Austin: Airbnb “Super City” and Hotspot For Emerging Boutique STR Purveyors
Austin is known for a number of things — temperate climes, great barbecue, and hosting multiple internationally known music/film/tech festivals each year — but it’s not a place ordinarily discussed along with the likes of Venice and Berlin … unless Airbnb happens to be the topic of conversation. While it may come as a surprise to locals and visitors alike, the short-term-rental (STR) unicorn considers Austin to be one of its 24 global “super cities”: destinations that routinely generate the company’s largest revenues, and are viewed as having the strongest prospects for future growth. Last year Austin managed to edge out Venice and Florence in terms of 2018 Airbnb revenues, and it nearly beat Berlin as well. It was also one of only a dozen cities worldwide included in last year’s launch of Airbnb Plus, which Airbnb CEO Brian Chesky described at the time as one of the “biggest changes to our platform in our ten-year history.”
Austin is also a destination market for many of the increasingly large segment of startups that manage STRs one could describe as either “aparthotels” or “boutique STRs”: a modern spin on the corporate apartment concept, if you will. Most of these companies employ variations of a similar model: they typically lease sizable blocks of apartments in upscale buildings; furnish them in varying degrees of style (but nearly all in a contemporary / modern fashion); and rent them out on a nightly basis, both via Airbnb and other online sales channels. Nearly all of the major online travel agencies (OTAs) — including Expedia, Travelocity and Hotels.com — now include listings for boutique STRs, oftentimes placed directly alongside ones for traditional hotels, but the second-biggest player in the space is believed to be Booking Holdings, the new moniker for Priceline that it adopted in 2018 after acquiring Booking.com. (Booking also owns Kayak, OpenTable, and a variety of smaller OTAs more broadly known outside of the U.S.)
Among the myriad startup aparthotel ventures, The Guild — which is headquartered in Austin, and had 97 keys under management at the end of 2018 — is one of the companies most worth watching. It completed a $9 million Series A funding round last fall, and is using its capital to further grow in Austin and Dallas (its main existing markets) and expand into Denver and Miami. It also generated an impressive $2.6 million in Q4 2018 revenue from its Austin units alone, or roughly $26,800 per unit, according to a source with knowledge of the company’s financials. A relative newcomer, Locale (based in Austin as well), also recently announced it had secured $2.5 million in seed funding, though it already had 150 apartments under management in Austin, Houston and Nashville beforehand. Like The Guild, Locale plans to use its capital infusion to expand into both new markets and further so into existing ones.
The Austin STR hubbub is all the more remarkable considering its city council banned most new STR licenses three years ago, and plans to phase them out entirely by 2022. (That said, most industry observers consider this possibility to be a remote one, and many initially thought the Texas Legislature would vote to preempt local STR regulations — which would likely nullify Austin’s ordinance in its entirety — by the end of its 2019 session in June. Even if it doesn’t, there’s little realistic chance the ordinance will survive an ongoing lawsuit over it — one in which the Texas attorney general has directly intervened.) The curious part — which appears to have been overlooked by the city’s many vociferous STR opponents — is that even in its current form, Austin’s STR ordinance allows for precisely the types of home rentals managed by Locale and The Guild.
The ordinance breaks down local short-term rental properties into three categories. Type 1 STRs are owner-occupied homes that can be rented out when their owners are out of town. Type 2 STRs are both the most predominant and most contentious variety by a wide margin: they’re defined as non-owner-occupied “permanent STRs” in predominantly residential areas that are rented year-round on a short-term basis. The apartments rented out by startups like The Guild and Locale fall into a third category, however: Type 3 STRs, defined as units in multifamily buildings located inside areas zoned for commercial and/or mixed-use purposes. Some of the parts of the city that qualify as such are downtown and most arterial roads that were rezoned as “vertical mixed-use” (VMU) over a decade ago, including South Lamar, East Riverside and Burnet Rd. Up to 25 percent of the units in such buildings can be used as fully licensed STRs — a fact that The Guild apparently discovered early on: all eight of the Austin apartment complexes where its units are housed (as of the end of 2018) fall into this category, and the ones I’ve seen in person have their official STR licenses posted adjacent to the units’ front doors. Although Austin’s daily newspaper, the American-Statesman, ran a particularly hyperbolic article on the subject last fall, no problems of note — and no crime to speak of — have been reported to date at any Type 3 STRs.
