The desire for comfortable apartment-like accommodations without the unpredictability which comes with small hosts has created a valuable niche and a new business model in the hospitality industry. Startups like San Francisco-based Sonder are now leasing floors in commercial and residential buildings and renting them out to business travelers and vacationers for short-term stays — essentially offering serviced apartments which run like licensed boutique hotels.
The new model is an evolutionary trend emerging in the hospitality industry to meet demand from business and vacationing customers for a consistent and reliable experience without the hotel-like feel.
Sonder, which has served more than 300,000 guests to date and raised $135 million in series C venture capital funding last year, spoke with Connected Real Estate Magazine about its business model, growth, and partnerships with landlords and developers.
While the startup has been dubbed as Airbnb’s billion-dollar competitor, Mason Harrison, Director of Communications at Sonder, says it doesn’t consider Airbnb to be a direct competitor because Sonder is not a small host vacation rentals platform. Instead, the company is creating locally curated alternative accommodations for a forgotten demographic.
“Accommodations is an industry that has not seen a lot of innovation. We felt that there was a part of the market that wasn’t being addressed. There is a forgotten demographic of travelers and vacationers who don’t fit in with the large hotels or Airbnb small host business models, who prefer to travel in large groups or with their families, but want a consistent and predictable experience,” said Harrison.
The business traveler who needs an extended stay, but doesn’t want the typical corporate housing accommodation, a family with small children for whom adjoining rooms in a large hotel isn’t always the best option, or the digital nomad regularly shifting jobs who needs a short-term housing solution are all people who share a need for alternate accommodations who were not being well served by existing hospitality models, according to Harrison.
“We are hitting the reset button by providing a seamless experience for all these groups without the unpredictability which comes with home-shares,” he added.
The formula seems to be working for Sonder, which generated more than $250 million in revenue last year and has achieved a valuation of $1 billion, according to the Wall Street Journal and Forbes.
“At our core, we are a technology-enabled hospitality company,” said Harrison.
Sonder’s guests manage their entire experience over the phone. Everything from accessing the property to automatically connecting to Wi-Fi with the push of a button or requesting late checkouts and even 24-hour concierge service is managed via smartphone.
“It’s essentially a lobby on your phone,” Harrison said.
The company also uses tech to manage back-end processes such as zoning regulations for real estate acquisition, distributing rates and managing inventory and supply chain logistics, which include distributing furnishings and items it sources via its own warehouses.
Part of the company’s strategy has been to pursue hotel licensing from the get-go, which means Sonder pays both hotel and occupancy taxes like any other hotel.
“We made a decision very early on that in every market we were going to pursue hotel licensing,” Harrison said.
While Sonder initially built relationships with landlords and developers to gain access to apartments through locally placed commercial real estate teams, developers and landlords are now approaching the company directly, says Harrison.
Sonder signs multi-year leases as the anchor or sole tenant in existing and development projects, enabling landlords to increase net operating income, accelerate lease-ups, and reduce cash flow risk.
“With our master lease, we are able to help developers reduce credit risk, get financing to move forward to other projects, and generate an average of 20% more income,” Harrison said.
Sonder has a stringent background check and fraud prevention system, and local offices in every operational city with a 24/7 building support staff and a strict no-party policy to safeguard landlord properties.
Currently, the company manages over $2.3 billion of outstanding projects spanning commercially-zoned mixed-use, residential, serviced apartment, apart-hotel, and hotel assets across 5,000 spaces in 16 cities and four countries.
When it comes to competition from others like Airbnb and large hoteliers eyeing the company’s niche, Harrison says that being an early entrant will enable Sonder to maintain a competitive edge.
“We expect others to enter the market- the opportunity is obvious. Accommodations is a trillion-dollar global market which is growing every year. The largest hospitality provider has no more than a 5% market share. But we have got it down to a science from the supply chain to how to run daily operations. We are lightyears ahead of others,” Harrison said.
“While this space has very low barriers – anybody can rent a space – barriers to scale are quite different, and we want to be the operator of choice,” he added.