Last week I lead a panel at HEDNA’s LA conference about 'Evolving Business Models in the Hotel Industry' where we discussed one of the most popular hotel trends in today’s mainstream media landscape.  The idea for the panel actually formed a few months earlier. Back in September, I published an article titled Sonder is Not a Tech Company where I argued that an excess of venture capital and a bad case of AirBnB FOMO (fear of missing out) was driving exciting new hospitality brands into dangerous waters.

I wrote the article on a Saturday afternoon and by Monday it had more than 7,000 hits.  My inbox was flooded with emails from industry colleagues sharing their take on the article.  I hand picked three of the experts for this panel based on those who had the most insightful perspectives. All three of these responses came from people with significantly more intellectual horsepower than me who also disagreed with me on key arguments in compelling and articulate ways. 

I have spoken at length with each of these individuals on the subject matter but learned even more by putting them all in a room together. In this article, I’m going to share how each of them changed the way I think about alternative accommodations and the future of the hotel business.

Here are the panelists I chose and why I chose them:

• Rami Zeidan (CEO & Founder, Life House) told me that he disagreed about my point that hotel groups shouldn’t build any tech in house and that it’s a fools errand.  Rami shared data on how Life House has built backend tools for revenue, marketing and distribution to acquire direct business far more efficiently than typical hotel groups.

• Adam Harris (CEO & Founder, Cloudbeds) disagreed with my definition of alternative accommodations.  Adam’s software is now putting heads in more than 1M beds each night so he has a unique view on new hospitality products working with accomodations players ranging from RV parks and campgrounds to hostels and upscale hotels.

• Drew Patterson (formerly founded, Jetsetter and now Chairman, Transparent) disagreed with my point that alternative accommodations will negatively impact hotel rates anytime soon and through his analysis of Transparent’s proprietary dataset showed me that these alternative accommodations players were not even close to having scale that could impact a market.

• Elizabeth Winkle (Chief Strategy Officer, STR) is the one panelist who I hadn’t met prior to writing the article but she had read it and definitely had a unique take from our first conversation.  I asked Drew who he thought had the best insight into this subject from his impressive network to which he immediately replied that we needed to get Elizabeth on the panel.

The intent of the panel was simple: to have an unfiltered, real and yet respectful conversation about how business models are evolving in hotels.  Mainstream media hypes these companies up as they raise boatloads of venture cash without ever taking the time to understand the underlying businesses.  Journalists then proceed to immediately turn on these companies and their founders when they inevitably show cracks, kicking them while they’re down. The panel (and this article) is intended to break the “boom or bust” media cycle and take a closer look at where the hotel industry is actually going.

What Counts as 'Alternative' Accommodations?

As I read up on the emerging sector coming into the panel I couldn’t seem to find a clear definition of what ‘alternative accommodations’ meant.  To me it was something between an AirBnB and a hotel with a tech focused positioning that attracted venture capital (investors who usually don’t invest in hotel companies).  When speaking with the panelists prior to the event, each seemed to have their own definition so I wanted to ask what it meant to them during our live discussion.

Rami went first and gave such an articulate response that the rest of us just nodded in agreement.  Rami’s definition seemed incredibly obvious in hindsight as most great ideas do, “alternative accommodations refer to the alternative use of residential spaces for lodging purposes.”

This new definition meant that companies like Rami’s Life House Hotels and even the controversial India based OYO Rooms aren’t actually ‘alternatives’ despite taking on venture capital.  They are just hotel companies with different investor profiles.

Why Alternative Accomodations Isn’t a New Category 

I joked at HEDNA that without Drew Patterson, Hotel Tech Report wouldn’t exist.  I won’t go into the full story here but in many ways without Drew I would never have got into this space where hotels meet technology.  Needless to say, when Drew talks I listen. With our new definition of alternative accommodations Drew added a critical layer of nuance.  He pointed out the fact that while these assets might be alternatives in urban markets, they’re actually the status quo in leisure markets like Myrtle Beach and Breckenridge.  

In highly seasonal leisure markets property managers have for many years tapped underutilized vacation homes and condos as professional short term rentals to provide extra income.  In these markets it’s relatively difficult to justify hotel development given the large supply of rentals already servicing lodging demand. To see how an oversupply of professionally managed short term rentals impacts hotel development - we can look to these markets as pretty clear case studies.  These “alternative accommodations” players are doing the same thing in urban markets that vacation rentals have done to an extent in seasonal leisure markets for many years. Drew has leveraged proprietary data to do deep analysis around the market dynamics and nuance that's definitely worth checking out for those interested in this rapidly changing market.

