Vacasa CEO Matt Roberts can still remember the minute-by-minute details of the day the COVID-19 pandemic shut the world down.
Sitting at his desk in the company’s Portland, OR headquarters, the former Chairman of OpenTable had already had one eye on the news for a few weeks since the first U.S. coronavirus infections began appearing in California and Washington in February 2020.
Tasked with scaling the already behemoth vacation rental company to an IPO through a series of strategic acquisitions (the SPAC deal was just announced), Roberts was already that rare breed of executive who took impossible potentialities like pandemics seriously. He’d also barely been at his new job a week when COVID struck.
“I’d already weathered the financial crisis at OpenTable,” Roberts recalls of that day in mid-March last year when the U.S. closed its borders with the EU. “But we all knew immediately that this was something totally different. This wasn’t just an isolated business crisis. This was an everything, everywhere crisis.”
By the time California issued its statewide stay-at-home order six days later, Vacasa’s reservations calendar across the country already was flipping upside down from ‘booked’ to ‘cancelled’ so fast that no one had ever run models on it before.
In his office, Roberts whiplashed back and forth between the news and his computer screens as all of this was unfolding, watching millions of dollars in future revenue zero off of the company’s balance sheet, while simultaneously realizing that his entire company of more than 5,300 employees, along with his family, were now also at significant physical risk.
Two weeks later, by April 5th, with more than 40 of all 50 U.S. States now under mandatory stay-at-home orders, Vacasa’s occupancy rate across more than 25,000 vacation and other short-term rental properties was down to the single digits.
“The inconceivable had just became real. There was also no clarity on the end day. So we had nothing to plan for. It was like the movie Spinal Tap,” Roberts recalls, referencing the 1984 rock band cult movie classic. “This was headed all the way ‘to 11’ and nothing could stop it.”
Within hours of Vacasa’s reservations bottoming out, Roberts and everyone around him went into hurricane mode. “You can make decisions fast enough when something like this happens,” he recalls of those first few weeks. “And you have no idea if any of them are going to be right.”
The first and hardest decision Roberts made was to furlough over half of the company’s work force, while at the same time contacting each of them personally to let them know that their jobs were secure once the pandemic passed.
“We knew we had to stay in touch with everyone,” says Roberts of the triage, “Our investors, our homeowners, but most of all our employees. No one knew what was going on ‘out there’. So we made it a priority to stay constantly engaged and transparent even if that meant saying ‘we don’t know’ so that at least everyone knew what was going on ‘in here’ with us.”
Roberts also went to the company’s investors to make sure that he had access to fresh funding if he needed it, even though the company’s balance sheet was already on solid footing.
Two years earlier, in November 2018, when Roberts first took his initial Board position at Vacasa, the CEO chair he was sitting in had looked a lot rosier.
At the time, the vacation and short-term rental (STR) industries didn’t look much different than the early 2000 days of the web: the space was flush with cash, frothing with start-ups, and fraught with glaring red warning signs that no one could care less about because everyone was making a ton of money—at least on paper.
At the retail level, AirBnB was minting millionaires daily it seemed out of thousands “mom and pop” flippers who were quickly amassing passive income micro-empires. Higher up at the institutional level, dozens of big-name venture capital firms were meanwhile writing blank checks to anyone with a convincing plan to grow the STR business at scale to take on a Marriott. That was when the serious, nine-figure spigots to the “alt hospitality” space really opened up.
The dominant, growth-or-bust business model back then—loosely called arbitrage—went (and still frequently goes) something like this: raise a bunch of cash, “master” lease blocks or full floors of apartments from building owners at a discount, furnish them like a house, market them like a hotel, streamline operations through technology, and collect the difference. Voila! An instant hospitality brand.
But better yet, do it on the back of someone else’s (e.g., a developer’s) real estate, something that the industry would eventually call “asset light”.
For nearly a decade—up until the pandemic at least—the pitch worked, in many cases splendidly.
Start-ups like Sonder, which began with a handful of sub-leased student apartments in Montreal back in 2014, scaled within six years to a $2.2B, global conglomerate with more than 13,000 rooms across 350+ properties in 38 cities in 10 countries (they’re now going public via SPAC as well).
Another early start-up, Philadelphia-based Method Hospitality founded by former Korman CFO Randall Cook with a few short-term stay apartments he called Roost, grew organically into a bona-fide, vertically integrated hospitality brand over the same period, with three award-winning restaurants, a new hotel label called Whyle, and more than 1,100 apart-hotel rooms coming online within the next three years.
