The mid-term market – defined as stays between 1 and 6 months – is about to be the next major market to be disrupted by the sharing-economy model of trust and no asset ownership. This trend, part of the ‘Experiences over Things’ shift in consumption patterns with younger consumers will revolutionize the housing rental market as we know it and set the stage for an entirely new crop of market entrants in the rental sector.
Most market-research firms will cite the ‘trillion dollar’ opportunity in real estate, while many industry upstarts will make proclamations about becoming the ‘Airbnb of real-estate rentals;’ yet most of these projections fail to take into account the underlying demographic shifts and subsequent changes in consumer behaviour, which in many ways are historical in proportion. This leads to predictions that are an extension of the current rental-market reality, rather than a radically different view of what the future might hold.
As a result of unaffordable home prices, rapid urbanization, and the digitization of most industries, young people (Gen Y and Z) will continue to search for options in the rental market that leverage components of the sharing economy, rather than get tied down by hidden fees, long-term lease agreements, and dated expectations of service. Affordability, community, and flexibility will be primary concerns, as more and more people will give up their dream of home ownership at a young age and be forced to adapt to a world where agility is key. This is principally driven by the demographic shift in the workforce, which in our estimation is the key driving trend of the rental market over the next decade, where ~2/3 of the global workforce will be composed of Gen Y (Millennials) and Gen Z by 2025. This means that block apartments/condos with no amenities, no services and no community will become a thing of the past, as the housing market takes more of a ‘subscription’ format like we see currently in the auto industry.
Currently, the market is being disrupted on the short-term end (stays under 28 days) and the long-term end (stays more than 6 months), by travel platforms and co-living companies respectively. On the short-term end of the market, there are platforms such as Airbnb and a series of other platforms (HomeAway, Booking.com, etc) that have mastered the user experience to book a room for short-term stays; on the long-term end of the market, there is the new ‘coliving’ movement, which is changing consumer expectations for long-term rentals due to the overarching focus on community and customer experience.
But the mid-term market is the magical middle ground where platforms are disrupting the intermediaries that source rental supply.* And because short-term platforms will not want to cannibalize their travel supply and margins to push into mid-term, and co-living platforms rely on long-term leases to secure prime supply, dedicated mid-term platforms with strong brands and technology will have a massive edge on any other players in the market. The market is still in it’s infancy, but as we will see below, it’s about to explode and have it’s ‘Uber 🚕 moment.’
*For the purpose of report, we won’t include ‘roommate’ platforms in the analysis, as there is no business model in roommates.
We have written extensively about Airbnb’s business model and shown, using the Funding Map, how they capitalized on the demand explosion in the early part of the 2010s, giving the company a massive edge on the competition in a market that now includes Booking.com, Expedia (via HomeAway), TravelAdvisor and a host of major hotel brands vying to have the ‘next-generation consumer’ on their platform, cutting out all intermediaries and outdated brands.
Expedia paid $3.9bn to acquire HomeAway in 2015. Airbnb has a $5.5bn balance sheet, is profitable, and is possibly months aways from an IPO at potentially north of $50bn. Booking.com’s growth in the market arguably forced Airbnb to acquire Hotel Tonight (for $400mn) due to increased competitive pressure. Then you have a whole host of new upstarts in hospitality who are ‘managed marketplaces’ where they curate all their housing stock to hotel-like standards – Sonder tops that list and raised $85mn in a Series C last summer. These are who we would consider the Short-Term Kings of the market.
But the short-term market is not a simple extension into the mid-term market. Airbnb has had Sublets on their platform for many years, and many companies have been experimenting with ‘Serviced Apartments,’ which is the luxury spin on the mid-term market; all with very little success to date. In the short-term market, the average stay is 5 days. In the mid-term market, the average stay is 3-4 months. Bookings, payments, consumer expectations, and operations are dramatically different between short and mid-term stays, which is why we don’t expect short-term platforms to succeed by simply creating a brand extension into this market.
With so much competition on all sides of the travel marketplace, it’s likely that the Short-Term Kings who specialize in travel will continue to maintain their focus there; and those companies who have a fortress balance sheet will use an Acquisitions strategy to enter the mid-term market rather than trying to build it themselves.
At first blush, co-living seems to simply be an extension of co-working, a custom-designed place for individuals to congregate and live together. Individuals share communal spaces (kitchen space, living rooms, etc) and generally have smaller personal living spaces than they have in their own apartment; however, unlike co-working, where individuals pay much less in monthly rent than they would for an office space on a month-to-month contract, co-living generally requires individuals to pay equal to or more in monthly rent and sign 9-12 month leases. That’s why some of the earliest co-living brands, notably The Collective in London, UK, were simply an upgraded version of the college dorm. But we think there is much more to co-living than an ‘upgraded dorm,’ and for the market to succeed in its own way requires a focus on pricing, customer experience, and flexibility, not simply an inner-city hotel for millennials to ‘network.’
The next-generation of co-living brands, aka the Long-Term Kings, are focused equally on community (public spaces) and the customer experience (private spaces), leverage technology to create operational efficiencies, and have an eye towards a more flexible future of living between cities (hence the subscription reference in the intro). The weakness of the co-living model, as a whole, is that it requires long-term leases. Generally, co-living brands, like US-based Common, will partner with traditional real-estate firms and act as the property manager, pocketing the margin between the lease rate and the rental rate. More visionary brands like German-based Medici Living will seek greater control over the real-estate without actually owning the buildings – they operate both Medici Living and The Quarters (pictured below), a ‘globally connected‘ sub-brand in the US. But this takes a large amount of institutional capital to achieve. Common has raised more than $63mn in venture capital, while Medici Living raised €1bn from Corestate Capital Holdings, a German-based property management firm.
