master lease model
A number of short-term rental firms using the master lease model are headquartered in San Francisco

The master lease model: is the bubble about to burst?

Worldwide: Terms like aparthotel, corporate leases, master leases and pop-up hotels have become synonymous buzzwords in hospitality recently as a swathe of players operating under the master lease model enter the short-term rental space.

In the US, aparthotels tend to be operated by startups as professionally managed short-term rental apartments with added amenities and services, as opposed to traditional UK aparthotels which are often run by established operators [SACO, Staycity etc] for leisure and business travellers. Now, more firms such as WhyHotel are emerging with pop-up hotels within newly-built luxury rental blocks, which do not operate under a master lease but provide similar overlapping apartment-style amenities and hotel-standard services. 

In this article, I will revert to using master lease as the umbrella term, yet each term denotes an arrangement whereby a branded service provider promises to rent all available space in a building from the landlord for a predetermined price, before subleasing it to third parties. The brand then takes control of the full tenant experience.

Accommodation operators all mark themselves out as providers of unique offerings to what else exists in the market. Air Agents co-founder Fran Milsom says this bridges the blurring gap between perceived traditional serviced accommodation [hotels] and private alternative accommodation [short-term rentals, Airbnb], which has resulted in a “buoyant and exciting market”.

Many of the key disruptors discussed – Sonder, Lyric, Stay Alfred, Domio, Locale, The Guild, Sweet Inn – feature on ShortTermRentalz and operate a master lease model.

For more detailed information on the companies listed below, see base of article:

  • Sonder operates buildings in 13 US cities, as well as London, Montreal and Rome, that feature hotel amenities, and uses technology to source new spaces with exacting brand standards.
  • Stay Alfred offers upscale travel residences across two or three floors, while property developers sign exclusivity clauses so multiple operators are not present in the same building.
  • Domio operates aparthotels by partnering with developers to master lease full buildings, elevating the quality of the building and its design, and claims to be the WeWork of hospitality. 
  • Lyric leases apartment units and floors, refurbishes them and transforms them into hotel-style properties or ‘creative suites’ for extended stay business travellers.
  • Locale is a boutique accommodation firm specialising in short-term and extended vacation rentals and corporate housing, occupying ten to 25 per cent of a building’s inventory.
  • Sweet Inn offers a long-term lease with insurance coverage, guaranteed monthly income, renovation and luxury restyling by interior designers, plus property maintenance.
  • The Guild is a boutique short-term rental and hotel operator which operates “50 or more apartments” in a new building to achieve a “branded integration within the community”.

Along with the insights of leading industry figures, I will evaluate the risks and rewards of the master lease model and whether its bubble is ready to burst. To do this, I have broken the article down into five key questions:

  • How is today’s market and why has there been a swell in firms adopting the master lease model?

Short-term rental master leases have rapidly gained traction as disruptors such as Airbnb and HomeAway blur the lines between traditional hotels and rentals and the growth of OTAs provides more consumer choice and booking transparency. Newer players are realising the lucrative potential of the market and tailor their offerings to combine apartment-style amenities with hotel-standard services. Established hotel operators also want their share of the cake and are diversifying into the alternative accommodations space with acquisitions.

According to Properly CEO Alex Nigg, this new breed of vacation rental brands has “full control over not just curation and processes but design”, which underlines how the travel accommodation space has come full circle between traditional boutique hotels and short-term rentals in delivering a consistent guest service at an affordable rate.

But what has caused this paradigm shift? This swell can largely be attributed to three key reasons: the amount of ‘floating’ capital in the sector, business expansion and the growing popularity of online short-term rental platforms.

MRP Group chief executive Max Thorne says a “cash-driven market” which sees investment houses deploy “significant amounts of equity” has piqued the interest of sharing economy platforms and raised awareness of hotel alternatives. As the sector continues to deliver strong demand and occupancy, owners will seek to capitalise on entering markets that provide more niche offerings and generate substantial revenue returns.

This was evidenced by Domio CEO Jay Roberts’ interview at SAS Americas. Quoting a private equity report, he highlighted an estimated “$2 trillion of dry powder capital waiting to be deployed for the right deals in the space” in 2018. Taking inspiration from WeWork’s lease model and subsequent growth, he said disruptive tech firms like Domio were bringing investors round to the master lease model to generate these high returns.

