The blending of apartments and hotels has been one of the biggest real estate trends of the past decade. And this episode’s guest, Roman Pedan, co-founder and CEO of Kasa, has had a front row seat.
This episode is a wide-ranging conversation covering the future of multifamily, the role and evolution of flex rentals, and technologies on the horizon that have the potential to overturn real estate conventional wisdom.
We’ll also discuss how Kasa has navigated the tumultuous post-pandemic years, which have seen a number of flex rental operators struggle and fail, as well as how real estate owners should approach innovation and the capital markets.
Roman is one of the most thoughtful real estate entrepreneurs I know, so you won’t want to miss this conversation.
As always, you can listen (and watch the video!) here on Substack or on the following platforms:
If you’d like to hear more like this, make sure you subscribe to Thesis Driven on these channels or here on Substack!
Season Two is made possible with the support of Neutral. Neutral is redefining multifamily real estate with a focus on sustainability, resident health and well-being. For example, Neutral is building the tallest mass timber and Passive House residential building in the U.S with a state-of-art wellness club in Milwaukee. Beyond environmental impact, Neutral offers investors access to substantial sustainable tax credits and deductions. Accredited investors can explore available opportunities at invest.neutral.us or connect directly with their team to learn more.
We’re back here next week with Sean Sweeney of Hall Sweeney Properties.
—Brad Hargreaves
The following transcript is automatically generated. Please forgive us for any errors or misspellings.
Brad Hargreaves: Hello and welcome to Episode 2, Season 2 of the Thesis Driven Leader Series. I'm Brad Hargraves, founder and editor in Chief of Thesis Driven, and we have a really fun episode for you, so thank you all for listening in and joining. We're gonna be welcoming Roman Pedan, the founder and CEO of Kasa to the show here today.
Kasa is really a survivor in an industry that has had substantial thrash and ups and downs over the past five years. That is the short term rental sector, flex term rentals. People use different names for it, but it is really fundamentally about taking apartments and converting them into more flexible, more short term stays.
And as I said, this has been a sector with a lot of thrash, a lot of interest but also some real challenges. A lot of people are familiar with Sonder, had ton of success in the years prior to the pandemic. Got hit pretty hard, raised a ton of money at a very high valuation. Went public through a SPAC in 2021, and has been really on a challenging journey since then.
But I said survivors, but Kasa is not just a survivor. They've really thrived in this environment. They've taken this model of taking apartment inventory, now increasingly hotel inventory as well, and converting it to this flex furnished model. And they've had a tremendous amount of success doing that.
They just raised $75 million in fresh capital a bit over a year ago to solidify their dominance of this space, and it's thinned out a lot. There have been, as I said, a lot of failures here. But Roman is one of the most thoughtful founders I know in real estate tech writ large, certainly in operating businesses.
So we're gonna talk about a wide variety of topics from, you know, the journey of Kasa and the flex day environment to what's going on in the market right now. We're gonna talk a little bit about cities, urbanism, real estate, tech management, all the above, so it's fun conversation. Before we get into it, I did want to thank our sponsor Neutral.
They're a developer that focuses on sustainable construction and sustainable development isn't just good for the planet. It's very financially beneficial. Neutral is building institutional grade multifamily projects with mass timber that meet the industry's most rigorous certifications, including passive house, living building, challenge lead, and energy star.
So they're able to do this by leveraging sustainability tax benefits Section 48. 45 L 1 79 D. So it passes those savings then onto investors, sometimes up to 60% of the investment value in additional deductions, so it's both about doing good and about generating a great return in multifamily investing.
You can explore Neutrals investment offerings at invest.Neutral.us. They have a visual calculator on there to simulate potential returns. Verify your accreditation. End track portfolio performance. You can also reach out to them very directly. They're good friendly people. I know them well. Emailing their investor relations team at invest@Neutral.Us.
So thank you so much to Neutral our sponsor for making season 2 possible. So what you've been waiting for, let's dive in. Would love to welcome Roman Pedan here to Thesis Driven Leader series.
Brad Hargreaves: Roman, thank you so much for joining the Thesis Driven Leader series, really excited to have you on the show.
Roman Pedan: Long time listener. First time caller. Thanks for having me, Brad.
Brad Hargreaves: Amazing. Look, so let's just start by giving a little bit of the state of the union here on the flex rental sector.
So obviously you started Kasa in 2016, only a year after I started Common in 2015, so I am somewhat familiar with the arc of these spaces, but a lot has happened since 2016. Particularly the past couple years, what's been happening in the flex rental sector? What has changed?
Roman Pedan: Yeah, so when I started the business in 2016, there was a ton of energy behind flex rentals and it was palpable because the demand drivers for what we're building were really significant. You could feel the need for more flexibility in the world.
You saw the rise of Airbnb, and it was an imperfect answer to a cry for help from consumers who are looking for something different in hospitality and weren't finding it in the traditional hotel brands. As a result of that energy, this was one of the most competitive sectors in PropTech.
There were probably 20 companies that all looked and smelled very similar building towards an inevitable future of people wanting a hotel brand that felt like Airbnb meets Hilton. And then 2020 came. There was this cascade of 10 plagues that hit the industry, a bunch of interconnected, but independent ly mass extinction level events that occurred.
COVID, of course, decimates travel. These businesses are the beneficiaries of travel. Then we saw out of COVID a tremendous amount of rent growth and the lowest vacancy in the history of multifamily. That hurt this industry because we're solving, we're converting vacancy to cashflow, and when there's no vacancy and when the market in multifamily is in euphoria, we're not solving a problem. Then the tech bust, and interest rates went up, just as the PropCo is becoming in vogue.