If the speed and froth of it all pre-pandemic made anyone nervous, however, no one said anything. Besides, by relative size, the vacation and short-term rental industry’s footprint was still a fraction of the real estate compared with brands like Marriott or IHG. So back then there were still tons of ways to edge your way in, pick a few thousand customers off, and make a little money.
That was the theory, at least.
3200 miles away from Portland, OR—where Vacasa’s Roberts was sitting on the CEO hotseat that morning on March 11th, 2020—31-year old Andreas King-Geovanis was having a similar kind of day in Miami.
Three years earlier, the University of Miami economics grad had founded Sextant Stays, one of the newer start-ups in the alt hotel, arbitrage space, with one apartment and no formal hospitality or leisure industry experience. But several years at real estate crowdfunding start-up running balance sheets profitably, Geovanis reckoned, gave him an edge in an emerging industry that already had a habit for over-spending.
“On paper, I came into the space as an underdog,” Geovanis recalls of launching his first short-term rental units in Miami. “No Wharton or Stanford MBA, no connections, no hospitality experience, no venture capital budget. But I never thought of myself as an underdog because I knew it was far easier to get those four things than what I, and every Sextant team member, innately have: empathy and grit.”
Ironically, when it came to the day that COVID shut global travel down, it turned out the last two traits were the only ones that mattered.
Although Sextant only had a fraction of the reservations that Vacasa was sitting on, the stakes for the younger company were arguably far higher when borders started slamming shut since Geovanis didn’t have an established brand to fall back on when bookings began falling off a cliff. All he could do was to prove himself.
“There are two dates that I’ll never forget: September 11th, 2001 and March 11th, 2020,” recalls Geovanis, who fled his apartment building in downtown Manhattan on 9/11, which was located a few blocks from the World Trade Center towers the morning they collapsed.
“The latter was the night President Trump announced the European Travel Ban. I was in my living room watching the Oval Office livestream and a tsunami of cancellations literally started pouring in. Wait times ballooned from 30 seconds to 30 hours. I personally took over 200 calls. We had been watching COVID carefully since late January. But this felt like a Category 5 Hurricane hitting us every day. All I remember thinking was, ‘This will define us.’”
The next morning, Geovanis taped an Andy Grove quote on his bathroom mirror so he’d see it every day that said, “Bad companies are destroyed by crises, good companies survive them, and great companies are improved by them”.
That small mantra it turned out would take on an outsized importance in keeping the company focused over the next few weeks.
“Crisis is a moment to demonstrate your values,” Geovanis tells me of those first few weeks. “And as a leader you have to have a contagious psychology. If you think all is lost—then it is. If you think this is your defining moment, then it will be. Our team made the collective decision that the pandemic for us would be the latter.”
That’s when Geovanis’s economics, balance sheet brain kicked in as well.
While honoring every guest’s cancellation request, Geovanis also personally called each of his landlords to assure them that Sextant would meet every one of its lease obligations for April and May and each month thereafter for as long as it took to weather the pandemic. That simple act—paying rent—would turn out to be one of the best decisions his company has made so far.
Meanwhile, to keep his revenue column in the black, Geovanis also agilely pivoted Sextant’s now empty apartments to medium to long-term stays for essential workers, students, nurses, and first responders since they had full kitchens, washer/dryers, and space to spread out. That in turn allowed him to retain his full-time team of well-oiled employees.
Most importantly, Sextant was still debt-free unlike most of its competitors, which put Geovanis in a unique position to fill a vacuum that no one saw coming.
As all of this was going on, the rest of the short-term rental industry was still rapidly unraveling.
Untold thousands of AirBnB and VRBO hosts across the country all of a sudden found themselves holding mortgages on short-term rentals they couldn’t book, particularly in cities like Nashville and Orlando where tourism had ground to a standstill.
At the same time, the VC-backed alt hospitality start-ups that spent years over-gorging themselves on master leases in downtown urban locations found themselves holding thousands of empty apartments with no bodies to put in them. Ergo no revenue.
By the time the first wave of the pandemic had swept through last summer, dozens of these start-ups were already walking away from leases. A few eventually went under, including a few of the future unicorns. In places like Silicon Valley and Austin, where most of the money came from in the first place, the speed of the collapse was just as dizzying, even for the VCs who’d seen this “a million times”.
From a raw square footage perspective, however, all of those “restructurings” left developers and building owners across the country in a quandary: what to do with all of those empty apartments?
That’s when Geovanis saw his opening.
“Less than four weeks after the European Travel Ban went into effect, we were on a plane to New Orleans,” recalls Geovanis on the hearing news that other short-term rental start-ups were giving back their leases.
