Latest posts by Ershad Chagani (see all)
- 3rd Annual Titans of Real Estate Wrap Up (3 mins) - April 26, 2018
- Smart Contracts: Changing the Way We Do Deals (6 min) - April 18, 2018
- The Potential of Machine Learning Real Estate Valuation Models (5 mins) - March 28, 2018
At a lodging conference in December 2016, Laura Paugh, Marriott International’s SVP of Investor Relations, remarked that Airbnb hasn’t “[made] headway in the corporate environment, which is really [Marriott’s] bread-and-butter business.”[i] This statement is reflective of the hospitality industry’s general stance on Airbnb: the platform hasn’t yet made a material impact because Airbnb does not cater to business travelers, who represent 70% of room nights in the US lodging industry[ii]. With the perceived lack of immediacy, few industry leaders have actively responded to the threat that Airbnb poses. Ian Schrager, often referred to as “The Godfather” of boutique hotels, recently shared his thoughts on the matter with architecture blog Dezeen[iii]: “For some reason the hotel industry in general is in denial about Airbnb… I think the only way is to come back with a stronger idea than Airbnb.”
Airbnb’s Impact to Date
A recent Morgan Stanley report estimates that Airbnb has captured approximately 4% of traditional hotel demand thus far, and forecasts that their share could grow to 6% by the end of 2018.[iv] The increased supply of beds from the sharing economy has negatively impacted both value flags – low-cost hotels and inns located far from tourist hotspots – and the frequency and extent to which the industry is able to take advantage of demand compression. From 2015 to 2016, the number of compression nights (when city-wide occupancy rates reach 95% or more) dropped by about 20% in the top 25 US markets. Morgan Stanley has also estimated that Airbnb will reduce RevPAR by an average of 1.8% in 2017, and a further 2.5% in 2018[v]. Airbnb’s success has largely been driven by appealing to budget-conscious travelers seeking accommodation in prime locations. While it’s true that this isn’t a prime target segment for most high-margin hotel flags, this demographically young group of travelers will eventually transition into the higher-income business travelers that many hotels cater to. If Airbnb is able to satisfy these customers and build loyalty today, the loss of this segment will surely be felt by the industry in coming years.
PUBLIC Hotel: “Valuxury”?
Ian Schrager’s response to win this segment back is PUBLIC Hotel – a low-cost, luxury alternative with an emphasis on social activity. The hotel features 367 guest rooms, two restaurants, three bars including a rooftop terrace, and a multimedia performance space. PUBLIC Hotel is the ultimate juxtaposition between luxury and value engineering. Schrager took the approach of “luxury as a process of subtraction,” and a as a result, PUBLIC lacks many elements that would be expected at a typical luxury hotel. There is no room service, and a minimalized staffing model drops doormen, bellhops, and porters. The budget-conscious segment, after all, is likely willing to trade off the effort required to haul a wheeled bag to their room for the tips saved by forgoing these additional services. Schrager also commented on the inefficiencies that multiple layers of service results in: “a bellhop brings a guest’s bags to the lobby and hands them to a front-desk attendant, who then brings them out to a parking employee. Three people, three trips. It’s ridiculous.”[vi] PUBLIC replaces many of these traditional services with technology. Check-in is completed on a self-serve tablet, calls from the room are redirected to call center, and chatbots are in place to respond instantly to guest requests. The result: PUBLIC Hotel offers a stay in the Lower East Side of New York in a good-sized room (by Manhattan standards) for a starting rate of $150/night.
At a price that’s competitive with Airbnb rates in the area, Schrager has attempted to differentiate in a way that Airbnb can’t. Though PUBLIC is a value play, guest spaces and common areas still feature high-quality finishes and designer furniture. For example, upon entering the hotel and moving up the Donald Judd-inspired escalators, guests encounter Hermès cushions on designer furniture and a solid hand-rubbed bronze billiards table. In addition, the hotel’s social element was designed to fill a gap that Schrager sees in Airbnb’s value proposition. The common spaces and F&B establishments enable social connections between guests in a way that is more consistent and communal than the relationship that one might build with a single Airbnb host. In addition, these F&B spaces have helped to make up for the top-line impact of the low-cost rooms. The model defies traditional hotel fundamentals, as PUBLIC earns 35% to 45% of its revenue from F&B, compared to an industry average of 24%. In addition, F&B margins are approximately 20% higher than what is typical at hotels in PUBLIC’s price range. [vii]
Great value today, but how will Airbnb hosts respond?
At $150/night, PUBLIC Hotel will be an attractive proposition for many budget-conscious visitors to New York City. The hotel addresses many concerns that would-be travelers have with Airbnb, such as concerns over privacy and safety, while simultaneously offering consistency, cleanliness, and a brand promise. Will PUBLIC be an “Airbnb Killer” as many have proclaimed? Only time will tell if the hotel will draw members of the price-conscious segment or if it will just push Airbnb pricing lower by simply adding to an already competitive landscape. Schrager is bullish on his concept and has five more PUBLIC hotels planned for the next three years – another in Manhattan, along with Brooklyn, Miami, Las Vegas and Europe. [viii]