And as a result of the 10 plagues, the mass extinction events, what was a very intensely competitive space really winnowed out. We are really proud to have persevered, to have grown stronger and emerged in many ways as the proven industry standard out of that. And when I step back, I'm like, these 10 plagues are separate from the macro trends that have been fueling the industry.
I look at today and I see the most opportunity that we've ever had and the least competition. You asked what has been the arc? What has changed? I think of 2016 when I'm sitting there on my birthday just thinking about starting Kasa, dialing up owners, asking them, begging them, can I run a small hotel in your apartment building?
We massaged the messaging since then, but I was getting a cascade of nos. I'd previously been at KKR and I thought that my relationship with the real estate world would've made it much easier to get the first yes. And it was like a devastating cascade of nos. Airbnb was a dirty word.
We really struggled to find the first property to work with. I remember sleeping on the floor of that first property to get it furnished. I remember leaving class, I was at business school at the time to answer guest calls, 'cause we didn't have any infrastructure. We signed leases at the time, 'cause we needed the simplest agreement that would allow owners into allowing us to operate in their buildings. We operated scattered inventory within apartment buildings. It was less purposeful. There was no signage. We hid the fact that we were in the building from the long-term residents, 'cause we were worried that would have a negative impact.
That was 2016. 2024 as the plagues hit, the competition receded. Now we're in early 25, we delivered last year what I think is a symbol of the progress that we've made. So we partnered with Toll Brothers and Prudential to deliver a really beautiful property in Little Italy, San Diego, where Kasa's several floors of a larger apartment building purposefully built with our furnished rental use in mind to work really well with the long-term unfurnished rentals. It's beautifully designed. We're in a asset light agreement with them, a management agreement. We have full floors rather than scattered inventory throughout the building. We've really thought about how to ensure that the units are not a thorn in the side of the long-term residents, but are actually an amenity to those residents and we're seeing that in the data.
That's been the journey. It's certainly been hard fought. The team is battle hardened, but I'm really proud that today we're trusted by many of the most discerning owners in real estate who take their time in picking partners like Starwood Capital, like Greystar, like Berkshire, like Toll Brothers and many others.
I'm most proud that many of our properties, because they now are more purposeful, because the way that we design them really fits with the rest of the property, our properties are ranked really well and have great reviews. We're the number one property in a lot of cities on TripAdvisor in Chicago, Denver, Austin, San Diego, et cetera.
It's been a crazy arc and I'm proud to have emerged as the industry leader.
Brad Hargreaves: So I love the 10 plagues metaphor here, because I think a lot of people looked at this space and adjacent spaces, including coliving and said, "ah, the pandemic had to be really hard," or " Ah, there's rise in interest rates. That's brutal." But it wasn't any one of those things. It was actually how quickly the market moved between those things. It forced companies to be very adaptable because the business model, the go to market, the value proposition that worked during COVID when we were, in Common locations putting up, traveling nurses and people who were trying to separate get distance from each other versus what worked during a high interest rate environment versus what worked when rents were ripping -those are three totally different value propositions. Being able to transition quickly between four or five different market situations in three and a half years that was the hard part.
Roman Pedan: A hundred percent.
Brad Hargreaves: Congrats on the building in Little Italy. Awesome neighborhood. Great asset. The one thing I wanted to drill into though, you did an excellent writeup in Thesis Driven about a year-ish ago, I think it may been the end of 2013, focused on exit cap rates of short-term rental units. The problem here with co-living, with short-term rental has never really been getting them built necessarily as, what do they trade for once they're built and yeah, okay, they're gonna generate higher NOI than the alternative use. I think that's an established thing right now, but then what does that NOI trade for? What have you seen over the past year? Has it evolved at all since you wrote that piece really arguing for more multifamily like cap rates in the market?
Roman Pedan: I appreciate your embracing my inner nerd and allowing me to write that.
Brad Hargreaves: It was a very detailed piece.
I don't think we have ever or since allowed someone to argue for their own sectors cap rate compression in Thesis Driven. I've had several people come to me after that was written and they were like, can I write this article arguing about cap rate compression in my sector for Thesis Driven?
I was like, no, you can't do that. And they're like, but you let Roman do it. And I was like, are you going to bring the level of detail and quantitative analysis in 4,000 words that Roman brought... and then they don't respond to my email.
Roman Pedan: I was waiting to write something that included the Gordon Growth model in it, and I finally had the opportunity to do it.
Look, we were getting this question from owners. Any time there's a newer asset class or a newer way to use existing real estate the big elephant in the room is going to be, how will this be valued at residual? Because so much of real estate value is in the residual. A cap rate shift can overwhelm operating performance in a meaningful way, as I learned when I was an investor, both in the positive when interest rates are dropping and in the negative today when the interest rate environment is less predictable.
The reason I wrote the paper is a lot of owners, when they heard that we would be operating hospitality within a multifamily context, they knew instinctively that hospitality trades at a higher cap rate, and so they would then just assume that the property would trade at that higher cap rate. The main thesis behind what I wrote, I borrowed from some of the savvier owners who started telling us the way that they were thinking about evaluating the cash flow and how they came to a more nuanced conclusion by measuring the underlying riskiness of the model we were bringing to their buildings. That basically were telling us, "look, I am excited that you can generate more cash flow in my multifamily property by running it furnished and any length of stay. Frankly, in a new development, you create much more cashflow earlier for me than I would've made during the lease up period, which would take 20, 24 months. At stabilization, I love that it makes me more money than a multifamily cashflow. I can always switch you back to multifamily."
