Did the Short-Term Rental Industry Ever Collapse?

At the beginning of 2023, we reported on the advent of #Airbnbust, a term coined by Amy Nixon and amplified by vacation property operators on social media to describe falling revenues per host due to a rapid increase in the supply of rental homes. Last July, we also dug into conflicting data that sparked a viral debate on whether the short-term rental market was crashing or reverting to normal. 

Did the trending term correspond to an industry-wide shift in vacation rental performance that would put most rental property owners out of business? Or did it merely reflect the sentiment of eager, inexperienced hosts who fully expected the rapid growth in demand and average daily rates (ADRs) to keep pace without any impact to the supply side?

From the beginning, here at BiggerPockets, we’ve been skeptical of cries that the sky is falling on short-term rentals as a real estate investment strategy. But we’ve also been aware that an oversupply of available units has created a very real threat to the revenue streams of many Airbnb hosts in certain areas of the country. We’ve also been keeping an eye on the impact of a wave of short-term rental regulations and the behavior of travelers during an uncertain economy, either of which could tip the scales in an investor’s decision to buy a new vacation rental property. 

More than one year after the panicked warnings of short-term rental hosts flooded social media, AirDNA data shows that, despite an uptick in demand and bookings, revenue per available room (RevPAR) was down year over year in December 2023 due to an increase in the supply of vacation units. There was even a slight overcorrection early in 2023 when occupancy levels sunk below 2019 levels, but the trend stabilized by September. And indicators of slowing supply growth could even lead to rising occupancy rates in 2024. 

The data points to the fact that, despite the business-shattering impacts of restrictive regulations in cities like New York, the short-term rental industry appears poised for an overall upward crawl. Here’s a closer look.

Occupancy Rates Are Stabilizing at 2019 Levels

Occupancy rates reached above 60% in 2021 as demand for hotel alternatives surged in the pandemic environment, but 2019 occupancy rates offer a better standard for a stable short-term rental market without a sudden spike in demand. By the end of 2023, occupancy rates mirrored 2019 conditions. 

The correction was due to an imbalance between supply and demand. In 2023, demand for vacation rentals grew 6.5%, slower than in previous years, while the available nights supply rose 12.6%. That includes growth in available listings of 11.5%, in addition to existing hosts offering their properties for more nights. This increase in supply without strong demand growth led occupancy rates to decline by 5.4% when compared to 2022. 

In December, the average occupancy rate was 49.9%, according to AirDNA data, about 0.6% lower than in 2019. It doesn’t appear, however, that hosts have slashed their listing rates in response to increased competition from new listings. Average daily rates fell 1.3% over the course of the year, but that was due to lower average daily rates on new listings rather than price cuts. Still, the decline in RevPAR was a significant 8.1% year over year as of December. 

Airbnb’s financial data shows a similar story. While a small percentage of hosts reduced or dropped their cleaning fees in response to Airbnb’s price transparency initiatives in 2023, global ADR was flat year over year in the fourth quarter. The company reports an 18% increase in active listings in the fourth quarter of 2023 compared to the year prior. Though Airbnb experienced strong growth in 2023, the company expects revenue growth to decelerate somewhat in 2024. 

Indicators of Slowing Supply Growth Leave Hope for Future Occupancy Growth

Though December showed a small overall increase in new listings when compared to 2022, new listings accounted for a smaller share of available listings than in the previous December. The trend indicates that supply growth may be slowing.

AirDNA expects the gap between supply and demand growth to shrink in 2024, allowing occupancy rates to remain steady and ADRs to increase slightly. This is consistent with data that show second-home transactions, which peaked during the pandemic-era low interest rate environment, have dropped by almost three quarters since August 2023. 

There’s even been a slowdown in tourist hotspots where demand remains strong. As of August, second homes made up 16% of the housing market, a smaller share than the 22% peak in January 2022. Though second-home buyers tend to be less affected by high mortgage rates, lack of inventory continues to present a challenge to would-be rental property owners. 

It’s also quite possible that the sentiment around short-term rentals as an investment strategy is changing. Even cash buyers may be working with decreased cash flow projections due to the fall in RevPAR and higher costs. Once touted as one of the hottest investment opportunities, short-term rentals are getting a bad reputation as hosts in many markets struggle to cover their costs. That change could have a delayed impact on supply growth. 