Co-living tends to be more of a European concept, so there are several smaller brands that have achieved a strong following in local geographies – CoHabs in Belgium, SwissEscape in Switzerland, and Nest in Denmark – so we make honourable mention to our ‘Euro Stars.’ In addition to Common and Medici/Quarters, you also have giants like The Collective and WeLive competing to be the Long-Term Kings of co-living; yet these smaller brands that focus more on an authentic form of community (as opposed to a corporate form of community) could grow more organically over the long-term to challenge incumbent brands, and maybe even unseat the Kings on their throne. But for now, the co-living business model requires large amounts of capital to be invested upfront with the view that the dominant brands will win out over the long-term due to brand loyalty and operational efficiencies achieved with technology.
Part of what makes this market difficult to analyze is the difference between what each service offers and the corresponding price points. Very few co-living brands would be considered ‘affordable,’ part of which is intentional (brand image) and part of which is not (lease price dictates rental price). Furthermore, very few of these brands have incorporated technology into bookings, as almost all co-living brands direct you towards scheduling a viewing. This means that people need to come in person, tour the space, sign a lease, and overall go through all the same behaviours as they would when they are apartment hunting. Community and customer experience are co-living brands current differentiators, but it’s unlikely this will be enough to sustain most business models over the long-term without significant technological upgrades. And that brings us to the mid-term market.
The mid-term market is difficult to analyze, given the fact that it exists in the middle between short-term platforms and long-term companies. Our definition of a mid-term stay is 1 – 6 months. But what separates the real mid-term players from the pretenders are a few things:
- they have some form of Bookings and Payments built into their platform and business model; they are not roommate/listings sites reliant on advertisements
- they are not simply listing aggregators (Nestpick), they source their own supply and are responsible if customers have a bad experience
- they function as sharing economy sites, matching landlords and tenants, by creating new forms of trust, property viewings, and other innovative ways to make it easy to book a room for the mid-term, even where a customer is living in another city at the time of the booking
- they are not run by agents or big property firms, they are independent entities that are functionally technology companies
Within those criteria, here are 3 Rising Stars in the mid-term housing market.
Value Prop: “the easiest way to find and book your mid to long-term housing”
Headquarters: Relocating from Madrid (where the company was founded) to London
Business Model: one-time booking commission (landlords and tenants)
Money Raised & Employees: $64mn in total, most recently a $40mn Series B from top American VCs. They recently announced, as part of their London relocation, that they would hire 200 people in London alone, bringing their projected employee count to ~500.
SpotAHome, which began in Madrid in 2014, found it’s key innovation through in it’s ‘Homecheckers,’ individuals who go to the apartments of landlords and take pictures, upload floorplans, and most importantly take a video of the flat. This video enables SpotAHome’s market, principally exchange students and expat young professionals, to book without having seen the apartment in person. Now, the company does not allow viewings. And while they do have cancellation terms that allow tenants to change their mind, they are moving towards ‘Uberizing’ the rental market by bringing as much supply online as possible. Given their relocation to London and recruitment of top executive talent from Uber and Amazon, they are likely planning to take on the London agents and scale-up towards Uber levels. This ambition is signalled, in part, by the fact that ex-Uber CEO Travis Kalanick is one of their investors.
(in Dutch, no English subtitles)
Value Prop: “safely book your new home abroad”
Headquarters: Rotterdam, Netherlands
Business Model: one-time booking fee (landlords)
Money Raised & Employees: they have raised approximately $13.6mn, most recently a €6mn Series B in 2018, and have approximately 100 employees.
The overall branding, vibes and positioning of HousingAnywhere is around the student exchange market. They even have student dorm room listings on their platform. With their latest financing, they are focused on creating a ‘peer to peer payment service,’ a necessary innovation in the market in order for ‘mid-term’ to scale-up. While they are competing for one of the most competitive market segments in the world, students, their platform-scale strategy and new innovations may help them reach critical mass at a much greater speed than their competitors. They are no SpotAHome, but they offer a compelling value proposition and strategy in the mid-term segment.
Value Prop: ‘a month or two co-living’
Business Model: commission on rent for total duration of booking
Headquarters: London, UK
Money Raised & Employees: unknown and according to LinkedIn, they have 3 Employees
RoomForTea has been in existence for several years, as the platform started out as a social enterprise to help young people doing internships find an affordable room in London. In recent years, they have launched an entirely new bookings system and platform, and now they advertise to have ‘hundreds of beautiful homes’ across London. Similar to SpotAHome, they offer verified listings, professional photos (although no videos or floorplans); however, they also have Reviews that are similar to Airbnb, which gives the impression they are positioning themselves to grow more like a sharing economy platform than a co-living brand.
As with the ‘Euro Stars’ in the CoLiving category above, RoomForTea appears to be a niche player with future upside; however, there are several things that make their value proposition unique compared to other players mentioned above: they mention ‘female focused housing network‘ on their ProductHunt page, a potentially untapped niche; they have a very strong visual aesthetic across their platform, which makes the brand look premium; and finally, they seem to have grown organically with very little funding and a small team, meaning that they are more of a community-oriented brand. Community can be a good strategy in this type of market because a strong community tends to portend brand loyalty and referral-based growth. It will be interesting to track the success of this model in the highly-competitive London market.
Honorable mentions – Flatio.com
It looks like the mid-term market is set to come online, especially in London UK where SpotAHome and other players will begin challenging the agents … so buckle up!