And so the underlying risk for us is actually multifamily risk. So let's say that you're generating $4 a square foot with your model, and I could have made $3 a square foot with multifamily. Well, $3 a square foot is multifamily risk, so that's a multifamily cap rate. And then maybe the extra dollar, which I couldn't replace if I backfilled the space as a traditional unit, that's hospitality risk. You're actually driving higher margins and a longer length of stay, so it's actually like hospitality that's shifted towards more multifamily type margins and risk.
The owners that understood this got a fairly meaningful competitive advantage. It's obviously to our benefit to spread that word because we were one by one hearing it from owners and we're delighted. Once I heard it from the first owner, I realized that was the right approach to valuing the space and then started sharing it more frequently.
I think it's still a competitive advantage to an owner who recognizes this. The problem with answering this question is you can answer it from first principles as I did in the paper, but ultimately the proof is in the actual trades and trades take time.
This is why early entrants into an asset class who can understand the first principles and feel very confident around the ultimate conclusion that the empirical evidence will show in the trades , they get a competitive advantage, 'cause initially there's like a skepticism discount.
Brad Hargreaves: That's cap rate compression, right? Isn't that the essence of it? Right?
Roman Pedan: Yes. It's not a definitive answer to this, but the building evidence is that when we're in the properties, there is no cap rate change to how, the property trades. Now we're 10% to 20% of the building, typically. For 100% of the building, there is likelier to be a change, but it will be the valuation framework that I laid out where you can always backfill as multifamily with minimal switching costs, and apply a multifamily cap rate to that portion of cash flow and hospitality just to the increment.
As much as equity is the important piece here, the lender piece is the one that matters as much. Lenders are increasingly realizing that this strengthens their underlying collateral, because instead of having one demand stream that they're lending on, they now have two relatively uncorrelated streams, which is important. If they were correlated, it wouldn't be diversification for them. As a result, they're seeing value in lending to buildings that can, if multifamily rents drop, add in more hospitality. If hospitality is low in demand, adding more multifamily creates resiliency in the underlying NOI stream.
The lenders often drive the cap rates because there's such a high percentage of the capital that comes into the sector. We're seeing some really large issuances of either CMBS or life co's that are lending to products that have furnished rentals in the same way as they would for a multifamily, but it's still a developing story.
I don't wanna overstate the level of certainty in this outcome, versus eight years ago when the sector was just beginning, it's now become real. It started as a trickle of trades and now there's more of a torrent of trades.
Brad Hargreaves: So let's go back to this asset in San Diego you were telling me about at the beginning. You talked about it being purpose built. You've got a chunk of floors, that's great, really lets you get across what you're doing. Obviously part of the argument of the cap rate model here is that it is easy to convert back to multifamily.
When you think about purpose built in the context of Kasa and short-term rentals, flex rentals, what does that mean to you? When you're purpose building here, you have four floors to do whatever you want, how far can you push that in terms of design modifications?
Do you wanna push it in terms of design modifications before it gets unpalatable to lenders and those cap rate concerns start coming up?
Roman Pedan: Yeah. When I say purpose-built, I am referring to ensuring there's the right signage package in the building that creates a real sense of place for the guests who stay.
That's how you set up the parking in the property to better serve the furnished rentals and the unfurnished rentals. It's how you create a really seamless access experience for that first moment of arrival. It's light touches in the lobby for luggage storage, which allow for a seamless departure experience. It's signage on the floors where there's furnished rentals.
In the traditional apartment inventory, the way it's designed, you don't need to change the actual physical makeup of the unit. If you were to value engineer the units for furnished rentals, you can make the closet smaller, because people who are staying for seven nights or a few weeks don't need as large of walk-in closets.
You can increase the amount of living space, maybe maximize bedroom count because people care about how many guests can stay there. Families certainly wanna separate bedroom for the kids, that kind of thing, but you don't need to do those things if you're hyper-focused on convertibility back.
And obviously our goal and our experience has been that the owners don't wanna convert back 'cause there's such a economic pull towards generating the cash flows that we generate. But if you want to insure it, the most important part is keeping the units in a state that can be leased long term. The switching cost of the signage is not very high, but ensuring that it's there, creates a real sense of place.
Brad Hargreaves: Yeah, and dedicated floors unlock that and that makes a lot of sense to me. And noted on kind of the closets and some of the other small modifications make sense. I'm curious, what are the biggest mistakes we made at Common when we were growing is, probably from the period of 2016 to 2019 - 2020, just going into too many markets which adds operational complexity. It means you need teams in all of those markets. When you're growing and the mindset is grow, it makes sense. Someone offers you a building in San Diego and you're like we'll be in San Diego eventually. We have an opportunity here to add 50-100 units in San Diego. Let's go take it. I'm curious how you're thinking about that tradeoff in geographic expansion? So how many markets is Kasa in today?
Roman Pedan: Yeah, so we're in about 40 US cities today.
Brad Hargreaves: That's a lot of markets. Your economics, your take rate is higher than Common. We were doing more multifamily, but I'm curious how you think about that trade off of going into more markets and the operating infrastructure you need in those markets?
Roman Pedan: Yeah, and it's interesting. As we were building the business, we're always trying to answer questions. I like this model of an onion of risk around the business, and you're constantly trying to peel the onion and reduce the risk by answering core unanswered questions about the business, that if untrue, would be real problematic. One of the questions was, can we convert from a lease model to a management agreement model? We knew that doing that was really important for the durability of the business, for our owner partners and for ourselves.