The scary thing here is thinking about the types of investors backing these players and how that impacts the trajectory of these businesses.  Could you imagine Softbank backing Joe Shmo’s Vacation Rentals business in Tampa, Florida? Joe Shmo probably makes a really nice living but he's not exactly running a venture business.

How Hometels Are Impacting the Apartment Industry

Drew helped me realize that alternative accommodations aren’t a new concept like they’re being portrayed.

Elizabeth pointed out some of the impacts these ‘hometels' were having on local housing.  A super interesting element of Elizabeth’s perspective is that her company STR was recently acquired by commercial real estate data giant CoStar for a cool $450M.   That means that Elizabeth now has exposure to commercial real estate datasets reaching far beyond the hotel market.  Every major media conversation about alternative accommodations talks about how they are disrupting hotels, but Elizabeth was the first person I’ve heard to posit that they’re having a greater impact on the multi-family space.

What did she mean by that? Elizabeth noticed that deals are getting underwritten in the multi-family world that are structured in non-traditional ways and that some of those deals wouldn’t have ordinarily been done at all without a player like Sonder or Stay Alfred coming in and leasing up units out of the gates promising revenue guarantees.  She also introduced me to WhyHotel, a company that in concept could be the most interesting of them all.  WhyHotel runs pop up hotels with the specific intent of helping landlords drive revenue while they lease up their units on new development.  It's a super focused and clear vision which I respect and if they can figure out how to make the economics work, they will create a very nice business off of this that would be very attractive for a major multi-family REIT like Equity Residential to acquire one day.

But in the case of these other players, they're attempting to create long term hotels in multi-family spaces.  Let’s say that you had a questionable multi-family development that wouldn’t get underwritten by banks or investors because the rental market was oversupplied - now that deal might get done because the alternative accommodations component is tied to the lodging market and not to the multi-family market.  In new builds this dynamic can potentially lead to an oversupply of housing which drives prices and real estate values down. In multi-family conversions this could occupy rental supply driving exacerbating the new housing crisis and making rentals even more expensive.  It's important to really think through (and model out) the potential long term impacts of new business models on our communities to the best of our abilities.

They're Actually a Response to Brand Dilution

Shrewd venture capitalists question the underlying assumptions baked into the success of a business prior to making an investment.  Rami built Life House as a next gen hotel company that uses a new organizational structure (brand + management) and technology expertise to simply deliver hotel owners better economics and performance.

To be bullish on an investment in Life House, Rami's investors like Ashton Kutcher and Thayer Ventures needed to agree with two core assumptions about the hotel industry:

Hotel brands mean less today: Online reviews and digital media (e.g. photography) make brand awareness less valuable because travelers can compare accomodations products like never before. The major chains are launching more brands each day meaning that each brand means less to consumers than the last (all else equal).  Adam Harris brought up the great point that when you search on an OTA today you see all of these different accommodation types side-by-side which is direct result of this shift.

Technology is core to hotel management: Old school hotel management companies for the most part don’t understand technology all that well.  These companies built their businesses on expertise in operations, marketing, human resources revenue management and administration.  Each of those competencies where a huge value add for hotel owners 10-20 years ago but in today’s world, an efficient organizational structure and a smart technology strategy makes most of these areas relatively easy to manage for owners.

Rami is unlike most of the founders in the adjacent alternative accommodations space in that he brought significant hotel and finance experience at top firms like Sydell Group and Starwood Capital to the table.  It was through those formative experiences that Rami realized he could do things better. Life House’s business is built on the idea that management and brand are no longer as compelling of value propositions when pulled apart than they used to be.  It’s also built on the belief that a large swath of traditional management companies don’t understand technology which renders them incapable stewards of precious hotel owner assets. I tend to agree with Rami on both fronts.

Life House is building a new kind of hotel company brick by brick where alternative accommodations players have creatively found ways to growth hack their way to scale at the risk of coming out the other side with a shakey foundation.  Alternative accommodations players have raised venture capital to chase a broader opportunity for disruption in the traditional hotel market under the guise of delivering a meaningful unique or disruptive model.

So how are alternative accommodations players growth hacking their way to credibility?

