Airbnb (see my previous article on Airbnb for a description of the business) creates a new revenue layer in real estate that supplements cash flow for property owners (and even renters). Yes, vacation rental sites like HomeAway and VRBO have established rental classifieds system but they operate as advertising media and require upfront annual subscription fees of $300+ to participate. Airbnb lowers the barrier to entry for renters by charging no upfront fees. Lowering the cost of property listing to zero markedly increases the number of listings, and according to Airbnb, they are adding 1,000 new listings per month. In addition, Airbnb is building a comprehensive social reputation system that the classifieds systems lack.
With its new VC investment in the works valuing the company in the $1bn range, Airbnb is poised to become the poster child for social travel in the same way Groupon defined social commerce last year (recall Groupon made its mark with a $1.35bn valuation round in April 2010). Both Airbnb and Groupon are disrupting traditional models simply by adding a new revenue layer on the hospitality and local advertising markets respectively. Both have in essence created “exchanges” that in Groupon’s case has become widely adopted, and in Airbnb’s case will soon reach a tipping point when it will become a destination rental resource.
The new revenue layer that Airbnb has exposed isn’t obvious yet – it’s real estate. Anybody, even a renter, can now create a business model based on space rental. This works most efficiently in cities and areas with high tourist or traveler demand – New York City, San Francisco, resorts and college towns. The Airbnb “exchange” makes it simple for listers to price their offering to ensure high occupancy rates.
Property managers and real estate investors should be looking at opportunities to invest into depressed second home markets in Florida, California and coastal resorts. $400,000 can buy an upper end Lake Tahoe 3BR home to create a virtual bed and breakfast.
If the bedrooms are rented out to skiers / nature lovers at an average of $50 per room per night, or the whole home at $150 per night (and these are well below market prices for Tahoe), 50% occupancy would gross about $2,250 (15 nights x $150). With Airbnb and other exchange-based social travel systems that will evolve on Airbnb’s coattails, ensuring high occupancy will nothing more than tinkering with pricing. New kinds of “hotels” can be developed by listing unique properties in various locations within a region.
In conclusion, Airbnb creates real estate liquidity, a completely new concept in commercial real estate. It can potentially usurp traditional leasing models because 1) Exchanges enable transactions to happen instantly, much more efficient than posting classifieds and processing responses, and 2) Daily rate rentals almost always create more revenue than monthly rents; up to now there’s never been a way to ensure occupancy without a lease.