We saw the history lesson from hospitality where hundreds of companies have been built on the management agreement model, but almost to the individual company, master lease companies did not make it through for a variety of reasons. And so that was one layer in the onion of risk.
Another layer is, and we heard this often early in our building Kasa, was " Hey, this works in Market X. Does it work in market Y? We grew to more markets, partially to answer that question and partially because we were very partner led in our approach. And so our partners - Starwood and Cortland and Berkshire - our approach is to sign a master services agreement to build trust over a long period of time and then to expand across portfolios.
They have national portfolios and they'd ask us to expand to more and more markets. We now have very good geographic coverage. And so our MO right now is to go deeper, rather than wider, partially because of the fact that we have coverage, partially because we've answered the fact that this works.
Brad Hargreaves: I'm like curious about the kind of investor who's yeah, this works in, 29 markets, but is it gonna work in Cincinnati? Like really?
Roman Pedan: There becomes a lower marginal return to the amount of risk we're reducing by answering the next markets question.
Brad Hargreaves: Sure.
Roman Pedan: No doubt. Now, there is a benefit to a travel business to having a network of many locations that an individual who stays with us in San Diego than wants to repeat in Chicago and Miami and Boston. There's a real benefit to scale and geographic diversity that benefit, by the way, during COVID was very helpful.
Because we weren't in one market, we were able to adapt really quickly to the markets that worked and were getting a lot of signal from those versus ones that were not going to recover as quickly. What we've done in terms of the technology we've built is try to take the complexity of having lots of markets and simplify that to the greatest degree possible. Which isn't to say that adding more markets doesn't add complexity, it's to say that it adds a significant amount less complexity to us than a traditional hospitality operator. The reason why that's the case primarily is we centralize a lot of the work that otherwise would have happened at the market level.
Things like revenue management, accounting, corporate and group sales, a lot of process that otherwise would require more on the ground staff. And then our model is a lot more self-directed for the guest. It's perfect for the independent traveler where you check in and you go straight to your room.
You have a keypad entry code and a door code for your Kasa. That also reduces the staffing at the market level, which isn't to say that you don't add complexity by adding more markets, it's to say that you add less complexity for us than you do with a traditional hospitality operator.
That allowed us the superpower of going a bit wider than most, and for the last year or two, we've been focused on going deeper into existing markets 'cause there's a deep amount of demand within those markets. Having the beachhead in those markets actually gives us credibility and data with owners to speak to the performance that we have in the properties that we operate and allows us to build scale and density and complexing at the local level.
Brad Hargreaves: Awesome. On that note of expansion, one interesting thing I saw recently is Kasa get into the management of more traditional hotels. Tell me more about this. Are you competing with Aimbridge out there creating a hotel management company? Help me understand that.
Roman Pedan: What we're doing in the apartment hotel world was and is hotel management. We are a hotel operator. The difference between a traditional hotel and an apartment hotel is the kitchen and living room, but if you think about the backend systems, if you think about all the work, the jobs that need to be done to deliver hospitality, those jobs are very similar between the traditional hotel and an apartment hotel.
So the reason we went into hotel management was out of the 10 plagues that I referenced earlier. There was a moment where there wasn't a great need for us for apartment owners. In 2020 and 2021, RevPAR, or revenue per available room, in the hotel parlance dropped dramatically 'cause people weren't traveling and at the same time, RentPAR, the rents went up at the highest level in recorded history because of the stimulus that went into the economy and the lack of building that happened during 2020.
At the same time, hotel owners were struggling deeply. Their revenue was down and their costs went up as labor was quite scarce. We had this real pull from the hotel market that we were pretty hesitant on. I remember we had a leadership meeting. We were like, we should stay focused on apartment hotels.
We shouldn't do hotels. And then we said, fine, let's try it. We're gonna give it our best, if it doesn't work, we will decide this isn't right for us and we did. We signed our first hotel in July or August, 2020. What we found is the model worked really well.
Brad Hargreaves: Are they branded Kasa?
Roman Pedan: Yeah. So Kasa means home. Kasa's our apartment style properties. The hotel properties are powered by Kasa or they're by Kasa. They keep their local identity. They're connected into the network of properties that we operate.
Brad Hargreaves: So you can book one on your website?
Roman Pedan: You can book one on Kasa.com and it'll be very familiar to you. If you stayed in an apartment style property and you book a hotel style property, you'll see how they connect together. The experience is fairly unique relative to a traditional hotel.
You're doing self check-in, you're texting us if you need something. We call it hospitality that's rarely seen, but always felt. It's the kind of hospitality that's in demand by the modern traveler, but not really available. So yeah, you can book it on Kasa.com, but the name of the property will be the local identity of the property.
Brad Hargreaves: Got it. Zooming out a bit, macro trends in the flex rental sector. Obviously the last five years really saw a lot of thrash. Probably four or five different kind of microeconomic climates within the past five years. What do you foresee for the next five years? Is it going to be smoother sailing? What are the macro trends you're watching right now in the flex rental sector?
Roman Pedan: Yeah. I couldn't be more excited about where we sit right now and looking forward into the future. As I said, the competition has receded and the opportunity in my view is greater than ever.
Now we're prepared to be punched in the face 20 more times if we need to be. If I learned anything from the last five years, it's that I should not predict that it's gonna be sunshine and rainbows looking forward. So I'm not saying that's the future, but if I look up at the sky, it does feel as though there were a lot, there was like a hurricane that maybe is has passed and there is a little bit of more sunshine.
