The Long View: The Starwoodification of real estate

At most hotels in Manhattan, all you need to do is look at the giant “Marriott” or “Holiday Inn” sign splashed across the facade to figure out who runs it. Apartment and office buildings are a different story. You book a room at the Hilton, but you rent an apartment at 31 West 17th Street and your office is in a building called 158 West 29th Street. Who runs those buildings? Maybe the super knows.

A small but well-funded group of startups is arguing that there’s a better way. Firms like WeWork, Knotel, Common and Founder House are trying to bring the branded hotel flag concept to the office and apartment markets. If they succeed, they could transform the real estate industry and what it means to be a landlord. 

Common [TRDataCustom], a New York-based company backed by more than $20 million in venture funding, recently announced its takeover of Adam America’s 595 Baltic Street in Boerum Hill under a management agreement. In exchange for a share of revenues and profits, the startup will run the 69-unit rental property as a co-living space under its own brand. Customers can rent furnished rooms or studios through Common’s website. The units will look similar to other Common buildings across Brooklyn. In other words: the company wants to operate as a sort-of Marriott for apartments, a recognizable brand that offers consumers a unified experience throughout different locations (and eventually different cities and countries).

“Residential real estate is one of the last industries where you have a lot of consumer spending but no consolidation or brand awareness,” said Brad Hargreaves, founder and CEO of Common.

A variation of the flag concept is also popping up in the office market. Amol Sarva, the founder of New York-based Knotel, describes the startup as akin to a Starwood for office space. The company, which recently raised $25 million in venture funding, signs management agreements with office landlords that are similar to hotel flag contracts. In return for a cut of revenues and profits, it will manage part or all of a building, furnish the office floors, put its logo on the walls and rent them out to companies on a month-to-month or year-to-year basis. Unlike some co-working companies, Knotel doesn’t cater to freelancers and small startups but to more established firms. Asked whether the model could one day dominate the entire office market, Sarva said: “I don’t see why not.”

Hotel or office building? A WeWork in Philadelphia

WeWork, which is in talks to raise up to $3 billion from Japanese fund manager SoftBank at a $20 billion valuation, appears to be the only startup trying to bring the hotel model to apartments and office markets simultaneously through its WeLive and WeWork business lines. The company signs simple leases for many of its locations, but it has recently shifted to more Starwood-esque management agreements that give it a share of profits in some locations. Its plan to build a global brand of standardized office and apartment buildings that sells its services directly to consumers certainly seems to follow the Starwood and Marriott model. (WeWork isn’t too keen on the hotel comparison and prefers to brand itself as a social network. But tellingly, it recently hired a former Starwood executive to head its co-working business.)

Other startups applying some form of the hotel flag concept (global brand, standardized customer experience, revenue sharing) to office and apartment rentals include Breather, OneFineStay and many more.

So far, these companies service a niche market. But their tentacles could spread across the industry. A look at the history of the hotel sector shows why.

Hospitality was once a fragmented business. Landlords would either run their own hotels or lease their property out to an operator much like an office landlord would to an anchor tenant. But in the second half of the 20th century, global hotel brands began taking off. And starting in the late 1970s and early 80s, the lease and owner-operator models began being replaced by the type of management agreements that dominate the sector today, said Greg Hartmann of JLL’s Hotels & Hospitality Group.

For landlords, partnering with global brands can be profitable because they tend to be better at marketing, enjoy economies of scale and inspire customer loyalty.

“One might pay 5 cents more for Coca-Cola than another type of soda,” said Talia Goldberg of VC firm Bessemer Venture Partners. “It’s a known commodity — you know what you’re getting.” And while profit-sharing agreements come with more risk for landlords than leases do, they also give them more control (operators can be fired for poor performance) and greater profits if things go well.

The Starwood model could offer similar advantages for the office and apartment markets. Who in New York hasn’t rented an apartment and wondered whether the landlord will be a nightmare, or whether they’ll have to deal with bugs or mold? If you rent with a brand, you’re a bit more clued in to what you’re getting. The same goes for offices: a New York company can rent a WeWork desk in Shanghai and know (roughly) how things will go.

For landlords, partnering with brands offers a chance to expand marketing and brand loyalty – at least in theory. “If Common were not branded but just a collection of nine different buildings, it would be a lot harder to make sure all these buildings are full,” Hargreaves said. Customers “are not applying to a specific building, they are applying to Common as a brand.” And if one building is full, they can be placed in another.

Plenty of landlords are good at finding and buying properties, but marketing isn’t always their forte. Signing on a flag would allow a landlord to operate more as an investment firm, following in the footsteps of most hotel landlords.

But if the shift towards the Starwood model offers perks, it also offers headaches.
Landlords who have grown accustomed to the regular income of leases may balk at the more fickle finances of a management agreement – and so could their lenders. “Moving that needle will be difficult,” Hartmann said.

Knotel’s Sarva expects resistance from those who see the Starwood model as a threat to their market share. “Every stakeholder in the system feels threatened by us,” he claimed. “What we have been designing are models that create unfair profits for the first that adopt this thing. There will be institutional backlash for sure.”

There’s also the fact that if things go sour, fending off a legal challenge from a venture-backed firm like WeWork or Common might be much harder – and more expensive – than dealing with a regular office tenant or individual renter. Landlords aren’t used to the power dynamic being flipped, and they may not like it.

(Read more of The Long View here.)