Companies such as Sonder and Lyric achieve significant boosts in revenue by integrating a rental arbitrage strategy into their business models. This refers to the signing of long-term leases for properties before re-listing them on short-term rental platforms like Airbnb and HomeAway. 

The proliferation of the master lease model has also been driven by platforms like Airbnb and Expedia aggregating demand effectively, according to Vector Travel CEO Mickey Kropf. This has led to the “cannibalisation” of hotel demand by creating a supply of travellers who want high housekeeping and hospitality standards, while professional operators can now access global and leisure and business travellers from previously unattainable databases.

Airbnb has played a pivotal role in this trend. Ahead of a much-anticipated IPO, it has made key acquisitions across various accommodation sectors [Gaest, HotelTonight, OYO Rooms, Luckey Homes] to be an end-to-end travel hospitality brand. Now it is venturing further into the master lease model space, firstly partnering with RXR Realty to operate suites at New York’s Rockefeller Center and then leading a $160m financing round in Lyric. This latter investment seeks to harness Lyric’s latest technology, partnerships with the real estate community and cutting-edge design while improving its image as a disruptor at odds with rental regulations. In doing so, this is ushering in tech-enabled firms like Domio and Stay Alfred to strengthen their own market position.

Stay Alfred CEO Jordan Allen lauded the master lease model for effectively ensuring developers and owners eliminate vacancy loss for the lease’s duration and providing profit by increasing net operating income (NOI). 

AJL Consulting CEO Simon Lehmann says Stay Alfred, Sonder and their peers are building consumer-facing brands with distinct products to hotels and ‘phenomenal’ appetites for raising capital. “Wherever real estate investors can achieve a higher return rate on invested capital than from traditional hospitality assets or long-term rentals, they will invest in properties and look for master lease property managers. These take on more risk but they have full control over the inventory’s availability and quality,” he adds.

Now boutique accommodation brands like Locale, The Guild and Cosi are entering the fray and signalling a trend of prioritising the delivery of a high-quality guest experience over becoming the largest professional accommodation operators. 

  • Why do the likes of Sonder think they have a successful business in this space? What has changed to make it this way?

Sonder is not alone in believing it is the future of the master lease space as a new crop of professional accommodation operators converge on the market, including other venture-backed tech firms such as Stay Alfred and The Guild.

In today’s lodging economy, these digital disruptors are providing ways for apartment owners to monetise their vacant units. For Sonder, which was founded in 2015 on the back of a $3 million seed round, it was built on the basis of combining the character, convenience and experience of a short-term rental with the standards of a boutique hotel. 

Co-founders Francis Davidson and Lucas Pellan say this is where their firm comes in and hotels are lacking, due to their inability to innovate and adapt to the evolving accommodations landscape. Since then, Sonder has been crowned the latest unicorn brand [valued at $1.1 billion] after raising $225 million in Series D funding in July. 

With this round, the tech-heavy firm has grown credibility in the market, and the hiring of Laurence Tosi to its board, who helped Airbnb overcome rental unit supply demands as its CFO, has enhanced this. Since last August alone, Sonder’s apartment inventory has grown from 2,200 spaces in 12 cities to over 8,500 spaces in 20+ cities and is projecting its revenue to rise to $400m this year. 

Sonder’s founders say their success has also been underpinned by their collaborative approach to entering new global markets and technological infrastructure. It spends months studying zoning laws and building size requirements with experts before committing to new master lease deals to develop a good reputation within communities. Taking a consistent approach with technology to handpick properties and integrate innovative features like smartphone-only check-in highlights Sonder’s desire to set itself apart from competitors, including hotels. 

Simon Lehmann says Sonder and the like are benefitting from changes in consumer behaviour as demand for greater choice and experiences grows: “As hospitality offerings converge, consumers are looking for choice and places to stay that are individual from an experience point of view. It is more of an individual product than serviced apartments. The consumer behaviour and the urge for better travel experiences have brought that change.”

The idea of creating a heightened guest experience for the success of the master lease project is a view shared by Ben Davis, co-founder of serviced apartment real estate agents Saxbury

“Sonder hasn’t revolutionised the serviced apartment world but it has shaken up what was quite a bland corporate offering by presenting stylishly furnished properties in prime postcodes. Instant online book-ability is also beneficial in a marketplace which is notoriously high touch,” he says.