If someone were to come from outside the hotel industry and tell experienced real estate investors that they were going to create the next Marriott they’d get laughed out of the room.  Consequently, these alternative accommodations firms have shrewdly gone to venture capitalists with a case of AirBnB FOMO and told them that they’ve found a loophole in the system.

While they can’t go out and start managing hotels from day one like Life House is doing, what they can do (and have done) is convince struggling multi-family owners that they can make their lives a little bit easier by master leasing floors of their apartment buildings and guaranteeing revenue on risky assets.  They then compare the P&Ls of these assets to traditional hotels and say that they’ve been able to use technology to operate more efficiently than hotels when in reality most of what they’re doing is avoiding the need for hotel permits, savvy investors and labor law compliance.

The smart part is that it’s super easy to persuade landlords in the benefits of guaranteed income and no work in the short term so these companies have been able to scale up quickly. The problem is, now that they’re getting to scale and have venture milestones to hit - going floor by floor just doesn’t scale fast enough.  Don’t believe me? That's why you see most of these companies opening traditional hotels of late and more will continue to do so.

A critic might say that they shrewdly see the writing on the wall.  Regulation always trails innovation so being stuck with a bunch of leased long term liabilities in tandem with short term assets doesn’t seem like such a great idea when you’re looking at the end of a bull market and the prospect of local accommodations labor unions who want to regulate you the same way they do hotels.  A conspiracy theorist might sing a different tune, namely, that these firms used alternative asset use to build a brand, raise institutional capital and ultimately get a seat at the hotel development table long dominated by the Marriotts, Hyatts and Hiltons of the world.

Regardless of which side you’re on, it’s clear that all of these companies and their venture investors think that the traditional hotel market is long overdue for a shakeup.

What’s happening here parallels what we saw in retail 10-20 years ago.  The 90s spurred insane growth in cookie cutter branded retail like Abercrombie and Aeropostale but recently these stocks have gotten clobbered to say the least.  Consumers don’t want cookie cutter and omnichannel has won the day in dominant new age brands like Warby Parker, Bonobos and Stitch Fix. Investors in those businesses saw the writing on the wall for the tired old school brands who didn’t understand digital and overexpanded their real estate footprints. Venture investors today are betting that the same thing is going to happen in hotels and alternative accommodations is their preferred trojan horse (or go-to-market strategy).

Digital's Biggest Lodging Opportunities Have Nothing to Do With Technology

Let’s hop back to the original question, “what are alternative accommodations?”  Cloudbeds founder Adam Harris generally agreed with our definition of alternative accommodations but posed that mass media is missing the most exciting part of the “alternatives movement.”  Earlier we put forth the idea that brands (generic ones) mean less today because (1) there are so many of them and (2) consumers have access to information that helps them understand products without needing the crutch of brand associations (e.g. reviews and photography).

These forces have fueled a powerful movement, namely, hyper specific alternative accommodation types like glamping villas, cannabis hotels and wellness tourism (think surf resorts and yoga retreats).  Ultimately, low cost digital distribution has powered the long tail.  25 years ago yoga lovers would have relied on friends in their direct network to find a great yoga retreat.  Today, 49,500 of them search on Google each month for that offering which powers experiential niche travel like never before.  Adam believes that the most exciting trend happening in alternative accommodations isn’t about the way hotel companies are tapping multi-family real estate but it’s about the way that accomodations providers are able to build wonderful businesses off of niche interest groups by delivering truly unique and catered experiences.  Ultimately, new marketing and distribution channels have unlocked the long tail and allowed niche accomodations businesses to thrive like never before while generic hotels squabble over guests who will never be loyal to them no matter what they do.

What Does it All Mean?

Rather than conclude with answers and recommendations I think it’s important to conclude with questions.  These are questions that everyone in the industry should be asking as these business models evolve because if we don't we're likely to experience a significant amount of turbulence across the industry. These are also the things that journalists need to dive into before writing the next “doom or gloom” article about disruption in the hotel industry.

1. What is the long term impact of excess venture capital going into traditional hotel businesses?

2. A platform like AirBnB created immense value by activating inaccessible capacity, is the alternative accommodation sector actually creating value or is it just gaming the system?

3. What are the long term effects of alternative accommodations on both multi-family and hotel assets (and their local communities)?

4. How will unlicensed hotels in multi-family assets impact hotel industry jobs and broader employment?

5. Does the alternative accommodations model work in all portions of the market cycle or is it only a quick fix here and now?