The rise of independent short term rental (STR) brands over the past decade, as someone who has worked in the hospitality industry all of their life, was something to behold. Beginning in the mid-2010’s and accelerating through and past the Covid-19 Pandemic-era, brands like Lyric, Kasa, Mint House, and Sonder (our primary subject) grew to greater heights than what was thought to be possible in such a short period of time. Relatively cheap access to capital, lower interest rates, and changes to guest preferences in their accommodations (the way paved by Airbnb’s similar rise to popularity), facilitated the fast and furious growth of these brands.
But I wouldn’t be writing this article if all things were rosy in the world of independent STR brands. The post-pandemic economy has not been kind to many real estate adjacent businesses, especially these hospitality brands. Some like Lyric and Stay Alfred have shut down completely. Others like Mint House have needed to shutter poorly performing properties and downsize their corporate staff to survive. And then we have Sonder, who when presented with a life line in the face of many legal and operational challenges, decided to take it in the form of a strategic partnership with Marriott International.
This partnership, a licensing agreement where current and future Sonder properties will be listed through Marriott’s robust distribution channels, essentially brings all Sonder units under the Marriott umbrella. Guests of Sonder properties will earn and redeem points through Marriott’s Bonvoy guest loyalty program, and Marriott sales managers will sell Sonder properties for meetings and events. Sonder also gets a small capital infusion of $146 million, while Marriott gets a royalty fee on gross room revenue, as well as an improved unit growth rate for the year.
In short, it’s a fantastic short term deal for Marriott, a brand that needs to step further away from traditional hotel design and development standards in order to attract a younger demographic. For Sonder, and the broader independent STR market, the consequences are the death knell for what was once a great experiment in how cheap capital, momentous tech advancements, and changing guest preferences created something both beautiful and terrible.
Where Did We Go Wrong?
The story of Sonder’s retreat is also the story of the broader independent STR decline. As alluded to earlier, a bustling economy helped to fuel the growth of these companies, both in the number of units and properties, as well as the multitude of brands to choose from. But once the economic fuel dissipated, first as a result of a global pandemic that shrunk demand, and then from tightening monetary policy where the cost of capital rose, particularly in the U.S., the STR landscape became one of survival, not growth.
However, it has become increasingly clear that few of these companies even opted to insulate themselves from changing economic headwinds, denoted by two distinct commonalities amongst most of the struggling players.
First, Sonder and others essentially owned nothing of value, and everything that was valuable was either leased or depreciated/degraded quickly. These companies didn’t buy or own the vast majority of the real estate assets where they had units, opting instead for expensive master lease agreements. These lease agreements were very attractive to real estate developers and owners looking to fill buildings and further increase the value of these assets. However, when you’re renting luxury apartments for $3,000 a month, and you’re only seeing them filled 50% of the time while trying to support an entire local operations team and a national corporate team, the math will never work out in your favor. And the items that Sonder was likely buying, its furniture, smart locks, linen, etc. depreciates, degrades, or breaks over time, further siphoning value from the company.
The other aspect that Sonder and others seemed to underestimate was the sheer amount of competition in the marketplace. Sonder thought they were filling a specific void in the market for apartment style short-term accommodations in major cities that were technologically sophisticated and more affordable than traditional hotels. But were they? Traditional hotel brands, while slower to adapt to the changing consumer desires for a more frictionless check-in, stay, and check-out experience, were already offering apartment style short-term accommodations in major cities and elsewhere. These took the form of the extended-stay brands, like Residence Inn (Marriott), Home 2 Suites (Hilton), and Staybridge Suites (IHG).
The affordability claim is also difficult to see, especially when one considers the multitude of Airbnbs and other one-off accommodation options that continue to depress prices as more supply is added. Moreover, hotels have seemingly caught up technologically to what was the competitive advantage of the Sonder-like brands; most hotels do offer mobile check-in, mobile check-out, mobile keys, mobile dining options, and more, all through apps that are easy to navigate and reward the guest for loyalty.
It’s difficult to see a path to viability for these brands, other than a Marriott-like lifeline. However, the availability for such assistance isn’t guaranteed, and actually unlikely to materialize in the same manner again.
The Big Brands Won’t Save Everyone
Marriott’s decision to form this licensing partnership with Sonder, while a short-term win for Marriott, is not going to turn into a trend for the industry. Sonder being one of the larger operators in their space, with many premier property locations, certainly helped their case for being rescued. One could look at other companies that have made similar acquisitions or partnerships to fuel their growth in certain segments, like Hilton’s recent acquisition of the Graduate Hotel brand, or IHG’s acquisition some time ago of Kimpton Hotels.
The difference between most of these acquisitions and something like the Sonder/Marriott partnership, which I’m very much considering a one-off and unique situation, is that the end goals for each are totally different in my opinion. Hilton and IHG’s acquisition were much more about penetration or expansion into specific markets or brand types (the lucrative college town and upper upscale tier respectively) than about general unit growth across the board. Marriott’s licensing agreement didn’t penetrate any market or expand into any brand class that they weren’t already in. Between the midscale brands like Residence Inn and Element, and the more upscale brands like Apartments by Marriott and Homes and Villas by Marriott, Marriott has a sufficient presence in the types of lodging provided by Sonder, with plans to expand even more in the extended stay accommodations.
So the Sonder partnership, while a smart idea in the short term for Marriott, is unlikely to be replicated by other brands. There’s just not enough meat on the bones to justify an acquisition in something that can either be better executed in a home grown manner, or which doesn’t address a brand’s specific market needs.
What Have We Learned?
If I sound like I’m critical of the Sonder deal, and I am, it’s only because I think the industry can do better. Sonder and similar brands need to stop seeing growth in these unsustainable ways as the only vehicle to success. The great thing about a product like a hotel is that you’re not really competing globally, you’re competing locally. And that’s what the independent STR brands should focus on, delivering exceptional hospitality that will make guests seek out these hotels for their combination of design, amenities, tech stack, and location.
What’s more, this gives Sonder a real chance to fix their mistakes and actually undertake a real turnaround. They’ve been in the process of this for some time, exiting unprofitable leases (they’ve exited or restructured at least 105 over the past year) and cutting their corporate workforce by about 17% over the same period. What the company needs to continue to do is move away from any and all master lease agreements, which opens the company up to significant risk if particular markets have a down month or year, and start signing units under revenue sharing, or better yet, franchise agreements, a move Marriott can certainly help with.
Other independent STR brands should take note, and insulate themselves now from the macroeconomic forces that will continue to take bites out of them, just like it did for Sonder.
Looking for more guidance on building your hotel or STR brand and protecting it from the same financial difficulties? Check out our website, or get in touch for more information.