There's trends behind what we're building that feel more true today than they did even when I started the business. Mega trends around people wanting a more reliable version of Airbnb. You can see it on Twitter and X where people are complaining about certain experience where they want that space, but they can't stomach their best or worst experience being on Airbnb. There was a obvious rise is flexible living. There's a little bit of a pullback in terms of back to the office, but if we're to look as to the direction of how people work long term, it's towards more flexibility.
No doubt tools will get better. The access to talent for folks who embrace flexibility is going to only get better. We're seeing in the data people taking extra days when they go on a work trip and staying in the city. They want a more comfortable home-like place to stay.
The mass immunization of like apartment buildings, more apartment buildings feel like hospitality offerings and this trend of experiences over things which fuels all travel. And frankly, as I think about what AI will do, it will eliminate all the mundane tasks in our life and open up more time for things that take the same amount of time, whether AI exists or not, which is traveling to a place, having a conversation. That will be a trend towards people wanting to experience more things when they don't have to do a lot of administrative stuff at their desk. And then the rising cost of labor, frankly. I think you wrote a piece on not just growth declines, but population declines 'cause of a lack of immigration and a falling birth rate.
The supply demand imbalance of labor will continue to increase the cost of labor and what we're doing in a lot of ways is lowering the cost structure of operating hospitality. There's never been a greater need for that than there is today.
And if I look 5, 10 years into the future, something would have to drastically change away from trend for future hoteliers to not need a lower cost way to operate their properties than today and it's already an acute problem.
Brad Hargreaves: Yeah, so it's interesting. I wanna talk about Airbnb for a second because as much as Airbnb is a now massive and established company and kind of the largest, if you can call them, PropTech company. I feel like it's still a little bit of an open question of: is Airbnb alpha or is it just pure beta on a hospitality experience? Kinda a weird use of terminology, but it's obviously more variable than booking a hotel. Is it objectively better? So one, how dependent on Airbnb are you, and two, what's your outlook for Airbnb as a platform?
Roman Pedan: I'm a big fan of Airbnb's, and obviously it served as a portion of inspiration for starting Kasa. In fact, I don't think I've shared this, but I wrote a letter when I first heard about Airbnb in 2010, or maybe in 2011 I was so inspired that I applied to work there. I snail mailed a letter to Brian Chesky.
Brad Hargreaves: Amazing.
Roman Pedan: I've looked back at it. I'm like a little embarrassed. One is looking back at old writings of themselves, like an echo of yourself that you don't recognize as much anymore, but I've always really connected with the idea of using space more effectively and sharing resources that are fixed with more people, and so Airbnb really helps to do that. They're a great partner of ours. They do drive demand into our properties. I view them today as a OTA, an online travel agent, right? Similar to Expedia and Booking.com.
They're one of our sources of demand, they're not our largest. Kasa.com is our largest source of demand, but Expedia and Booking.com are meaningful sources as well. I think about us relative to Airbnb. I think like eBay is to Amazon as we hope to be to Airbnb, where eBay is this amazing business that opened up the world of really well priced and abundant options of goods, but they weren't quite reliable in what you were gonna get or when you were gonna get it, and Amazon came along and because they were a managed marketplace, they controlled their inventory. They gave you the everything store, so a lot of options at reasonable prices, but you knew what you were gonna get and it was gonna happen and be delivered in two days.
Our aspiration is to deliver that reliability that I think a large set of consumers deeply care about. They want to have great options. They want reasonable prices, but they want to know that their important trip with their family is going to not have a midnight lockout or a WiFi will be down, or maintenance issue when the person's in a meeting who's hosting them.
Airbnb has a lot of tools to try to increase reliability using technology, but ultimately they don't control the underlying inventory. And so it's just a very difficult problem that eBay has shown is also difficult to solve. I'm bullish on the need for Airbnb long-term, but I think this part of the problem set is just one that's better suited for a company that has control over the inventory to actually solve.
Brad Hargreaves: As someone who travels a lot with my family, I've got three kids. I look at it very much yeah, you can hate on Airbnb today, because it's become so normalized and standard. You can see the flaws, but then you think back to the way it was before Airbnb and how hard it was - expensive suites in hotels. How would you travel with kids before that existed? People hate on Uber now, but as someone who flew around to a bunch of cities and would get scammed by cab drivers back in 2006, 2007 ...it was terrible. So people forget how bad it was before that innovation happened, and now obviously the innovation is the norm and you can see all the flaws in it with Uber and Airbnb. But God before it. It was absolutely brutal.
Roman Pedan: Totally. It's interesting. There's lessons and things that rhyme in history with Airbnb and also in other cultures. Cuba has something called "casas particulares", which predate Airbnb. It's you share when you travel, get in a guest house to someone's home. When the nation was founding and George Washington was traveling to cities, people would put him up in their houses because there wasn't a real hospitality set of options in in the United States. So Airbnb isn't a new concept.
The idea of people wanting to share happened before Airbnb in other cultures and in the United States. But even before Airbnb, HomeAway and VRBO obviously were in many ways the originals in the space. And there are lessons to learn from why Airbnb, though they started much later, became known as the innovator in the space that became the leader by a very wide margin, partially because of the network effect in the sector, but there are some lessons. HomeAway built its business through aggregation. They bought a large number of other companies, and the integration of those companies was not as smooth. It didn't harness one brand. The consumer experience as a result, pretty clunky across the different parts of the companies that HomeAway bought.
