Sonder appears to have broken out of the hospitality slump. As Covid-19 has pushed traditional hotel occupancy rates below 20%, shrunk airline demand by 95%, and all-but obliterated business travel—the short-term apartment rental company has closed a $170 million Series E round.
Fidelity, Westcap, and Inovia Capital led the deal that values Sonder at a post-money valuation of $1.3 billion—a slight up-tick from its Series D round last July. “It’s pretty extraordinary given the situation,” says Cofounder Francis Davidson, who appeared in the 2018 Forbes Under 30 list. “We pivoted our strategy toward temporary housing, took measures to get to a good financial place and a position to bounce back rapidly on the upswing.”
Sonder leases and renovates apartments in trendy city neighborhoods, and rents them to customers through Airbnb, Expedia, and its own site. Launched by Davidson and cofounder Lucas Pellen in 2012 as a way to rent vacant college apartments, Sonder’s portfolio has grown to a massive size. Today its 1,000 employees manage more than 12,000 rooms across 28 cities and six countries. Sonder signs 3-5 year leases, often partnering with landlords to occupy full floors. To avoid getting squeezed during downturns, Davidson says contracts include provisions that drop rates when times get tough—many deals included a recession clause that decreased rents by 8% during the pandemic. While other home-sharing companies have run afoul with city lodging regulations, Davidson says his properties either have hotel licenses or are in buildings that allow for short-term rentals.
Sonder aims to deliver a professional and predictable accommodations in the notoriously spotty home-share market. Its apartments feature luxury hotel perks like modern design, professional cleaning, fresh towels and toiletries, and an app-based concierge. In short, Sonder gives users a hotel room experience without the rest of the hotel. “They offer a consistent experience that people can rely on,” says Lawrence Tosi, the founder of venture firm WestCap, who was previously the CFO of Airbnb. “They are masterly designed, easy to get to, can buy with one click, and bigger than hotel rooms.”
But during the depths of the Covid-19 crisis, the rooms were a struggle to sell. Sonder’s occupancy, which typically topped 80%, plunged below 40%. Revenue plummeted. Davidson quickly slashed prices, unloaded nearly 2,000 underperforming properties, and furloughed or let go 400 employees—a third of his staff.
For Davidson, the cuts were painful but look to have paid off. Thanks to a new focus on temporary housing, shrewd leases, and properties with Covid-friendly amenities, Sonder is on the rebound. While many of its well-funded rivals like Stay Alfred and Airbnb-backed Lyric have folded, Sonder’s occupancy rate has returned to its pre-pandemic level of near 80%.
Previously focused on jet-set millennials traveling for fun or business, in February, Davidson quickly shifted his marketing to target people displaced by the virus. Sonder offers deep discounts for longer bookings—say 40% off for two-week stays. The demand for temporary housing has come from college students shut out of dorms, workers looking for better work-from-home set-ups, and families in between moves. The apartments have also been a refuge for frontline medical workers looking to avoid infecting their families, and customers escaping Covid hot-spots for cities less hit by the virus. “We acted fast to create a new landing page and marketing for people that wanted to socially distance, work from home, or needed housing,” says Davidson. “We created an impromptu sales team to work with medical companies and traveling nurse organizations.”
Sonder’s product is suited for social distancing. Its rooms are in residential buildings, away from busy hotel entrances, staff, and other guests. Thanks to its app and digital door locks, users check into rooms without any in-person interactions. And as Covid has quashed once-attractive hotel perks like room service, spas, gyms, and lounges, Sonder properties offer critical quarantine amenities: most have large living spaces, kitchens, washer/dryers, and reliable wifi. A professional service cleans the apartments between guests. “People want to isolate. Sonder gives you contactless entry and lets you avoid lobbies and people,” says WestCap’s Tosi. “Because they have kitchens, you can go to the grocery store and sustain yourself. For medium-term stays, it’s the perfect fit.”
Making guests feel comfortable and safe is crucial. “Extreme cleanliness is table stakes right now,” says Davison. Many Sonder locations now offer hand sanitizing stations and in-room health kits. Other Covid changes include listing outdoor activities like hikes to the Sonder concierge app, a delivery partnership with Postmates, and deals with nearby garages as most guests now travel to Sonder’s via car.
After hunkering down through the worst of the corona-recession, Davidson is now focused on growth. Sonder is now flush with cash (it has authorization to raise an additional $30 million in the coming weeks) just as the urban real estate market goes on sale. “We’ve survived the crisis, are one of the only players left standing, and many people in the real estate industry are hurting,” says Davidson, “It’s now an even more attractive environment to grow the company and be a hospitality disruptor.” Davidson, who uses data from Airbnb and Expedia to target neighborhoods popular with customers, will use the new capital to lease and modernize more locations. One of the hotel-alternative’s targets: independent hotels. “Hotels are hurting right now. People aren’t comfortable staying in places that aren’t part of a big brand and haven’t been renovated for a long time,” says Davidson. “We have a chance to partner to bring our design, operation, and technology to make them more efficient to run and attractive to guests.”