Regulatory and Economic Shifts Have Changed Which Markets Are Most Popular

Data from 2023 shows that travelers increasingly favor small and midsize cities boasting desirable local attractions rather than visiting urban cores. While this may represent a shift in travel preferences, the impact of regulatory oversight has also been significant. 

New York City provides the best example of how restrictive short-term rental laws can impact a major city and surrounding areas. In September, the city strengthened enforcement measures for a rule that required hosts to be present in units available for a rental period of less than 30 days. Hosts are now required to register with the city, which has dramatically reduced the supply of vacation units in the area. Housing activist group Inside Airbnb reported an 85% drop in available rentals between August and October, most likely due to the effect of Local Law 18. 

AirDNA clocked a stunning 46.1% decrease in demand in New York City, the greatest decline of the top 50 markets. Airbnb notes that the new rules have so far had no meaningful impact on the housing supply in the city and have not led to decreased rents, as supporters had hoped. Meanwhile, hotel rates in the already pricey travel destination have increased, and an underground market for illegal short-term rentals has emerged. 

The legislation may have put NYC, short-term rental operators, out of business, but Jersey City/Newark hosts reaped the rewards of their proximity to New York, realizing a 53.7% increase in demand. Demand growth in the area far outpaced other top markets. These market shifts indicate the sensitivity of short-term rental viability to restrictive regulatory efforts. 

But Jersey City/Newark isn’t the only market that holds promise for potential investors. AirDNA’s roundup of the best places to invest in 2024 shows strong revenue potential in smaller, off-the-beaten-path markets like Columbus, Georgia; Ellsworth, Maine; and Logan, Ohio, all of which boast typical home values below the national median. And occupancy rates are as high as 77% in areas like Anaheim, California, where Disneyland regularly brings tourists in droves.  

Economic Recovery May Impact Short-Term Rental Revenue in a Combination of Ways

Many firms are forecasting flat housing prices or slight declines on a nationwide level in 2024. Meanwhile, Morningstar expects the 30-year fixed mortgage rate to settle down to 4.75% in 2025. Federal Reserve officials are predicting a median of three rate cuts this year, and it now appears likely the central bank will achieve the soft landing it’s been working so hard toward. 

The subsequent improvement in housing affordability could bring new investors to the short-term rental industry, but it could also offer existing operators the chance to leave. From this vantage point, it’s hard to predict the net impact of more housing transactions on short-term rental revenue. 

Strong wage growth, low unemployment, and cooling inflation may also lead to increased consumption in 2024, particularly among moderate-income Americans. But wealthy Americans have been curbing their spending since the summer, a trend that may persist in 2024. 

In addition, a Forbes survey found that while 39% of Americans plan to spend more on travel in 2024, that share is reduced when compared to 2023 survey results. And almost half report they’ll adjust their budgets based on inflation. 

AirDNA’s 2024 outlook points to higher demand in most markets this year, except for NYC and Maui. But while Americans are starting to feel more optimistic about the economy, most still believe conditions are worsening rather than improving, according to a recent Gallup poll. Gallup’s Economic Confidence Index now sits at the highest it’s been in two years. That said, the effects of lingering economic uncertainty could prevent the growth in demand AirDNA is forecasting. 

The Bottom Line

It’s always been true that the success of a short-term rental business is highly location- and property-dependent. But the occupancy rate decline of 2023, coupled with record-high maintenance costs and increased cleaning fees amid a dip in ADRs, has left vacation rental investors with less wiggle room. High borrowing costs and low inventory may also continue to challenge new investors in 2024, even as mortgage rates head lower. 

But if all that leads to slower supply growth and economic optimism improves enough to boost demand, RevPAR could stabilize or even increase. There’s no evidence of an industry-wide catastrophe, and there’s no need to dismiss the short-term rental strategy entirely, as the #Airbnbust movement suggests. Instead, there’s hope that outcomes could improve. 

But, investors should be cautious about where they invest. Be sure to investigate potential legal issues and evaluate the competition within each market.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.