Skift Take
The smartest money appears to be warming to the emerging asset class of professionally managed short-term rentals and vacation rentals. But it’s probably too soon to expect an “STR REIT,” or short-term rental real estate investment trust, this year.
Sean O’Neill
Some of the biggest names in private equity firms, hedge funds, and alternative asset management are chasing investments in short-term rentals and vacation rentals as new assets to diversify their portfolios.
Veteran, well-capitalized investors such as Blackstone Group, Davidson Kempner Capital Management, and Harrison Street would like to develop exposure to alternative hospitality lodging, according to people familiar with their research.
While commercial real estate firms have done deals involving short-term rentals for years, traditional institutional investors haven’t.
Institutional investors are working to create funds that invest in debt backed by properties managed as short-term rentals, vacation rentals, or related lodging.
The next step will be to build instruments that echo real estate investment trusts (REITs) specializing in short-term rentals and vacation rentals. But establishing a fund could take a year or two.
Two insiders said that hospitality REITs are themselves said to be looking at the short-term sector as a complementary asset class.
This news doesn’t surprise some of the branded property management companies in the travel segment.
“Private equity firms and hedge funds and the like are definitely moving into the space,” said Jason Fudin, CEO and founder of WhyHotel, which offers premium apartments for travelers to stay for varying lengths.
“Sleep Away From Home” Sector
One headwind for institutional investors has been ensuring that the underlying real estate assets are sufficiently high-quality to be recession-resistant. It has been difficult for property managers to scale up the process of persuading the owners of premium homes to rent to travelers with ample availability. Premium properties may have more margin cushion to be resilient in a cyclical downturn.
Private equity firm Alpine’s acquisition of short-term rental data firm AirDNA on Monday was a small but relevant sign of the growing recognition of the sector. This acquisition followed the news in February that AvantStay, a short-term rental property operator, had closed a $500 million funding round to create a company to hold its property assets, with Saluda Grade, a real estate advisory and asset management firm, backing the fund.
Andes STR, a property manager for short-term rentals, recently began working with Chilean investment firm WEG Capital to buy U.S. units, the Wall Street Journal reported.
Last month, private equity firm Durable Capital Partners led a $100 million capital raise for Evolve, a vacation rental property management service.
Private Equity Has Dabbled Before in Vacation Rentals
To be sure, in the height of the pandemic, private equity giants Silver Lake and Sixth Street Partners bet $1 billion on Airbnb. But that was a short-term play on Airbnb’s hiccup before an eventual initial public offering rather than a long-term bet on short-term rentals as an asset class.
Before the pandemic, Bain Capital, KKR, Blackstone, and CVC were outbid by Platinum Equity on Wyndham’s vacation rental portfolio in Europe in a $1.3 billion deal.
Among still-private companies, fast-growing Sykes Holiday Cottages based in the UK is backed by private equity firm Vitruvian Partners.
One factor that improves institutional investors’ visibility into the sector is the professionalization of data analytics services, whose benchmarking numbers could help with the underwriting for debt-based transactions by institutions.
Until now, only smaller investors and magnates in residential and commercial real estate have used analytics services such as AirDNA, Transparent (just acquired by OTA Insight), Alltherooms, Airbtics, KeyData, and Mashvisor.
Other Ways for Institutional Investors to Play the Category
It can be tricky for private equity funds to play the property management market. The funds tend to last only about a decade before being dissolved. That might not give the funds much time to benefit from long-term appreciation from property management fees and property appreciation.
Some look instead for other ways to gain exposure to the perceived upside of alternative accommodations.
In recent months, institutional investors have expressed initial confidence in the sector by investing in the stocks of companies aiming to rise by professionally managing the inventory.
Vacasa, a branded vacation rental property manager, is a notable holding of private equity firms Level Equity and TPG Capital. Other institutional investors, such as PAR Capital Management and Guggenheim Partners, have also taken low single-digit percentages of Vacasa’s common stock outstanding.
Sonder, a professional manager of apartments licensed either as rentals or hotels, has been less appealing so far to institutional investors. As of late December, Blackrock held 189,769 shares, amounting to a modest stake of $900,000, according to financial filings.
Looking outside of North America and Europe also might reveal some of the greatest opportunities. For more context, Skift Research subscribers can read this month’s report: Short-Term Rentals: Asia Pacific Focus.
Overall, it’s still early days for institutional interest in short-term rentals. Other large veteran investors, such as pension funds, endowments, and sovereign wealth funds, have yet to warm to the category.