Therein lie the potential challenges for Sonder. Steve Milo, CEO of VTrips, maintains that rental arbitrage will have a detrimental impact as real investment trusts [REITs] want to “maximise their revenue and play Sonder off against competitors to get the best lease arrangement on their terms”. It may also find its gross margins do not expand rapidly enough before more players flood the category.

Not only is it clambering for bookings with hotel giants with much larger global inventories like Marriott [one million+ units], it is competing with tech and venture-backed startups that also want to reinvent the hotel industry. Among them, Stay Alfred and The Guild are raising significant funding rounds, while Airbnb participated in Lyric’s $160m funding round in April.

Taking inspiration from shared office space provider WeWork, Lyric leases a full floor of a building, refurbishes units and rents them out as ‘creative suites’, like at Manhattan’s Q+A Residential Aparthotel in partnership with Furnished Quarters. Despite having a relatively small inventory, it has raised $185 million to date since 2014, including a Series A round in 2018.

  • With stricter planning laws in the UK than in the US, what is the ideal model to inherit? New builds or conversions?

Ben Davis believes conversion is a better model to inherit as it is less costly and more viable under a master lease model with an unproven covenant.

He says: “Either route could require a fresh planning application and operators would ideally lease a custom-designed building, yet from a development viability perspective we’ve seen conversions to be more efficient and economical to fit out. However, this does require brands to show flexibility on brand standards and layouts.”

Max Thorne expands on this point by saying that operators and investors who choose an approach that includes a “multi-investment route to include lease, management and digital distribution into assets that are either existing, newly-built require conversion are most likely to be successful”.

In the US, laws are less restrictive, as evidenced by Domio, Lyric and Sonder moving into residential buildings and turning them into what Davis calls “pseudo-hotels” without making planning changes. In Europe, Davis says cities like London, Amsterdam and Barcelona provide more resistance to residential stock being “commandeered to be turned into holiday lets”. “We are advocates of the serviced apartment sector yet we favour fit-to-purpose, branded, licensed, purpose-built apartment stock rather than unregulated holiday lets because they detract from the local community,” he says.

Lyric and Sonder must navigate strict zoning laws to prevent a potential backlash triggered by Airbnb rentals. Sonder can only operate monthly rentals in San Francisco to comply with the city’s rental regulations, while in Minneapolis, it was forced to scale back plans after leasing 94 units of a 122-unit building from a developer as neighbours complained it was taking over the majority of the building.

In New York, companies have found a loophole to get around laws by taking over properties that are designated for hotel use and are operated as apartments with hotel-like quality, amenities and facilities.

Simon Lehmann underlines the importance of regulatory compliance for companies to survive: “Regulations need to be taken into consideration and it is different in every state or country. There is not a one-size-fits-all answer,” he says.

  • Will we see master leases in buildings that are currently empty or in mixed use developments, such as co-living spaces?

As the co-living model becomes more formalised, firms will start to see purpose-built spaces as viable alternatives to empty buildings. Speaking at SASEU, BridgeStreet COO Brian Proctor called the growth of co-living startups a “market game-changer” as they are reinventing the old model of serviced apartments.

The master lease model is already being pursued by a number of co-living operators and multifamily / hospitality combined brands like Sonder and Selina. Mickey Kropf says master leases are applied to “lease-ups, stabilised assets, co-living buildings and boutique hotels” where they apply to “entire buildings, floors or subsets of it depending on property status, market conditions and inventory needs”.

Creative structural solutions are essential according to Fran Milsom: “With such little C1 stock available, operators are having to be innovative with assets and strategies within those assets, especially in the London market.”

Nascent mixed use startups like The Collective are also latching onto emerging co-working / co-living trends where professionals want more flexibility to work remotely. Anyplace CEO Steve Satoru Naito says the co-living market is already worth $10 billion and could propel to $15bn by 2020 as remote work and nomadic lifestyles gain traction and demand for flexible housing rentals on short- and long-term leases soars. HoCoSo owner Jonathan Humphries agrees, saying firms must be more flexible in finding real estate solutions to suit a global, on-the-move workforce and the rise of the sharing economy has “highlighted the benefits of transforming assets into flexible serviced inventory without ownership”.

Ben Davis says it has taken a long time for the aparthotel concept to truly get off the ground in the UK because “from a developer’s perspective, it’s not easy to secure funding for a new build aparthotel without a guarantee of a master lease, and, crucially, a recognised covenant”.

Lehmann says this shows the challenges ahead: “Operators want to find the right asset at the right place with the best conditions. The co-working market is coming together and now co-living is an alternative. The return on invested capital will ultimately determine what a property is used for as long as it complies with regulations.”