There's echoes of that with Expedia, which is an aggregation of Hotels.com, and Travelocity, and Orbitz and others. And you can compare it to Booking.com, which itself was an M&A transaction with Priceline, but Booking.com as a platform is very pure play versus Airbnb is much larger, especially if you look at market cap than Expedia is. Similarly, Airbnb built - mostly organically - one experience, very clean, focused on really professional photos early, which was a huge unlock for giving consumers a confidence to book, versus you had a very fragmented space that made HomeAway not generate the network effect 'cause it had a lot of different brands underneath it and not generate the economies to scale on marketing dollars because they were marketing 10 companies, not one. It's a lesson that's easier to learn looking backwards than looking forwards. But it's interesting that Airbnb is known as the company that created the space when I think a lot of the hard work also happened with the tenacious entrepreneurs when the tech systems were much weaker aggregating inventory away maybe from Craigslist as they were building HomeAway.
Brad Hargreaves: So one last question on flex rentals and then I wanna move on to some macro stuff. Other than hire Kasa, what advice would you give an owner and operator? A lot of multifamily owner and operators, watch this show. What advice would you give them when they're thinking about how do I think about flex rentals? How do I think about this kind of product in my buildings?
Roman Pedan: Yeah. So a few things. One is pick the right locations. Obviously the frame that we use is RevPAR to RentPAR. That's a financial metric, but the qualitative question one should ask is do people wanna travel? Is there a demand driver to this property?
Midtown, Manhattan multifamily would do tremendously as flex rental, because there's so much demand to stay there as an example. Places like Rainey Street in Austin really do well. Maybe it's a little loud to live there, but it's the place in Austin to stay.
So the first question is, will this drive actual value? There's some hidden places like next to medical centers, near student campuses or near government centers where there's a lot of demand actually for furnished rentals. Those can be really good locations, though on the surface, they don't don't appear to be. So one is, will this work? Second, is this a fit for my business?
Plan as a building. Often office to resi conversions are amazing for this and generally ground up development, especially in qualified opportunity zones are really good for this. Because in a development, you just don't have cash flow for a while. So if you're gonna lease up for 24 months or thereabouts, you'll start generating cash on day zero in a flexible, furnished rental program. And then in the office to resi conversions, often those are in locations that by default have a lot of commercial activity, so they'll be well suited for the demand. They also are typically in locations where the regulation is suited for the use, and you'll have an easier time getting the licenses.
I think a lot of owners also look at regulation as a potential impediment to the business, and it is. It makes it harder to launch the business, but it's also a moat once you get the right licensing. We have a regulatory team that walks owners through what they need to do to get licensed, what the rights are in the given building. But in New York, for example, it's one of the toughest markets in the country to get hotel licenses for apartment style inventory, but the properties that do have a hundred year moat on this demand stream, that's only going to be growing.
The last is around picking an operator, and of course we hope folks pick us. But I think there's a set of questions that owners should ask when picking an operator. There's a very large difference between an amazing operator and one that might become a problem for your property. So one, look for references. Ask who else they work for. Do they work for institutions that you trust? Are they in your market? Ask how do they perform in the market? Trust and safety is a really big consideration. We've built and deployed a lot of resources into eliminating issues between the interplay of the short stay and the long term stays. We have decibel meters, cigarette marijuana sensors. There's a lot. I won't get into the details, but understand those and understand the data behind incidents. Not just ask, do you have the systems, but do you actually track the data? Is it an amenity for the rest of the residents? What do other residents think about the program, ask those questions. Those are questions that we hear with some frequency.
Questions we don't hear, oddly, is how do you generate revenue? How much direct bookings do you get? How many channels are you on? How is your corporate and group sales? Because revenue will obviously make the value proposition either hum or be not as strong. And to answer that, partially ask the quality standards, right? What are the reviews? You can see these online, you can go to Google or TripAdvisor and check how strong of an operator they are. I would just suggest before you pick an operator, write down the list of questions that you wanna ask.
Go through a process and understand who you know fits the criteria that you have and who doesn't. I think you'll, on the other side of it, feel like you've you've delivered a product that has an operator who cares for it in the same way that you do.
Brad Hargreaves: And one more question focused on the flex rental sector that I did wanna get to. There's been a lot of conversation about these Opco PropCo models over the past couple of years as well. It's been a big topic of conversation. Some flex rental operators have gone that route. Placemaker went that route. You have Central, which is basically I think owned by Iconiq Capital at this point, which acquires assets for them. Others haven't. As far as I'm aware, there is no Kasa real estate fund. Why did you choose not to go that route?
Roman Pedan: The reason is driven by the macro economic environment. In our DNA as a company, we have ownership at the core. I was a real estate investor, but a lot of folks in our team live and breathe assets.
There's a natural interest in aligning more deeply with the real estate and frankly, a lesson from history. I can't think of a major US hotel brand that didn't have a PropCo as part of building on the hospitality side, as part of building their brand.
Marriott was a PropCo all under one roof. Same with Hilton. Conrad Hilton went out and bought hotels for a long time. Same with Kimpton, et cetera. The reason we haven't done it is over the last two years transaction volume has been slashed in the hospitality world, because rates have gone up and, if we do it, we would like for there to be really great alignment between us and the PropCo, and what we see as a donut hole in the capital markets are folks who deeply understand operating businesses and also deeply understand real estate businesses.
When you understand the operating businesses you don't wanna deal with real estate assets. We see investors who deeply understand the real estate, but then if they invest in the OpCo, they assume it's worth nothing, which is not a good way to go into a partnership where we're building real enterprise value with the partner.
