Frontdesk, a once-promising short-term rental property management company with 1,000 units across 30 markets, closed its doors on January 2, 2024. It strategically acquired units from similar businesses like Stay Alfred, Lyric, and Domio. With $26 million in VC funding and industry accolades, FrontDesk seemed poised for success but faced risks inherent in its business model. These risks included increased leasing costs and decreased rental yields. The challenging market conditions in 2023, marked by higher interest rates weighing on debt servicing and reduced VC funding, further contributed to its downfall. This raises questions about the viability of the arbitrage model at scale in the short-term rental industry and the ongoing debate about its valuation as a tech or real estate company.
Who was FrontDesk?
Frontdesk, a company founded in 2017, quickly became a major name in short-term rental property management. It offered a large selection of furnished apartments across the U.S. The company had also developed its own tech stack and was thus sometimes classified (and valued by VCs) as a PropTech.
Despite growing rapidly and managing over 1,000 units, Frontdesk faced financial challenges and had to close down. CEO Jesse DePinto announced the closure and layoffs, emphasizing the company’s achievements like significant revenue growth, hosting 700,000 guests, and expanding to over 30 markets. However, they couldn’t overcome funding difficulties, ending their journey in the industry.
The Unexpected Closure of FrontDesk: A Company Once Deemed a Pandemic Survivor
A pandemic survivor who picked up the pieces of the likes of Stay Alfred, Lyric, Domio, and WanderJaunt
FrontDesk, once seen as a shrewd survivor of the COVID pandemic, was expected to reap substantial benefits from the misfortunes of similar businesses. During the pandemic and into 2022 and 2023, it strategically acquired units, including building leases and apartments, from struggling companies. In 2020, FrontDesk took over 77 units across three cities from Stay Alfred, Lyric, and Domio as these companies either folded or underwent significant restructuring. The company continued this trend in 2022 by acquiring 33 units from WanderJaunt, another unsuccessful venture. The acquisition spree didn’t stop there. In 2023, ZenCity became its latest conquest. This deal marked the beginning of a series of planned acquisitions by FrontDesk and expanded its short-term rental portfolio by over 200 apartment units across three markets.
VC money from JetBlue Ventures
FrontDesk had managed to raise an impressive $26 million from venture capitalists. Its investors included prominent names like JetBlue Ventures, Veritas Investments, and Sand Hill Angels.
Skift, Phocuswire, and PropTech Breakthrough gave FrontDesk accolades in 2022 and 2023
FrontDesk’s innovative strategies and resilience were recognized with several accolades in 2022 and 2023. In June 2023, it was listed in the Skift Short-Term Rental 250: Mapping the Rental Vendor EcoSystem as one of the industry’s Top 250 Short-Term Rental Companies and Top 10 Urban Rental Managers. The previous year, it was named “Short Term Rental Platform of the Year” by PropTech Breakthrough. Additionally, it was featured as a Phocuswire Hot 25 Startup for 2022.
Similar Fates in the Industry
FrontDesk joins the list of similar companies, such as StayAlfred, Domio, Lyric, Zeus Living, The Guild, and Wanderjaunt.
Stay Alfred had grown to operate 2,500 apartments across more than 33 U.S. markets. It announced its permanent closure on May 21, 2020. The closure resulted from the global lockdown caused by the coronavirus pandemic, which severely impacted the business. Despite attempts to secure new funding of up to $30 million as recently as March 2020 and strategies to minimize operations, the lack of investor interest and the pandemic’s adverse effects led to the company’s downfall. Stay Alfred had raised around $60 million in funding, with its most recent round in October 2018.
Risks of the Business Model
Companies such as FrontDesk or Zeus Living (which closed in 2023) operated in the short-term rental market, focusing on leasing properties, furnishing them, and then renting them out. This model demands significant capital for leasing and furnishing costs and is reliant on consistent rental income.
- Increased Leasing Costs: Companies like Zeus Living leased properties to furnish and rent out. When interest rates rose, the overall cost of real estate increased, leading to higher leasing expenses. This increase directly impacted their operational costs, as they had to pay more to lease the properties they then furnished and rented out.
- Decreased Rental Yields: A downturn in the real estate market often leads to lower demand and thus lower rental prices. For these companies, this meant the income they could generate from renting out furnished properties was reduced. Since their business model relied on the difference between leasing and rental prices, any decrease in rental income could significantly impact their revenue.
- Rapid Scaling Challenges: Aggressive expansion requires substantial resources and can strain a company’s operational capacity. For these companies, rapidly expanding their portfolio of properties meant managing more locations and higher costs, which could lead to inefficiencies and financial strain, especially if the expansion outpaced their revenue growth.
- Investment Dependency: Relying heavily on continuous investor funding can be risky. If market sentiment shifts, leading to a decline in venture capital, companies like FrontDesk, which depended on these funds for expansion and operations, could face financial challenges.
- Complex Operational Demands: Managing a large portfolio of rental properties across various locations involves intricate logistics. This complexity adds to the operational challenges, requiring robust systems and processes to ensure efficient management, which can be a significant strain, particularly for startups.
- Financial Infrastructure: Inadequate investment in financial management systems can lead to challenges in managing cash flow, payables, and receivables. For startups in the real estate sector, where transactions are large and frequent, having a strong financial infrastructure is crucial to maintaining financial health.
2023 market conditions did not help:
- Interest Rates and Real Estate Downturn: The higher borrowing costs and a cooling real estate market significantly impacted these companies, particularly FrontDesk, which had accumulated a considerable amount of debt. The rise in interest rates meant that the cost of servicing this debt increased, further straining their financial resources. This, combined with their reliance on property leasing and rental income, made the market conditions particularly challenging.
- Reduced VC Funding: The decline in venture capital interest in the proptech sector made it difficult for these companies to secure necessary investments for their operations and growth.
- Uncertainties about Remote Work: The demand for short-term rentals catering to remote workers might not have sustained at the levels expected after the initial surge during the pandemic, affecting market expectations and rental demand.
Sustainability of the Arbitrage Model at Scale
The downfall of companies like FrontDesk, Zeus Living, and others raises a pivotal question about the viability of the real estate arbitrage model at scale. This model, involving leasing properties and subleasing them at higher rates, has shown both promise and pitfalls. The recent failures suggest that while the model can be profitable in specific market conditions, it might struggle under economic stress, increased competition, and shifting market dynamics. The sustainability of this model at a large scale remains uncertain, and its future may depend on the ability of companies to innovate, adapt, and manage risks more effectively in a changing economic landscape.
Tech, Short-Term Rentals or Real Estate? The Valuation Dilemma
The classification and valuation of companies like FrontDesk in the tech sector is a topic of considerable debate. FrontDesk, along with similar entities in the short-term rental space, developed proprietary technology stacks, leading some to categorize them as tech companies. This classification implies a higher valuation, often seen in the tech industry due to scalability and innovation potential. However, their core business – leasing and furnishing properties for short-term rentals – aligns more traditionally with real estate operations, which typically command lower valuations. This dichotomy raises questions about the most appropriate and fair ways to value such hybrid companies, balancing their technological innovations against their real estate-centric business models. The debate continues as investors and analysts seek to reconcile these aspects in a rapidly evolving market landscape