopy by Hilton and Tru by Hilton.
“We welcome competition, when the playing field is level,” the spokesperson said. “These so-called sharing companies need to follow the same laws and regulations that real hotels do, to protect guests’ safety and ensure that governments get the taxes they’re due.”
From its vantage point, Starwood Hotels & Resorts contends anything that promotes travel is good. The company believes the sharing economy is here to stay.
“Even as new entrants come into our space, we’re uniquely positioned to provide through our Starwood Preferred Guest loyalty community, program partnerships, programming and new technology,” says spokesperson Jessica Doyle. “By building one-to-one relationships with our guests that no one else can replicate, we create real loyalty.”
In other words, the fight between hotels and home rentals rages on.