Skift Take

Landlords approached Sonders' rivals to take over properties where Sonder was trying to renegotiate terms or exit from master leases.

Short-term rental operators including Kasa Living, Placemakr, and AvantStay are taking over properties managed by Sonder. 

San Francisco-based Kasa Living opened Kasa Gaslamp Quarter in San Diego last week, which used to be a Sonder-operated property, and signed the contract for another in Alexandria, Virginia. 

Kasa Living CEO Roman Pedan said that it has taken over more than five Sonder properties and is in the process of negotiating on more. 

Similarly, Washington D.C.-based Placemakr opened Placemakr Noma last week, which it took over from Sonder. 

Placemakr CEO Jason Fudin said that it’s evaluating more Sonder properties to either operate or purchase. AvantStay is taking over two formerly Sonder-operated buildings in Nashville. 

A Blueground spokesman said that it has been approached by landlords to take over some Sonder lease agreements, and the team is determining whether they make sense for Blueground’s portfolio.

Rivals Working With Sonder Landlords

“We are looking at dozens of properties – it’s not an exaggeration – that are currently leased by Sonder,” Fudin said. He added that Placemakr is working with landlords to figure out takeovers, but Placemakr is also interested in buying some of these properties since they’re custom designed to suit short-term rental purposes. 

Pedan and Fudin explained how this has worked: When Sonder approaches the landlord asking for a rent reduction or lease termination, then the landlords approach companies like Kasa and Placemakr to take over. 

Pedan said that Kasa Living has been approached by several landlords as there is a high overlap with Sonder in the markets it operates in. Fudin also noted that Placemakr has also been approached by landlords who are anxious about Sonder’s financial position. 

Sonder’s Strategy

Sonder previously announced that it would be looking to shed some master lease contracts.

“As we mentioned in our last investor call, we are implementing a portfolio optimization program to address a minority of our properties that are not profitable. This is part of our company goal to deliver sustainable positive free cash flow as soon as possible,” a Sonder spokesperson said in an email to Skift. “At certain properties that no longer meet our brand standards, we have decided to exercise termination rights or exit at the end of our lease. In some cases the owner has found another operator which has different brand standards for their portfolio.”

Flawed Business Model?

Sonder’s business model is that it signs long-term leases with apartment buildings and operates the units as short-term rentals. In the recent past, the company has reached out to many of its landlords and asked for lease reductions and early termination as it struggles to curb losses. 

Short-term rental industry veteran Carl Shepherd compared Sonder’s business model to short-term rental arbitrage. 

“There’s two levels of it (short-term rental arbitrage): There is the corporate Sonder model, where homes are being rented long term, then converted to short-term rentals for some fixed periods. I’ve always thought that model was far too risky, and not a rational business model for the vacation rental industry,” Shepherd told Skift recently.

The other one Shepherd refers to is one where individuals do something similar — rent an apartment on a long-term basis and then re-rent it on a short-term basis. 

Pedan noted that the master lease structure can be risky if a company tries to scale too fast. 

“The problem is the lease structure, which in good times offered high upside, it could have been lucrative for operators that can produce income above that fixed rent, but had really high downside and can be financially dangerous if you try to scale too quickly,” Pedan said. “Those kinds of agreements can work on a small basis, but they have consistently shown to be sort of weapons of financial distress, at scale. This is not just in hospitality, but across the industry. Hundreds of companies that have used the lease model in the travel sector and have gone bankrupt when they scale very, very quickly.”

This was evident during the pandemic where companies like Stay Alfred, Domio, Guild, and Wanderjaunt, which were saddled with master leases went out of business. Kasa Living took over some properties from Guild and Stay Alfred post-pandemic. 

Conversely, Kasa Living and Placemakr sign management contracts with owners and landlords and take a percentage of revenue and or profit as the fee, and pass on the rest to the owners, instead of signing long-term leases.

Sonder’s Struggle

Sonder announced last week that it will delay release of its fourth-quarter earnings report and said it will have to restate earnings for 2022 and 2023 because of accounting errors. The issue, Sonder stated, is that it found accounting errors in 2022 and 2023 in the way it calculated “the valuation and impairment of operating leases, right of use assets and related items.”

Additionally, it also laid off 106 employees — or  17% of its corporate staff — in February. 

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Tags: avantstay, blueground, dwell, placemakr, sonder

Photo credit: Sonder CEO Francis Davidson on stage with Skift Director of Research Seth Borko at the Skift Short-Term Rental Summit on June 7, 2023. Ryan Bourque / Skift

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