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Airbnb’s Latest Shake-Up: Urban Travel Redefined

Airbnb (ABNB 7.09%), the short-term rental platform, has been pushing hard to entice more hosts to join the platform. On November 30, the company announced plans to further reduce friction by working with chosen apartment buildings in over 25 U.S. urban locations.

Here’s how Airbnb’s new program works, as well as what it can mean for investors.

How the new Airbnb program works

Airbnb has teamed with 12 apartment owners, including public company Equity Residential (EQR 2.01%), to advertise properties on its website, according to The Wall Street Journal. Anyone seeking a place to live might use Airbnb’s platform in the same way they would any other real estate listing aggregator.

Why would someone look for an apartment on Airbnb? Many flats, however, do not allow subletting; contractually, you are not permitted to publish the apartment you are renting on Airbnb. If you know you want to be an Airbnb host, these flats have already been approved for subletting.

Renters who choose to be hosts will have varied restrictions on how many nights they can sublet their flats. In addition, landlords will receive a percentage of the overall booking value – allegedly 20% in most situations. While these are disadvantages, it may make sense for someone searching for a simple setup process and the opportunity to earn extra money.

According to an official press release from Airbnb, the company plans to expand its service into new cities and apartment buildings in the near future.

What does it all mean?

This may appear to be a little news item for Airbnb, but I believe it has far-reaching repercussions for hosts, renters, landlords, and the firm.

Consider that several travel companies, such as Sonder (SOND 1.72%), have business models that are comparable to Airbnb’s new product. Sonder, for its part, handles bookings and operates its facilities directly. It does not, however, own its listings. Rather, it signs leases with landlords, frequently seeking significant upfront concessions to help it better manage cash flow.

It’s not only Sonder, though. As of the end of the third quarter of 2022, there were 660,000 multifamily listings on Airbnb and Expedia Group’s Vrbo, according to short-term rental analytics firm AirDNA. Apartments like those offered by Equity Residential via Airbnb are included in multifamily listings. In other words, this is already a significant event.

The approach is known as rental arbitrage, and it entails renting a house for one price while generating more money as a short-term rental on Airbnb or another platform. However, many rental arbitragers approach it similarly to Sonder, looking for rent cuts to enhance income flow on the front end. And landlords frequently agree to this in order to avoid having a vacant area.

Airbnb’s platform is constantly being updated. And it is currently working hard to raise the number of active hosts in order to expand the business. The company witnessed a comeback in city vacations in the third quarter of 2022, with a 27% year-over-year increase in high-density urban nights booked. As a result, it must stimulate supply expansion in areas where demand is increasing. That is why it has created this apartment site.

However, Airbnb risks upsetting existing hosts who are engaged in rental arbitrage. If landlords already allow Sonder and others to sublet units and offer upfront discounts, it may make more sense for these landlords to join Airbnb’s new apartment marketplace. They’d avoid giving away free rent, and when spaces are leased, they’d earn up to 20% of the booking value.

As a result, Airbnb’s new apartment platform appears to offer landlords a compelling value proposition. However, it may have a muted effect on stimulating supply growth for Airbnb. Yes, it may make onboarding new apartment hosts easier, but it may upset the applecart for existing rental arbitragers.

In another aspect, Airbnb’s new apartment platform appears to offer excellent value for landlords. The website is being marketed as a means for renters to earn extra money, potentially allowing them to save for a down payment on a property. However, it appears to be more of a means to help renters make ends meet in the face of record-high rental prices.

Greystar Real Estate Partners’ CEO, Bob Faith, told The Wall Street Journal that renters might think the company’s pricing is too expensive. However, allowing renters to sublet will help offset their rent and may make pricing more bearable.

In other words, Airbnb’s housing platform may benefit landlords more than tenants.

For the time being, I would say that this news does not make Airbnb stock a better buy or a better sell because the exact outcome is yet unknown. If Airbnb’s supply and demand continue to expand in urban markets in the next quarters, I believe this is a sensible strategy for the company.

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