I would expect in the future we will have a PropCo. The timing needs to be right from a capital markets perspective. The alignment needs to be right and the partner needs to be right. There's a really palpable opportunity to create differentiated returns for real estate owners who are looking for an edge in a world where we're not gonna get the edge from just falling interest rates.
And our model both for hotels where we can buy boutique hotels and meaningfully improve their profitability and for new development apartments, office to resi conversions, and just generally apartment acquisitions can be that. Our OpCo model can be that edge.
Brad Hargreaves: Awesome. Obviously over the past three years while you've been building this business, there has been a tremendous amount of hype coming and going about various PropTech technologies. Now we're seeing a lot of interest and billions of dollars venture capital flowing into AI automation solutions on the PropTech side. What's your view right now? Is some of that stuff overhyped? Are there under hyped sectors out there in PropTech that maybe aren't getting the love that they should because everything is going into AI automation, chat bots, et cetera?
Roman Pedan: Yeah, it's a great question. It's always hard to know in the moment what's overhyped or under hyped. My sense is the capital markets are pendulum that typically swings on momentum in like too wide in one side and then too wide and the other side, largely because it's self-referential. A lot of investors, they look to comps to make decisions, but comps feed on themselves and then capital feeds on capital for capital formation, creates more capital.
It is a natural feature of the market for there to be hype and under hype kind of moments. Very clearly there's been a pullback from industries that are hard businesses, and I think Packy wrote about this and I really resonate with this. Hard businesses are going to be the least likely to be disrupted by AI and are gonna probably create a ton of value in the future. When I say hard businesses, businesses that are not just software, but software services, maybe some operational element to them.
Brad Hargreaves: People do mean two different things when they say hard businesses. Some people mean like a home cleaning services business and some people mean you're building the drone army to take on China.
Roman Pedan: Yeah. I maybe more mean businesses that can be automated greatly and enhanced greatly with technology, but are a brick by brick build. And the reason why, you know, a lot of capital maybe in the over-hyped world has gone into SaaS.
Andreessen said software would eat the world. I'm parroting a little bit this really good blog post, I think now I'm realizing from memory, by Packy McCormick. A decade has passed where the barriers to entry for software have dropped, where the best opportunities have been now plundered, and so you're going to increasingly more and more niche areas.
Capital looks backwards for returns, and the returns have been great, 'cause software is a low marginal cost of of replicating and growing. And the recurring revenue model is amazing, but there's so much capital seeking the incremental software business.
It's gonna be really hard looking forward to know how AI will interact with SaaS businesses. You could imagine every company building their own version of a software solution, because AI makes it nearly...
Brad Hargreaves: Zero! Cost is going to zero.
Roman Pedan: Yeah. The cost of building it goes to zero, so I could imagine that being overhyped. At the same time, building a business that requires brick by brick laying will still be this kind of arduous... the same features that make it like unsexy are the things that make it durable.
The things that create a high barrier to entry, and there's a lot less capital chasing those deals right now. And and usually these businesses have massive TAMs. They have massive addressable markets. I think those are under hyped. The other companies that are under hyped are companies that rely on capital markets because the capital markets have just pulled back.
There's been a lot of distress in those worlds and a lot of companies in that world will be distressed. Maybe weren't good business models to start, but a lot are strong. And because of the whipsaw of the capital markets, it's a little hard to see through the fog, but out of the fog will emerge really good players.
I think that other overhyped area, and maybe I'm borrowing from my own lessons in building the business, are areas where there's opaqueness in the economics for multiple parties. If you're not quite sure if every party is winning, so master leases were that in in our sector, right? The owner was winning, but what was opaque was whether the actual counterparty was winning. But you can also see that in insurance, where insurance replacement products is the underwriter winning, the is the buyer of the insurance winning is the intermediary winning. If all three are not winning, then the business probably isn't as good as you think.
Now, it could be, but it's the same thing for, there's credit card businesses, that you know is the issuer winning? Is the bank winning? Is the consumer winning, right? Every owner liked free money of master leases. But if the counterparty wasn't winning, then that wasn't gonna be a durable business.
You can apply that same frame to the other side. The other business, there's a lot of hype that can be built 'cause if you balance, if you create a winning formula for one side that doesn't get evened out over time, you can grow actually really quickly, as long as you have capital. And the question is, will that balance be evened out?
That's a question that should have a very high burden of proof. The frame I would use is, does something deeply have to change in the future for this to even out? Or is it already true today? If it's already true today, you're in great shape, and if it's not, it might be on the over hype side, which isn't to say it won't be a good business, it's to say that you've got work to do to prove it.
Brad Hargreaves: Right. On that note, obviously it's a weird market right now for growth stage companies. Not a lot of IPOs happening. Not a lot of M&A. Kasa's obviously raised some outside capital, raised some venture dollars. So what do the next two to three years look like for Kasa? How are you charting that path?
Roman Pedan: The way I think about it, our capital markets are cyclical. So let's be immune as a business to the cyclical element and to the whims of the market. You're immune by your capital structure, by prudent growth, by profitability.
And then, let's be maniacally focused on the things that we know will be true a hundred years from now, as they were true a hundred years before. People who travel want good prices. They want great locations and reliable high quality experiences, and more and more flexibility over time.
We constantly wanna improve the profitability of our properties. We constantly wanna lower costs of the operation and to the consumer. We constantly wanna uplevel the experience as measured by reviews, repeat rates, et cetera. I'm really excited about where we're at because the TAM is big.