The co-working, flexible space industry segment has also seen sharp growth in recent times, however firms such as WeWork differ in operating on standard leases on the basis of occupancy, licence or membership agreements, rather than using the master lease model. Co-working brands typically lease only a portion of amenitised, rentable space in an office building on a long-term basis before renting out to shorter-term occupiers in open desks or private offices.

Max Thorne says: “Living, working and co-living spaces are here to stay and evolving with the living elements diversifying again, with hotels, aparthotels, serviced apartments and poshtels scheduled to co-exist in the same mixed use developments.”

  • Will the bubble burst? How will the players all survive and do they need to differentiate themselves?

While the master lease model has seen explosive growth over the last decade since WeWork’s pioneering entry into the flexible sharing space market with a standard lease, it is unclear whether all of the companies I have discussed are sustainably built to survive in the long term, particularly in the event of an economic downturn that many of them are yet to experience.

Among the swathe of startups using the master lease model to disrupt the short-term rental market, being differentiated and gaining scale will be increasingly critical. Lyric and Sonder are two companies who have raised significant investment through funding rounds to establish themselves at the forefront of the market. Those who ultimately prosper in the long term will be those with the widest and most affordable selection of properties while promoting exceptional guest experiences that make travellers feel integrated into a community of people.

However, as T5 Strategies managing director and former BridgeStreet CEO Sean Worker discusses, companies should be cautious of high expenditure: “Each one of the models has merit measured by market acceptance. Regardless of the genesis of the problem each protagonist is trying to disrupt, the underpinning sustainable measure is the ability to procure favourable lease terms in ideal locations at a rate that contemplates expected market volatility,” he said.

Meanwhile, WeWork will face a number of challenges moving forward, despite the office-share boom. Many of its expenses are locked in for the long term but much of its revenue is not, so if the market becomes more competitive, renters will look elsewhere or demand better lease terms and losses will spiral. Though it is bringing in increased revenue [rising by 106 per cent to $1.8 billion in one year], its net loss has doubled to $1.9 billion over the same period. This and its reported $47 billion in lease liabilities suggest it will not make a profit anytime soon if ever, which will increase building owners’ wariness in leasing to co-working firms. In these events, the firm will either need to renegotiate its lease to become more affordable or accept working space limits to cover costs.

News that Japanese conglomerate SoftBank, which largely funds WeWork, is considering halving the office-share provider’s valuation to around $20 billion for its impending IPO should provide a stark warning to real estate tech startups not turning over profits with their master lease model that they should be valued accordingly as property companies and they will operate more sustainably if a downturn hits. For all this, supply and demand must be balanced for when a market shifts and investors come on board as “every market that goes up must come down”, according to Worker.

He added: “The winner is likely to be an ‘eyes wide open’ long-term model vs an ‘eyes wide shut’ get in: get out strategy. Near future volatility is highly probable – it may come down to scale up or consolidate!”

The master lease model will be one of the topics on the agenda at our upcoming events next year, including SAS Americas 2020 in June and SAS EU 2020 in July. For more information and announcements, click on the respective links provided.


Company summaries:

  • Sonder – launched in 2012


  • – Founded by Francis Davidson and Lucas Pellan in San Francisco
    – Received at least $135m in investment and expects to book about $250m in revenue in 2020
    – Uses tech to source properties and avoid signing duds – narrows down which meet local regulatory requirements for STRs – then furnishes units with items it sources and distributes via own warehouses
    – Seeks out new buildings and stabilises them with ‘exacting brand standards’
    – General manager of Sonder New Orleans, Peter Bowen, says Sonder’s model is like that of a ‘deconstructed hotel’, representing a different expectation of service


  • – Faces regulations in cities like New Orleans, which restrict short-term rentals to commercial zones, and Sonder is opposed to a proposal which would limit short-term rentals in commercial multifamily buildings to 25 per cent
    – In a competitive market with Stay Alfred as the next largest venture-backed firm, as well as The Guild, Domio, 2nd Address etc
    – Only 16 per cent of bookings were repeat or direct in March, meaning it could be expensive to transform Sonder into a recognisable hospitality brand, not just a tech-centred one


