It is no secret that there are new viable alternatives to the traditional hospitality industry that have become more prevalent in recent years. Hotel owners are looking to take back some of the market share they have lost in recent years to short-term vacation rental services like VRBO, HomeAway, and Airbnb. It is now clear that this “fad” has surpassed trend status and become a fixture in the travel and vacation industry. While many in hospitality and its periphery industries haven’t taken the threat all that seriously to date, some are now fighting back against the onslaught of short-term rentals in their primary target markets.
Why should hotels be worried?
According to CBRE, “Airbnb accommodations now account for 9% of the total lodging units in the 10 largest US markets and appear to be adding units at a substantially faster clip than the US hotel industry”. This increase in inventory is taking the pricing power away from hotels. Hotels earn their biggest margins during times when demand for lodging is higher. Holidays and big sporting events are a couple of examples of times when hotel rates skyrocket. Airbnb is rapidly expanding inventory in gateway markets, leading to 1.3% fewer hotel nights booked and a 1.5% loss in hotel revenue in the 10 cities with the largest Airbnb market share in the US.
While these stats don’t seem all that alarming, a 1.5% loss in revenue of the projected $200 billion the US hotel industry is expected to rake in by the end of 2018 alone is substantial. And it is only the beginning of the war for consumer dollars. In February, Airbnb announced that they are rolling out their services to an additional 1,000 US cities. The rate at which services like Airbnb add inventory is something the hotels can’t compete with.
What are hotels doing to fight back?
So, what can the gargantuan brands that have become hotel mainstays over the last half century do about these charging industry disruptors?
Lobbying and Regulation
The first notable step to combat the problem was taken by the American Hotel and Lodging Association (AHLA) in 2016. In a joint effort with the Federal Trade Commission and the state of New York, an investigation was conducted into how companies like Airbnb affect soaring housing costs. This was followed by Governor Andrew M. Cuomo signing a bill that imposed steep fines on Airbnb hosts who break their local housing regulations and rules. While these events on the surface seem unrelated, the American Hotel and Lodging Association claimed these as “notable accomplishments” of their organization during a presentation in November of 2016. The American Hotel and Lodging Association’s membership includes Marriott International, Hilton Worldwide, and Hyatt Hotels, as well as other large hotel brands, owners, management companies, Real Estate Investment Trusts (REITs), and independent hotels.
The New York Times also uncovered documentation of an unreported AHLA plan to impede the growth of short-term vacation rental services that kicked off in early 2016. According to the minutes of the association’s board meeting, the plan was a “multipronged, national campaign approach at the local, state, and federal level”. Publicly, many hotel execs play down the impact short-term vacation rental services are having on the industry. But these documents prove just how seriously they are actually taking the threat.
Other hotel groups are taking a different approach and making note of changing consumer preferences and expectations in areas such as amenities, price, and experience. Take Mount Vernon Company’s “Airbnb Killer” hotel, for example. In Boston’s popular South End neighborhood, Mount Vernon and Chairman Bruce Percelay are renovating and modifying an old hostel for their upcoming Revolution Hotel. The building will have 164 rooms tailored to the younger and more frugal traveler. The floorplans will be a little smaller than a traditional hotel room, but that is going to enable The Revolution to be one of Boston’s most affordable hotels. The average daily hotel rate in Boston is $258, but The Revolution will cost about $150 a night. You shouldn’t expect hostel- or motel-style accommodations at this price though. The hotel will feature a co-working facility, a lounge with a bar made from the wood of a century-old tree that fell in Back Bay Boston, and a lobby mural done by Los Angeles street artist Triston Eaton, as well as odes to Boston’s history with décor made from 160 different items that were invented in Boston.
Hilton is also launching a new hotel brand that they refer to as “a hostel on steroids”. Motto is being positioned as having the value of a hostel with the safety and comfort of traditional hotels. “With Motto by Hilton, we are bringing to market something the industry has never experienced with its flexible and affordable room product, desirable locations, and guest-empowered service,” says President and COE Christopher J. Nassetta. Expect to see more and more of these large hospitality companies launching small boutique brands, like Motto, which is also designed with the younger globetrotter in mind.
For more on the changing landscape of the hotels industry and obstacles they are currently facing, check out the blog post CRE Trends & Challenges for the Hotels & Lodging Market.