Is ‘Type 3’ The Key?
More broadly speaking — and regardless of the fate of Austin’s STR ordinance — the “Type 3 Model” could end up being implemented in some fashion throughout the country, which would bode particularly well for many of the boutique-STR ventures. The idea certainly makes sense in many ways: one can reasonably argue that it represents a happy medium between the needs of travelers who either don’t want to stay in hotels or simply can’t afford to do so — not to mention business travelers who may stay in units for an extended period of time, a market to which The Guild (among others) is explicitly targeting — and long-term residents (both owners and renters) who worry about an endless stream of transient visitors on their streets or in their apartment buildings. A number of the aparthotel startups have begun taking proactive steps to address such concerns, including keeping out-of-town visitors from commingling with full-time residents in the apartment buildings they utilize. In Austin, for instance, The Guild has announced plans to lease apartment units on a full-floor basis going forward, and also already runs background checks on all prospective guests.
While some of the concern over STRs may be overblown, the issue of Type 2 full-time-rentals-in-single-family-houses variety — in Austin and elsewhere — is likely to remain a salient one. New Orleans is another city with a plethora of “whole-home” STRs — though unlike the situation in Austin, many are reportedly owned by out-of-town operators, and also much more commonly used as “party houses.” (It is New Orleans, after all.) In response, its city council voted in January to prohibit whole-home rentals in most residential neighborhoods altogether, though owner-occupied residences with homestead exemptions are still permitted. City officials in Savannah also banned STRs in residential neighborhoods last year, although the Georgia legislature has more recently debated a bill that would prevent cities from enacting such prohibitions — similar to the legislation being considered in Texas, although as a home-rule state Texas has considerably greater veto powers over municipal regulations. Still, it’s notable that both cities followed Austin’s lead, even if indirectly, in allowing existing STRs to remain largely as-is in commercial areas and/or multifamily buildings.
All of which begs the question: is the boutique-STR model — limiting many, if not most, rentals to multifamily buildings where they’re both legal and have been explicitly leased as such by their management companies — the solution to the vexing problems of out-of-towners “invading” predominantly single-family residential areas, as well as “corporate” home rentals in leading urban destinations? Should cities thus consider restricting single-family-home STRs in residential neighborhoods to local operators, but allow corporate rentals in multifamily buildings outside of such areas — particularly in parts of cities already zoned for hotel use? There may not be any one-size-fits-all solution in this regard, but by all appearances companies like The Guild and Locale seem to be on the right track.
To be clear, however, both startups face formidable competition — including from Airbnb itself, considering its Airbnb Plus offering is explicitly intended to add a degree of standardization to the STR experience. Among competing boutique-STR startups, the biggest threat is likely Sonder: the San Francisco-based venture emerged from stealth last August after closing an $85 million Series C funding round, and announced it had secured cumulative funding of $135 million. Last week The Information reported that the company is finalizing a deal that would add an additional $200 million to its coffers. Nipping close on its heels is Lyric, also headquartered in San Francisco: the company recently confirmed reports (first reported by The Information in December) that Airbnb itself would be leading a sizable Series B investment round in the venture. Its final funding amount was larger than initially expected, and the most to date in the boutique-STR space — depending on how one counts it: $80 million in cash plus another $80 million in equity. Still, Sonder appears likely to leapfrog Lyric’s funding either way in the immediate future.
In terms of its Austin operations, Sonder has dozens of apartment units under management in multiple parts of the city, including the Domain area 20 miles north of downtown — along with seemingly odd options, at least for tourists, such as South Congress near Stassney Lane and the East Riverside / Pleasant Valley area — and a source with detailed knowledge of its plans indicated the company is currently in negotiations to rent apartment blocks in new-build complexes in “multiple parts of town.” Lyric, which made its public debut in February 2018 with a splashy Wall Street Journal story featuring a sizable photo of one of its Austin units, appears to be pulling back from the market: although it still operates its Austin properties, including one at the Seven high-rise downtown, its new home page — introduced last week following its funding announcement, and which includes a direct booking engine for its units in seven cities, including Houston and Dallas — has no mention at all of its Austin presence.
