Is Sonder the New Airbnb?

Enter Sonder. It’s like a hotel, but with more space and a full kitchen in the heart of the city, and who wouldn’t want to stay in a Manhattan apartment for a week at the price of a hotel room?

The startup has been getting a lot of buzz of recently. The company raised $135 million since its inception in 2012, with an $85 million round in 2018. It made a New York Times list of the next 50 most-likely unicorns, and Fast Company’s most innovative startups of 2019.

Arthur Shmulevsky, the head of Sonder’s New York operations, told Commercial Observer the company has plenty of room to grow. “We think of ourselves as the Marriott of the 21st century,” he said.

Sonder operates in 14 cities in North America, including Montreal, Austin, and San Francisco, and in London and Rome in Europe. It launched in New York in 2018, and has two open locations, both in luxury rental buildings. It has a 10-year lease for 169 units at Metro Loft’s rental conversion at 20 Broad Street in the Financial District, and 44 units at BLDG Management’s rental at 222 East 39th Street in Murray Hill.

Its first deal was with Metro Loft but it wasn’t a hard sell, said Khashy Eyn, the CEO of brokerage Platinum Properties, who is also an investor. Eyn knew Shmulevsky from the days when the Sonder manager ran his own startup, Clean Cube, and connected him with Metro Loft.

“We vetted them for quite a while,” said Mitchell Wasser, Metro Loft’s head of residential leasing. “We really liked their business model, and thought it had really strong potential for the future to shake up the hospitality industry.”

They were impressed with Sonder’s CEO, the 25-year-old Francis Davidson, who flew in to meet with them. “He was very knowledgeable, very laid back, and sharp as a whip,” said Wasser. “It helped sell the whole thing to us.”

The timing helped, too. Metro Loft was still under construction when Sonder approached them so they were able to make adjustments as needed.

The benefits to landlords are obvious, said David Behin, a capital markets executive with Newmark (NMRK) Knight Frank, who represented Sonder on several deals, together with Billy and JD Cohen. It means a fixed revenue stream with no vacancies, and lower operational costs. “Every single residential developer is interested in working with Sonder for a portion of their building if they can do it by code,” Behin said.

In addition, in a softer residential market, it can be an alternative for leery developers, Behin said. “A Sonder lease for 10 or 15 years will allow them to earn their income, and have an asset that they can refinance,” he said. Down the line, the developer can decide whether to continue with the lease or switch back to their condo strategy.

Sonder has two additional locations in the pipeline, at a commercial development in Long Island City, Queens, by the Vorea Group, and in the Flatiron Hotel, at 9 West 26th Street, where the company is finalizing the lease details. The hotel’s owner filed for bankruptcy last summer, and Premier Equities has put up the funding to save the property from foreclosure in exchange for taking the reins, as CO reported yesterday.

At the Long Island City location, at 23-20 Jackson Avenue, Sonder signed a 15-year lease for 72 units, and was part of the process in designing the commercial development, Vorea CEO Peter Parpamichael said.

Neither of the two new locations fit Sonder’s previous model of leasing apartments for short-term rentals. “The most important thing for us is to always work within local regulation, and spaces that fit those can come in many forms,” Shmulevsky said via email.

Operating within the law is a key factor that differentiates the company from Airbnb and other home-sharing companies, Shmulevsky stressed multiple times. They were able to get around New York’s tight regulations on short-term rentals by operating in locations that are zoned for hotel use.

In New York, state law prohibits short-term apartment unless the host is present, while the city has similar restrictions on family homes. Part of the reasoning is that unless buildings are zoned for hotel use, they might not offer fire and other protections to accommodate such use. The city has been cracking down on illegal short-term rentals, and the city passed a law requiring home-sharing platforms to share data on hosts in August 2018 , as CO previously reported. (The law was blocked by a federal judge in January, before it could go into effect, and is currently pending the outcome of the ongoing case.)

“If they can operate legally, that’s a fantastic opportunity,” said Sean Hennessy, the CEO of hospitality consulting group Lodging Advisors. “The demand for Airbnb is immense, and the city has cracked down such that the inventory has been shrinking.”

But Hennessey was skeptical that a company offering professionally managed Airbnbs could grow much more, considering both the legal limitations, and the economics of the model. “I think the prospects for groups like Sonder growing are certainly not as robust as Airbnb,” Hennessy said, because unlike Airbnb, whose operating costs are minimal, Sonder has to carry the cost of leasing real estate and the management of a hotel operation. And while a below-market master lease might offset some of the costs, charging the same amount for a hotel room and an apartment may not balance out.

Shmulevsky said that the use of technology keeps Sonder’s operating costs lower than a typical hotel, since it can avoid inefficiencies like the need for a 24-hour reception desk or room service.

As for Airbnb, he said their model is different, but symbiotic. “Airbnb is integral to our success, but we’re not competing with them,” Shmulevsky said.

BLDG declined to comment. The owner of the Flatiron Hotel and a representative for Airbnb did not reply to a request for comment.

Update: This story has been updated to reflect that Sonder is based in San Francisco, not Montreal, where it was founded.