Q359: How Fast Can Vacasa Consolidate The Short-Term Rentals Market?

December 6th, 2018

Vacation Rental on Alabama Gulf Shore | LUFT | QUESTCAST
The short-term rentals space is quickly maturing and consolidating. Vacasa is at the forefront with its tech-enabled, property management platform model.
— Luke Bujarski

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The Vacasa Roll-Up

There are some companies out there that I consider catalytic companies. Vacasa is one of those. At its core, Vacasa is a tech-driven short-term rentals property management platform, but it’s so much more and reflects on a bigger trend toward consolidation and deepening focus on property owner relationships within the short-term rentals space.

If you’ve been following the company then you know that Vacasa has been on a meteoric climb since launching in 2009. What makes the model so powerful is that it effectively rolls up three functions into one:

First and foremost, Vacasa is an international, short-term rentals property management company. It contracts directly with owners and real estate groups and takes care of everything from customer acquisition and guest services, to clean-up and toiletries. The company now manages over 10,600 properties, mostly in North America, but increasingly in Europe and Latin America.

The company acquired Oasis Collections in October of this year, which folded another 200 listings into its portfolio, topping Wyndham Vacation Rentals as North America’s largest rentals management company.

Short-Term Rentals Tech Stack

Second, Vacasa is a technology company. It runs its own property management solutions across its portfolio of contracted listings. Herein lays the magic. Unity in tech offers significant efficiency upside in an otherwise labor and resource-intensive business. Think logistics and replenishment, pricing and yield management, workforce management, training, and staffing – not to mention customer acquisition and channel management. It’s like a massive, geographically distributed hotel running on the same tech stack. This transforms the operation into a big data play, where management can look for ways to incrementally optimize the business.

The Vacasa Marketplace

Third, and this is something that people often overlook, Vacasa now has the critical mass to become a relevant marketplace. Travel consumers can book directly on the site. Yes Airbnb, Booking Holdings, and HomeAway have millions of listings, but the opportunity is there for Vacasa to push harder for direct bookings. Layer in email marketing, a loyalty program, powerful branding, customer segmentation and presto. This is something that the small, single-market rental management companies could not have done on their own.

Inching Into Urban Rentals

Vacasa is also diversifying its portfolio which had historically focused on traditional beach, sun and ski destinations. It’s now moving into urban settings with its new Vacasa Multifamily Program. The initiative is all about long-term management agreements with real estate developers and property managers to essentially convert vacant units into short-term rental properties. As of now, the program is launching in seven cities. This will be a slow boil, with significant opportunity to grow into regulation-friendly urban areas.

Room to Grow

So the question then becomes, how fast can Vacasa grow? The business model has relied on consolidating small, often mom-and-pop, single-market management operations. The Oasis Collection acquisition was on the big side of the equation. No one really knows how big the vacation rentals market is. Some figures have estimated around one million units under management, but it remains a fragmented space. The key words here is “units under management”.

Airbnb exploded on the scene by effectively creating a new supply category - namely the peer-to-peer rental in urban areas, which has traditionally been hotel territory. As rentals have become more popular with the travel consumer, real estate groups and city regulators have also woken up to the opportunity, both in terms of cash flow and tax revenue potential. Vacasa seems to have plenty of runway to keep doing what it’s doing. The Portland based group recently raised US$64 million to do just that.

Own The Supply

The advantage and risk for Vacasa lays in control over inventory i.e. long-term contracts with property owners or managers. This is something that the pure marketplace players e.g. HomeAway or Airbnb or Booking.com and even Google haven’t done. Not unlike a hotel chain, with those contracts Vacasa controls channel management functions. As the distribution landscape changes, Vacasa will have the flexibility to move inventory and marketing budget to those most cost-effective channels. Brand marketing will play into it, as Vacasa turns toward the consumer, with new ad channels coming into view. Players like Facebook, Amazon, and Apple could eventually become viable marketing channels for a company like Vacasa. This positions them well for the long term, as distribution costs inch downward.

Risks, Execution Everything

What about threats. Cyclical travel demand in highly seasonal destinations. Markets and macro predictions have been squirrelly lately. The company has various types of agreements in place with its owner partners. Guaranteeing set monthly income on vacation rental investment properties exposes the company to risk. Entering into urban markets could help mitigate some of those risks, since occupancy is much higher for urban rentals. Our sources indicate that average occupancy across the entire Vacasa portfolio is currently north of 50 percent.

Lots of Moving Parts

What Vacasa is doing has a lot of moving parts to it. It’s a complex operation tackling the entire short-term rentals value chain. Herein lays the risk and reward. Property owners and managers pay handsomely for the service. In upwards of 45% premium on top of the daily rate. Guaranteed monthly income makes it a no-brainer for real estate investors - if Vacasa is willing to take on that risk.

2019 Outlook

Expect more roll-ups on the supply side particularly in the single-market category with more momentum in urban destinations, as competition in the beach and sun markets intensify. With more at stake and bigger financial backers, the company may pull in some heavy-hitting management talent to help run the business.

Don’t be surprised to see a partnership with Amazon develop, particularly on the replenishment side for home furnishings, cleaning supplies, kitchen and bath products, and linens – essentially all of Amazon’s private-label products. Additional opportunity there for further cost reduction.

Vacasa may start to come out more as a consumer brand in 2019. That could involve a Vacasa app and more optimization on CLV marketing. Overall, the company should see further opportunity to grow the top and bottom line. Execution will be everything to ensure the right properties get folded into the overall portfolio, and that ground-level operations get managed effectively.

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