“The pandemic brought a century of change to our industry in the span of 18 months and it ended up favoring smaller, profitable, adaptable companies that could react quickly especially when all of this inventory started becoming available all of a sudden. Ultimately, we were able to take advantage of the opportunity with an in-person handshake and a simple promise to landlords that we could keep paying rent because we had the balance sheet to prove it.”
Over the six months, Sextant would go on to pick up over 360 new apartments from four separate competitors who were shedding them, allowing the company to scale by 600% across three cities in less than a year.
Around the same time Geovanis was inking those first few deals in the Big Easy, back in Matt Roberts’ Vacasa home office outside of Portland, something equally unexpected was starting to happen.
In mid-May, almost as fast as bookings fell off a cliff back six weeks earlier, they suddenly began rocketing back again, surging even further in June—resembling what economists call an inverted bell curve.
Roberts recalls the shape more like Mount Everest flipped upside down.
“This was something that currency speculators see: these huge minute-by-minute swings up and down. That doesn’t happen in the vacation rental industry. One day, all of our reservations literally evaporated. And then the next day, they start pouring back in again and we had to get back into the game at turbo speed.”
In hindsight, says Roberts, what had happened wasn’t all that complicated. It just ended up working to Vacasa’s advantage.
As more cities locked down last spring, kids home schooled, and “density”, “proximity”, and “ventilation” became dirty words, the more people fled America’s urban cores to more rural and in many cases vacation destinations—which as it so happens are where most of Vacasa’s rental inventory is located.
People were also panicky in the early days of the pandemic, which helped to temporarily super-charge the second-home market from a discretionary luxury into a public health necessity, further constraining supply of the precise real estate asset class that Vacasa as a start-up has been quietly and painstakingly amassing the exclusive rights to across the U.S. and Canada since its founding in 2009.
As a result, by June, the company’s reservation calendar had soared back up to almost 90%, driven in large part by pandemic migrants now working from home anywhere they wanted. A few weeks later, Vacasa’s reservations were breaking their own internal records for metrics like length of stay and average daily rate, correlating almost exactly to the pace and location of states opening back up and where travel and non-essential activities could resume.
During that same period, Roberts also completed the acquisition of Wyndham’s vacation rental business which had been in the works pre-pandemic and began negotiating a deal to take over Vacasa’s largest competitor, Turnkey, which would add more than 6,000 homes to the company’s inventory.
Barely twelve weeks after the beginning of worst pandemic in modern history, all of this left Roberts with a fortunate problem: how to ramp his business back up and scale after virtually shutting it down.
“Rebounding with almost 7,000 staff was harder to manage than the free fall,” Roberts recalls. “In literally a matter of weeks, we were back to record bookings with a work force that was still largely furloughed and a ton of our people were rightly concerned about being exposed to the virus, which meant that we had to quickly come up with protocols and standards to manage all of the safety elements for guests as well as our own people.”
In some ways, reflects Roberts, Vacasa dodged a bullet. But the pandemic also proved out some essential things about the company’s business model that had innately prepared it for an atomic shock to the system.
“If you ask me now what got us through this,” says Roberts, “It’s two things. First was the constant communication. The other was the reaffirmation that our business model has always worked because it’s asset light. I hate saying that because everyone likes to talk about it these days. But it’s the truth. We’re a technology company that sells the exclusive rights to a calendar of homes in some of the most amazing places in America without owning the real estate, the leases, the furniture, or any of it. In terms of the sharing economy, COVID was the perfect storm that validated our product.”
For Sextant’s Geovanis, the pandemic in hindsight has been less a validator of concept and more an accelerator of vision—both for him as a founder as well as his company.
“As an entrepreneur, you have to be visionary,” Geovanis says when I ask him about the experiences gained during COVID that he’d pass on to other start-up founders. “So discover your vision. You could raise millions from blue-chip VCs and build a team full of ex-McKinsey employees, but without a clear vision, a company doesn’t have direction. We are in the most iterative moment ever to exist in hospitality, and there is no ‘paint by numbers’ blueprint for success. As soon as you stop dreaming though you stop innovating.”
The pandemic also reinforced to Geovanis the long-vetted business mantra to solve the fundamental issues first and get profitable, then invest in marketing and fundraising—not the other way around.
“We learn by solving problems at Sextant,” Geovanis says, “Where if you have money, money is the solution. When you’re perpetually one repair from going out of business, you understand the value of a dollar and are forced to come up with creative ways to deal with issues. Also be able to recite your P&L from memory and accept that you’re wrong on about 50% of the decisions you make and the numbers will show that. Ultimately, the team you surround yourself with will get you to the right answer through healthy conflict and debate.”