  • Stay Alfred – launched in 2011


  • – CEO is Jordan Allen, who is also the founder
    – Founded in Spokane, Washington and hit $25m in revenue before 2017 $15m funding round
    – Aiming to expand to 25,000 apartments in Class A buildings in downtown locations
    – Offers upscale travel residences in 30 downtown neighbourhoods (Dallas, Houston, Seattle and Austin) and has more than 1.5 million square feet under management
    – As part of a Stay Alfred master lease, property developers sign exclusivity clause so no multiple operators in same building


  • – Operates downtown units in cities like San Francisco, Seattle and Portland with skyrocketing house costs
    – Operates in the grey area between vacation rental firms and hotel operators so competition exists from both sides
    – Seattle has issued tax rules on short-term rental operators who rent out entire units, which prevents owners from renting out as if they were hotels


  • Sweet Inn – launched in 2014


  • – CEO is Paul Besnainou
  • -Raised $22m for serviced vacation rentals in May 2017, before setting up in London in July 2018, opening 26 serviced apartments in the capital
  • – Has now raised $48m in total
    – At SASEU, Besnainou predicted further consolidation taking place, with plenty of acquisitions in technology startups in Barcelona and bigger players such as Airbnb investing in the market
    – Offers a long-term lease with insurance coverage, renovation and restyling of the property by interior designers, day-to-day property maintenance and a thorough identification procedure upon check-in
    – Operates in 15 cities including Paris, Barcelona, Brussels, Rome, Lisbon, Tel Aviv, and Jerusalem, and its property portfolio consists of 700 apartments


  • – Focuses on mainly leisure travel market, not extended stay corporate residences
    – Has to pay fixed costs for upkeep on spaces that may sometimes go vacant and at a disadvantage in relation to upscale hotels in terms of economies of scale in customer service


  • Lyric – Launched in 2014


  • – Its co-founders are Joe Fraiman and Andrew Kitchell
    – In February 2018, it closed a $15.5m Series A funding round, and in April 2019, it received $160m from Airbnb in a Series B funding round
    – Targets modern business travellers between late 20s and early 40s
    – Designs and operates what it calls creative suites, which are spacious one and two bedroom premium studios


  • – It is smaller than its peers in inventory, though its total funding now exceeds bigger competitors like Sonder, The Guild etc
    – Lyric wants to become a large, independent hospitality company but questions remain over what happens when the Airbnb cycle ends and current margins are no longer around
    – Airbnb’s investment with Lyric not exclusive so it may yet decide to invest in competitors


  • Locale – Launched in 2016 in Austin, Texas


  • – Its founder is Nitesh Gandhi
    – Boutique accommodation firm specialising in short-term and extended vacation rentals and corporate housing
    – Locale secured $2.5m in seed round funding in April 2019
    – It has already expanded to Houston and Nashville and further expansion plans are in place in San Francisco, Santa Monica and Denver
    – Focused on delivering higher-quality experience rather than being the biggest short-term rental operator, with innovations such as automated check-ins


  • – Challenges remain the same as in hotels with regards to voice technology and the privacy and security over guests


  • The Guild – Founded in 2016 in Austin, Texas


  • – Co-founders are Chris Herndon and Brian Carrico
    – It is a boutique short-term rental and hotel operator that seeks to achieve a ‘branded integration within the community
    – Aims to target families looking to save money, long-term business travellers and groups of friends
    – More than 400 ‘hotel’ rooms in luxury apartment buildings in Austin, Dallas, Miami and Cincinnati
    – Rooms equipped with a full kitchen, in-room washer and dryer, high-speed internet and smart TVs, while guests have access to gym and pool


  • Facing challenges to compete with fellow disruptors which have smaller inventories but are entering the market with significant financial backing behind them. such as Lyric with Airbnb


  • Domio – launched in 2016, headquartered in New York


  • – Domio’s co-founders are Jay Roberts and Adrian Lam, with Roberts taking up the position as CEO
  • Domio had raised $67 million in funding as of November 2018, with a $12 million Series A funding round being led by Tribeca Venture Partners and SoftBank Capital.
  • Offers serviced aparthotel accommodations to group and business travellers
  • Operates in Austin, San Diego, Los Angeles, Boston, Nashville, Philadelphia, Chicago, Phoenix and New Orleans
  • Property openings are planned for London, Paris and Hong Kong in 2020


  • It is competing with other high-end luxury home-stay firms such as Airbnb for Work and Sonder
  • It has launched a 24/7 check-in on its platform to fulfil growing demand from its traveller demographics


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