It’s presumably stating the obvious that The Guild’s $9 million in funding and Locale’s $2.5 million are relative chicken feed compared to the nine-figure sums raised thus far by Sonder and Lyric. On the other hand, The Guild in particular has what could well prove to be its ace in the hole: it has Chip Conley on board as an investor and advisor. Until 2017 Conley served as Airbnb’s global head of hospitality and strategy, and despite his departure, Conley was arguably one of Airbnb’s smartest hires to date. He was one of the earliest pioneers in the boutique-hotel space: as the founder of the Joie de Vivre (JDV) boutique hotel chain, Conley acquired the Phoenix Hotel in San Francisco’s Tenderloin neighborhood way back in 1987. Even today — in a city that now has the highest median home prices in America — the Tenderloin remains a deeply troubled neighborhood, one where locals know not to wear open-toed shoes while walking in the area because of the danger of stepping on a discarded heroin needle.
Thirty years ago the area was effectively a no-go zone, and acquiring a hotel in such a neighborhood was a colossal gamble. Not only did it pay off, however, the Phoenix soon became quite literally a rock-star hotel, one where A-list bands often stayed while playing local gigs. JDV has since opened dozens more properties, and is now the second-largest boutique-hotel operator in the U.S. — in significant part because of Conley’s leadership. He’s also widely hailed as having played a critical role in Airbnb’s formative years, given his nearly unparalleled hospitality background. (One might also note that Airbnb has experienced myriad problems since Conley’s departure in its rollout of Airbnb Plus, its higher-tier verified-listing initiative first introduced in February 2018. Many of the early doubts about the program have proven true, including the pitfalls I pointed out in an article about it last April, and thus far it’s signed up only a fraction of the 75,000 homes Airbnb CEO Brian Chesky originally claimed at its launch would be added into the Plus program by the end of 2018.)
Moreover, both The Guild and Locale incorporate an element that’s decidedly lacking in Sonder’s units in particular: original interior design that explicitly embraces a heavy degree of local flavor. I’ve stayed in a Sonder property for an extended period and visited a dozen others in four cities: speaking as an admitted design nerd (one who began his career in web design and once launched a high-end home design e-tailer), I’d describe Sonder’s furnishings as blandly modern and effectively interchangeable, with few decor variances in varying cities — on top of being notably lacking in quality. Many of its furniture pieces are available from the likes of Wayfair, a purveyor of made-in-China decor even cheaper (and cheaper-looking) than most sold at IKEA. (To be fair, none of this appears to have been a deterrent thus far: during its public debut last August, the company noted it had hosted over 200,000 guests since its 2014 launch — and this was during its de facto beta period — and expected to generate $100 million in 2018 revenue. Using inexpensive furnishings also has the decided advantage of reducing its upfront capital costs.)
The Guild, in contrast, features apartments designed by local decorators, and they include luxury bed linens from Parachute along with witty design touches such as “Guildtone” displays featuring the Pantone colors of local landmarks such as Austin’s “I Love You So Much” mural and the water at Deep Eddy Pool, the oldest swimming pool in Texas (built in 1915). Locale units, meanwhile, offer bath products from Gilchrist & Soames, a high-end British supplier, along with Nest thermostats, in-room yoga mats and five types of sugar for one’s morning coffee. (For the record, the Sonder unit I stayed in had nothing but plain white sugar and Sweet ‘n Low — not even any Equal, let alone Splenda or stevia, and no half-and-half — and only enough for my first two days there.) Further still, The Guild and Locale appear to have locked up some of the central city’s most desirable apartment properties, most of which are located either downtown or in hot destinations such as East Austin and the South Lamar corridor (all of which qualify for VMU zoning).
Still, we’re in the comparatively early days of this niche in the broader STR space, and it’s far too early to ascertain which ventures will prevail. Sonder and Lyric have an obvious funding advantage, but at least in Texas Locale and The Guild have a decided hometown one: at present The Guild’s per-unit revenue is far higher than Sonder’s, and as noted Lyric appears to be abandoning the Austin market altogether. Sonder was effectively an unknown barely six months ago, but will likely soon have a war chest of over $400 million in total funding. If they play their cards right, there’s no obvious reason The Guild and Locale can’t do the same.
