Hospitality startups pick at carnage of failed rivals

To survive, operators are trading master leases for revenue sharing

(Photo illustration by The Real Deal)
(Photo illustration by The Real Deal)

Almost everything has remained the same at 70 Pine Street — the oak floors, modern furnishings and colorful art — except for the short-term rental startup operating its 132 rooms.

After six years in business, Lyric succumbed to shaky finances and a travel shutdown in July 2020. Now, the 66-story Lower Manhattan building is the New York City flagship for Mint House, a three-year-old startup that caters to business travelers. 

Mint House is one of several short-term rental companies playing a game of musical chairs with its failed rivals. Startups such as Lyric and Stay Alfred — which leased apartments and operated furnished rentals — went out of business after the pandemic sent travel into a spiral, leaving behind several thousand vacant units across the country. That’s created a big opportunity for other short-term rental startups to expand without having to front the costs of outfitting and readying units from scratch.

“These properties have been left high and dry,” said Jesse DePinto, a co-founder of Milwaukee-based FrontDesk, which operates 580 units — 60 of which it picked up from troubled operators over the spring and summer. “A lot of the businesses have great furniture, locations and the consumer demand is certainly there.”

Including 70 Pine, Mint House now operates nearly 1,000 units, up 75 percent since August 2020, according to CEO Will Lucas.

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The company, which signs management agreements with building owners, touts its contactless offerings, including keyless entry, smart thermostats and digital concierge. It has a partnership with Mirror, a home exercise startup. And it’s also teamed up with big corporations, including American Express Global Business Travel.

Vector Travel, based in Los Angeles and Jacksonville, Florida, is also capitalizing on an opportunity to expand. Last month, it said it would discount its management fee for landlords who signed 18-month agreements.

Founder Mickey Kropf said the goal is to help landlords impacted by lease defaults.

Vector currently operates a “few hundred” units, and it is on track to grow 50 percent during the first quarter of 2021. About one-third of new units are coming from landlords impacted by lease defaults.

“It’s a somewhat creative way of solving for the vacancy left behind,” Kropf said.

Short-term surge

Over the past decade, short-term rentals proliferated across the U.S.

The number of short-term rental units increased seven-fold to 1.5 million between 2014 and 2019, according to CBRE. That year, travel media outlet Skift pegged the sector at $115 billion.

But the pandemic dealt a catastrophic blow in March 2020. Airbnb hosts, for example, lost $1.5 billion in bookings overnight.

Not long after, Stay Alfred, which had raised $62 million from investors, permanently closed its doors in May and entered receivership. Lyric, which raised $180 million, folded in July. Domio, which raised $120 million in debt and equity, is in the process of winding down, sources said. Collectively, the three had around 3,500 units.

“If we were doing this again, we would’ve looked to have owned more buildings,” Stay Alfred CEO Jordan Allen told the Spokane Journal in May, citing a “foundational crack” in the company’s model. “But renting became the business model.”

For The Guild, a cross between Airbnb and a corporate-stay hotel, Covid was the catalyst to halve its portfolio, leaving it with around 300 units in Austin, Dallas, Miami, Cincinnati, Denver and Nashville. It also opted to “lean into” operating agreements, said co-founder Brian Carrico.

“It’s really been about figuring out how to adapt and survive, extremely rapidly,” he said.

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The startup, which raised $25 million in January 2020, worked out termination agreements with some landlords, Carrico said. In some cases, it forfeited its security deposit and furniture; in others, it found replacement operators.

New York City-based Kasa, which operates 1,000 short-term rental units in 35 cities, absorbed 124 of Guild’s units. It also took over units from Hi Howard, which closed pre-Covid, Lyric, Sonder and ApartmentJet.

Kasa CEO Roman Pedan said there are inherent risks to the master lease model. “It seems risk-free and it isn’t,” he said. And that’s one thing that many of these now-failed startups had in common.

Even before Covid, some skeptics questioned whether it made sense for hospitality startups to sign master leases with landlords. WeWork, which has since moved away from master leases,  served as a cautionary tale: Its plans to go public failed after filings revealed massive losses and lease commitments. (To date, the 11-year-old company has yet to turn a profit. )

Founded in 2016, Kasa initially leased units in order to demonstrate its operational ability, but Pedan said he refused to sign leases longer than 15 months. By 2019, the startup had shifted to service agreements.

“In a lease, you’re tied to fixed rental payments,” Pedan said. “If the revenue drops, it amplifies your losses.”

The new lease

When Lyric folded, its landlord at 70 Pine weighed its options carefully.

The easiest thing to do would have been to convert the units to residential, said Matt Ehrlich, chief investment officer at  Rose Associates, which owns the property with DTH Capital.

But one thing Rose and DTH did not consider was another master lease with a hospitality firm, which Ehrlich said “creates obvious financial strain.”

Instead, Rose and DTH inked a management agreement with Mint House. Lyric continued operating 70 Pine until Mint House took over in November 2020. 

It was a “difficult situation no one asked for,” said Ehrlich. But he described the transition as a “peaceful handing of the baton.”

Most importantly, he added, “we were never dark.”

Rose and DTH remained bullish on short-term rentals, even as they watched competitors in the area shutter permanently, including Prodigy Network’s AKA Wall Street and the Andaz Hotel in Lower Manhattan, which hit the market in March, asking $125 million.

“We firmly believe there’s strong demand, notwithstanding the issues the hospitality industry is facing today,” Ehrlich said. “Long term, we think it will continue to do well.”

And this summer, that thesis was confirmed. Short-term rental players held a distinct advantage over hotels as travel rebounded this summer: Travelers sought private accommodations to minimize their exposure to Covid-19.

In November 2020, short-term rentals outperformed hotels in key U.S. cities, according to STR, the hotel data firm owned by CoStar. In Philadelphia, short-term rental occupancy was 62.9 percent, compared to hotel occupancy of 41.3 percent. In Miami, it was 81.9 percent compared to 43 percent, and in Nashville, 60.1 percent versus 37.7 percent.

“What we do is aligned with what’s in vogue, as a result of Covid,” Pedan said. “At this moment, there’s a need for more flexible stays and professional operators.”

He added that some landlords hired Kasa to capitalize on requests for two- to six-week furnished rentals that they otherwise had to turn away.

Airbnb’s IPO in December 2020 — which valued the company at $100 billion, after its stock shot up 112 percent — further validated the short-term rental market.

“It’s a major endorsement by the public market of a category that’s still in the midst of a pandemic,” Mint House’s Lucas said. “And yet everyone is seeing where this world is going.