The competition is lower than before. It's the most opportunity I felt. We'll continue to scale the business. We'll do so prudently. Eventually, there's an international opportunity. Eventually, there's a PropCo opportunity. I'm excited by ground up development for purpose built apartment hotels, which will happen inevitably over time.
We're not gonna do all of those at once, but I expect over the medium term, those will be opportunities that exist, and this was the kind of business that compounds over a very long period of time. We have to be like a turtle, steadily building and building, and be independent of the volatility in the capital markets.
The last thing I'll say is we launched a product last year called Powered by Kasa, which was really driven, again, by demand from our owner partners who had visions for their own brand, but wanted our infrastructure and technology and centralized services that we've painstakingly built over the last decade.
Last year it's about a quarter of our growth, out of launching it in February, and really we haven't marketed it, so I'm speaking about it probably for the first time in this conversation publicly, but we've had owners who just came to us and wanted what we've built, but wanted their own brand on the building and to have the creativity and the experience be driven by them. We're really excited about that, so I expect that will continue to be part of what we deliver to the market.
Brad Hargreaves: Awesome. All right, and our last minute... the lightning round. Quick questions, quick answers. Same questions I ask every every guest here on the Thesis Driven Leader Series. First up, tell us about one startup, developer or entrepreneur you're watching and why?
Roman Pedan: I'll give you a couple very quickly. I like folks who fill the donut hole in the capital markets that I mentioned. So Chris Green at GreenPoint is doing that. People who just solve a problem that many others are not solving in some ways. Mo Saraiya at Madison Madison is doing that as well. I really like big swings and people who are smart and tenacious. I really like what LD is doing at Share or Ryan at Cul de Sac. You had Jan on from California Forever and what an ambitious thing to be building a city. So those are some folks I'm excited for.
Brad Hargreaves: I'm really rooting him on. Great. Waiting for that vote. So when you and I are recording this podcast in the 2030s, what's the most important real estate tech topic we'll be talking about?
Roman Pedan: You're spot on population growth. That will be a thing that becomes more in focus, that may change. There's gonna be fertility technology that will potentially impact population growth.
Brad Hargreaves: Wait, do you think fertility is a tech problem?
Roman Pedan: It's not a tech problem, but I do think you can break down why fertility has been dropping and one is people having kids later in life.
Brad Hargreaves: Yes, for sure.
Roman Pedan: The number of people that I know that are struggling with fertility is really high, and I don't think that was the case for our parents generation, so I think that will help, but it won't be the panacea.
Brad Hargreaves: A hundred percent the case.
Roman Pedan: I think AI will impact everything. It's a catchall, but you're gonna have a conversation about autonomous robots in 2030 that feels like the conversation we're having about autonomous cars today. Anyone who's ridden Waymo knows they're already here, but they're gonna be more so everywhere than they are today.
In our sector, we're gonna be talking about AI agents for booking travel, that will happen sooner than 2030, but that might be a big problem for Expedia, Booking.com, and others, where could be an opportunity as well. You'll have a personalized travel agent that will go out and book your stay and that obviates the need for for Expedia.
Those are big things. Autonomous cars will change where people live, how people work. It'll make difference in need for EV and parking, and it'll create more pedestrian areas. Robots will create more time for people. When I say robots, I worry people like their eyes roll back. They're like, what is he talking about? My brother works in robotics at Amazon. They're happening maybe slower than people hope, but faster than they expect. We'll be talking about those in 2030 and it's gonna be exciting.
Brad Hargreaves: What is one city or place you'd bet on?
Roman Pedan: I'm gonna say an unpopular answer or maybe not, I don't know, but San Francisco. I used to live in San Francisco. I left San Francisco. I voted with my feet, but right now you can buy below replacement cost.
I believe in the long term durability of the demand story, it seems like the city is getting its act together politically and starting to address the thorny issues within the city. Slowly, but hopefully, surely. And so my optimist lens is that the buds of spring are starting to show after a really deep winter.
I don't know if it's controversial San Francisco, like I'm a believer in the city, but my more pedestrian answer is New York and Miami. They're just vibrant places. And any city that's working to liberalize zoning is a city that excited for.
Brad Hargreaves: Last question. What's your favorite app on your home screen?
Roman Pedan: I love learning and growing. I think it's a miracle that I can access the best teachers in anything in the world through YouTube. So I'm constantly learning on YouTube. ChatGPT, frankly, is teaching me every day. Listening to your podcast. It's incredible. The fact that I have better education than a university just on a daily basis is incredible. And then health is the scarcest resource, so Whoop app for me helps me gets me the stats that motivate the action.
Brad Hargreaves: Nice. Love it. Roman, thank you so much for joining the show today. Really enjoyed this conversation and appreciate you coming on.
Roman Pedan: Thank you for having me, Brad. Really appreciate it. As I said, long time listener, so glad to contribute.
Brad Hargreaves: That was an awesome conversation with Roman. Thank you all so much for listening in and joining today.
We have another good conversation scheduled for next week with someone else who is one of the most thoughtful people in the real estate development world, we have Sean Sweeney at Hall Sweeney Properties. The Bright Build is his newsletter, and he's taken a really interesting model of combining real estate development, but also a heavy media presence, so he's really at the intersection a lot of worlds that we we think hard about here at Thesis Driven, and it's gonna be a very fun conversation.
So please join us next week with Sean Sweeney of Hall Sweeney Properties.
Thank you all so much for joining. See you next week.
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