Real Estate Investment & Technology - May 2023
Happenings in real estate, short-term rentals, proptech, and traveltech.
In RealTech, I share happenings in real estate, short-term rentals, proptech, and traveltech.
tl/dr
Charlie Munger, vice chairman of Berkshire Hathaway, warns of trouble with U.S. commercial real estate.
Vacasa says short-term rental booking patterns have become harder to predict. If you own a short-term rental it’s time to re-evaluate your operating strategy.
Charlie Munger warns of “bad commercial real estate loans” at U.S. banks and “agony” in the real estate market.
“A lot of real estate isn’t so good anymore… We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.” - Charlie Munger
Charlie Munger stated in an interview with the Financial Times that there is trouble ahead for the U.S. commercial property market.
Munger told FT that U.S. banks are packed with “bad loans” that will be vulnerable as “bad times come” and property prices fall.
“It’s not nearly as bad as it was in 2008,” Munger stated. “But trouble happens to banking just like trouble happens everywhere else.”
My 2¢
Commercial property values will not see an immediate turnaround as empty malls and offices struggle. This is indeed troubling news for many investors, but could birth more opportunities for some savvy entrepreneurs who are turning them into additional housing or medical spaces, storage, and even churches. Maybe there’s an opportunity waiting for you out there? 🤔
Many banks had already started lowering their risk by being stricter with commercial real estate loans. Expect that trend to continue, which means returns could suffer in the near-term. On the other hand, deals that get done should – at least in theory – have a safer risk profile.
If you’re a passive investor, thoroughly vet your deal GP even if you’ve invested with them before and they’ve generated good returns for you in the recent years.
The latest earnings call from Vacasa indicates that the short-term rental market is experiencing declines and that it’s in a very different demand environment than it was a year ago.
Vacasa’s CEO Rob Greyber attributed the volatility in the industry and the difficulty to forecast bookings to: “higher supply, changing consumer demands, and the macro backdrop”.
Greyber said Vacasa is refining its field tools to improve the efficiency of local teams that care for the rentals, acknowledging the importance of creating lasting operating leverage.
Vacasa’s CFO Jamie Cohen, who will soon be leaving the company, declined to issue explicit guidance as it is, “still adjusting to the emerging booking patterns as the industry comes off two record years.”
Cohen stated that the company is, “reiterating our full year 2023 revenue growth guidance of a low double-digit to high single-digit percentage decline”.
My 2¢
As the vacation rental industry goes through a reset, property owners need to be on alert. If you own a short-term rental, you already likely know that the market has shifted since a year ago.
If you underwrote your short-term rental purchases too aggressively, you may need to rethink your strategy (e.g. turning it into furnished mid-term, renting it room-by-room to long-term tenants, traditional long-term lease or exiting altogether). If you use a property manager, ask them how they are adjusting their marketing and operating strategy to give your units a competitive edge.
Vacasa (VCSA) recently received a notice of de-listing from NASDAQ for failing to satisfy the minimum bid price listing rule.
Vacasa eliminated 1,300 positions or 17% of its workforce in early Q1, three months after it had decreased headcount by 280. Sonder, another short-term rental operator, laid off 14% of its staff also in Q1.
Vacasa went public in late 2021 via a SPAC merger by capitalizing on a strong post-COVID travel demand, which was met by a growth in supply of short-term rentals made possible by low mortgage rates. However, this saturated the market with supply.
With high inflation and rising interest rates – and potentially a recession on the horizon – many short-term rental companies that grew aggressively during the pandemic are now struggling as travelers hold back on spending.
Based on VCSA’s closing price as of May 12, its share price is down nearly 93% since its IPO.
Operating a short-term rental is hard. Operating many short-term rentals, at scale, is even harder. I double-down on what I stated in my March post:
[Property managers] that have efficient, scalable operating models will rise to the top and those who raised capital on market momentum alone will sink.
Properties managers cannot grow their headcount linearly with their property count if they hope to be profitable and offer excellent service to guests and property owners. They must utilize technology and create operational efficiencies in all that they do – whether through the use of AI for customer service or outsourcing certain operational functions, such as a cleaning and maintenance.
I have a lot of respect for Vacasa, Sonder, and others industry pioneers that have professionalized short-term rental operations, and hope that they make the necessary adjustments to thrive in this new market environment.
Thanks for reading. I would love to hear from you. Leave a comment below or email me if you want to exchange investment ideas.
Until next time, keep learning and executing. Real estate investing is a long game.