As for the future of arbitrage and alt hospitality in general, neither is going anywhere any time soon. Part of that, says Will Lucas, founder of the start-up Mint House, is simply because the model works.
For one, alt hotel companies can find space and make the numbers work in neighborhoods and buildings where traditional hotel chain models don’t fit—which is good for travelers, particularly Millennials and groups looking to go more local but who want the branded professionalism of a Hilton or Viceroy.
Secondly, and perhaps more importantly, real estate developers still like it too. The build-to-rent asset class was already one of the fastest growing and most profitable sectors of commercial real estate before the pandemic. And in the wake of it after COVID eviction moratoriums that lasted more than a year, the lease-in-bulk, outsource-the-operations to a start-up pitch sounds even better to most of them.
The other part of alt hospitality’s staying power, however, is rooted in a bigger shift in how people stay these days, says Lucas, especially in the hyper-mobile, work-from-anywhere new normal that COVID helped to accelerate.
“I launched Mint House because as a frustrated traveler myself I saw a gap,” he recalls of Mint’s genesis moment. “There was a need in the market for a brand that was not only thoughtfully designed but workspace-efficient—making it economical and practical for guests to stay for two nights or two months. So Mint House’s spaces are up to three times the size of traditional hotel rooms and are fully tech-enabled for work, which was appealing to travelers before the pandemic, but has become even more relevant to them since.”
During those first few weeks of the pandemic, those larger, safer, contactless spaces also turned out to be what kept Mint House’s lights on to wait out the worst of it.
“As soon as we recognized the seriousness of what was going on and how it would impact our business, we immediately began reaching guests who could still take advantage of what we offered while leisure and business travel were shut down,” Lucas recalls, echoing Geovanis on the importance of agility in crisis.
“So we focused on first responders, medical professionals, essential workers, and displaced university students who needed temporary, fully-furnished, turnkey housing where they would still be able to cook, work, and live like home. We also heavily promoted our contactless model and remote technology like keyless entry, smart thermostats, and pre-stocked groceries which meant guests could stay with us safely and hotels couldn’t do at the time.”
Like Vacasa, COVID-19 also re-affirmed a critical stabilizer in Mint House’s basic business model.
Unlike many of his large, VC-backed short-term rental competitors, Lucas pitched a profit-sharing, management model to developers from the company’s inception instead of risking the asymmetry and potential exposure that come with taking on multiple long-term master leases. Some building owners politely walked him to the door. Enough, however, liked what they heard, preferring the idea of a long-term business partner to a short-term corporate tenant.
“One of our key differentiators from the beginning is that we operate through a revenue-sharing model with developers rather than traditional leases,” explains Lucas. “This allows us to act as a partner to the building’s ownership as opposed to a traditional tenant since we both have reciprocal skin the game.”
As there is for Vacasa’s Roberts and Sextant’s Geovanis, Lucas also now has the benefit of hindsight to assess everything that happened over the past 16 months since the pandemic began. He also has a similarly enviable perch to reflect from, having seen his company survive and thrive during a crisis that culled a terrifying number of jobs, dollars, and dreams from an industry that was so recently indestructibly on fire.
When I ask Lucas what words stand out to him most about the whole experience, “timing” is the one that comes most frequently out of his mouth. But with the weight on luck rather than misfortune.
“The pandemic drove us and the companies we work for to not only reexamine how we work, stay, and travel, but also how we conduct businesses and create a culture that’s prepared for crisis,” says Lucas. “Some of that examination for us resulted in realizing what’s working and what’s right. Our whole fundamental model of ditching losable key cards, long lines, room service and other relics of traditional hotels and replacing them with the things we miss most when we travel—like kitchens, groceries, workout routines, and the space to spread out—turned out to be exactly what people wanted during the pandemic. That not only helped us survive. But it’s here to stay. Even if a company isn’t going fully remote, the shift in work culture to accommodate personal schedules, the ‘new nomad’, and where you choose to call home means we’re not going anywhere either.”
As for the next generation of alt hospitality, short-term rental start-up founders?
Lucas, like Roberts and Geovanis, cautions against getting too hyped up on the flashy technology and fancy VC money, instead coming back to the basics, like communication, having clear vision, and minding the bottom line.
“My best advice is to remember that it’s the team around you and the culture that you build that are the most important,” he says. “When you inevitably hit a disruption—like a global pandemic—that is when you need everyone to rally together, be in sync, and trust each other or you won’t make it through.”
Wise words. And it doesn’t take an MBA from Stanford or VC seed funding to rally in sync.