Airbnb in Context

It's not about travel, it's about housing.

Airbnb’s IPO filings are now available. I shared some quick highlights on Twitter, and will likely write more about the company’s prospects later this week. The company summarized the reason for its existence as follows:

“ Travel is one of the world’s largest industries, and its approach has become commoditized. The travel industry has scaled by offering standardized accommodations in crowded hotel districts and frequently-visited landmarks and attractions. This one-size-fits-all approach has limited how much of the world a person can access, and as a result, guests are often left feeling like outsiders in the places they visit.”

This is true. I’ve been in Switzerland for nearly a month, staying in an Airbnb with my family at a residential neighborhood. We do our own laundry, walk around, go to the supermarket, cook, and experience life as it is here. A hotel could simply not provide us with such an experience. It would also be far less convenient for a family with a baby. COVID played a role in our decision to combine two business trips into one long family “adventure”, but we will be happy to do this again — once or twice a year — even in a virus-free world.

In light of the company’s upcoming IPO, I would like to share with you an excerpt from my book. It puts Airbnb in historical context and locates its emergence within broader changes in the housing market. It was written 15 months ago, but is more relevant than ever, as is the rest of the book.

Rethinking Housing & Lodging

The technological and demographic changes of our age correspond with those of the late nineteenth century, fueling demand for housing solutions that are shared, flexible, serviced, and urban. Today’s plain apartment buildings were once considered radical, opposed by social critics, and avoided by most “proper” people. The notion of sharing a hallway, a laundry room, an elevator, or a roof with other families was seen as a recipe for moral decline. Perhaps it was then, but we now consider it normal. In turn, many of today’s radical design, ownership, and operating models will seem mundane to our children (if we have any).

Technology facilitated the emergence of new urban industries that attracted young people to the cities. These people found ways to live in buildings that were formally designed for other uses. At the low end, that meant using single- family buildings as tenements for dozens of unrelated individuals, sleeping in bunk beds. At the middle and upper end, it meant using hotels as homes. Gradually, the market caught up and consumer behavior was formalized in new apartment buildings.

But technological and demographic trends seldom continue indefinitely. They are embedded in a political and social context. And technology itself continues to evolve to different effects. Urban housing solutions that emerged organically were regulated out of existence or deserted by middle- and upper-class residents. The trains and industrial facilities that pushed cities inwards and upwards gave way to cars and trucks that enabled and encouraged sprawl.

Cars combined the flexibility of the horse carriage with the speed of the train, unlocking new areas where urban professionals could live and where travelers could stay. For hotels in particular, the abundance of potential locations translated into a growing reliance on recognizable brands and efficient distribution channels. Hotel “landlords” evolved into three distinct businesses: property ownership, property management, and brand franchising. Technology demanded this evolution. Cars gave customers choice, mass media made it possible to build brands, and telephones and teletypes made it possible to centralize all booking and sales activity.

Hotel brands were able to consolidate thousands of properties under a sin- gle flag and a single distribution channel—holding leverage over property owners and travel agents. But online travel agents (OTAs) proved to be different than their predecessors. They were not simply another channel; they aggregated hundreds of thousands of properties and offered customers unprec- edented number of options, as well as new tools to help them choose. OTAs put independent hotels on equal footing with branded ones. And their con- centrated power gave them leverage over brands, forcing them to cede some pricing and inventory management.

But digital distribution channels did not simply change how hotels were sold. They changed what hotels are. Airbnb unlocked millions of rooms in new inventory by lowering the cost of finding, booking, and trusting them. Others used Airbnb as a channel to offer a more standardized lodging product, with a business model that flipped the real estate on its head: Sonder built an online brand first and then proceeded to standardize its actual physical product. Airbnb, meanwhile, used its own distribution power to affect how some projects are designed and developed. Soon, it might start developing (or manufacturing) housing or lodging units on its own.

The old definitions are losing their meaning. Hotel listing sites like OYO are becoming hotel franchises. Travel booking sites like Expedia are going into home-sharing. Home-sharing sites are adding independent hotels. Hotel franchises are acquiring or launching home-sharing businesses. Everyone is trying to spread the upfront costs of building unique technology products and brands across a larger number of properties and customers.

These dynamics from the lodging industry are making their way into the residential world. New operators are introducing a new level of service and flexibility, and designing products that cater to the needs of specific customers (and not everyone). Companies like Common Living and Ollie are building their own digital distribution channels and are building branded residential franchises. Their initial focus was on under-served, low-end customers, but they are gradually making their way upmarket. They do so with the backing of large venture capital and real estate investors.

Just like in the nineteenth century, it is becoming difficult to draw a line between housing and lodging. The same physical asset is used differently depending on the channel through which it is marketed: leased for a year through a traditional leasing agent, booked for a night on Airbnb, or offered for several months through a serviced operator like Sonder or Lyric. Many customers who can afford to own prefer the convenience and flexibility of renting and expect better service and more specialized solutions.

Technology also facilitates the aggregation of whole new asset types into rental platforms. Single-family houses are being consolidated into large port- folios, managed under a single brand, and financed by investors that previ- ously acquired only larger commercial assets. Even the boundaries between renting and owning are being blurred by technology. iBuyers use data and venture capital to bring unprecedented liquidity to the housing market, enabling people to sell or buy a house within days. Meanwhile, companies such as Space10 and Venn are exploring models that would enable long-term renters to build an equity stake in the houses and community facilities they use every day.

Technology is changing residential and lodging units in many other ways that were not covered in this section. Connected devices make it possible to create new experiences and offer new services. They also raise new privacy concerns and liability risks which will be addressed in the final chapter of this book. Robotic furniture from companies such as Ori Systems and Bumblebee Spaces makes it possible to use the same spaces in completely different ways throughout the day. On-demand apps handle daily necessities from laundry, to food delivery, to storage. By doing so, these apps “transfer” activities that used to require space inside the home into other locations. On the other hand, the constant stream of packages and deliveries requires residential build- ings to add new facilities and systems and, in some cases, whole service cor- ridors and back-of-house facilities—just like hotels. Meanwhile, new construction materials and techniques promise to make houses and apart- ments more affordable, more sustainable, and more pleasant to live in.

Finally, as we consider how people live, technology’s bigger impact might be on where they live. Technology enables goods and people to move around faster, for much lower costs, and along new paths. It also disrupts employment patterns and work styles, concentrating certain jobs in a few areas while dispersing (or eliminating) others. In the next few decades, these developments are likely to cause a displacement of value on par with those caused by the train and the automobile.

If you enjoyed this excerpt, you’ll likely enjoy the whole book.