Is There Still Room in The Short-Term Rental Market?

Dave:
Hey, everyone. Welcome to On The Market. I’m Dave Meyer. In today’s bonus episode, we are going to be talking about a topic that I’ve wanted to explore in depth for quite a while, which is the state of the short term rental market. If you know anything about this industry, you know that it has been absolutely booming over the last couple of years, but as we enter into uncertain economic times and face a potential recession, the question is, “Can short term rentals maintain this growth and what should you do as an investor to best capitalize on current market conditions?” Before we get into today’s topic, I do want to make a quick programming note. Hopefully you’ve been following On The Market since the beginning. We really appreciate it, but maybe if you’re new here, you might also have noticed that we usually only have one podcast per week, but recently we’ve actually started doing these bonus episodes like the one you’re listening to right now.
The reason we’re doing that is because when our producer Kaylin and I get together to meet about what topics we want to cover, there’s just too many topics. There’s so much going on in the economy and news and in the investing industry, that we want to be able to share more with you. So we decided to not limit ourselves and that when there is enough information, we are going to be putting out two episodes per week. We’re not going to be doing this every single week right now, but you should be checking back on your feed on Fridays to see when we do have bonus episodes. I do think we’re going to have them more often than not. So most weeks we are going to have two episodes now, one on Monday and one on Friday. Definitely make sure to keep an eye on your feed, because you don’t want to miss any of the great content that we’ll be putting out. Let’s get into our short term rental topic today, but first, let’s take a quick break.
All right. The short term rental industry. This is such a popular topic. I’m really excited to get into this today with all of you. This is something that keeps coming up over and over again. What’s going to happen in the short term rental market, particularly if there is a recession? If you follow this podcast or follow me on social media, you know I’ve been openly musing about what might happen, and rather than just talking about it, I decided to dive into the data and get to the bottom of what is happening in the short term rental market, and that’s what we’re going to talk about today. Before we get into the data, let’s just quickly remind everyone, if you’re not familiar, what a short term rental is.
It’s basically when you own an Airbnb or a Vrbo, you typically buy a single family residence. It can be a small multifamily. You furnish it and you rent it out. The reason people do this is because it has tremendous cash flow potential. As opposed to a traditional rental property, you can get way more revenue per night on a short term rental. Of course, you don’t necessarily have every single night booked. You can have occupancy problems, which we’ll talk about tonight, but the potential for revenue on a short term rental is typically way higher than if you rented the same home out as a traditional rental. That is why it has become an incredibly popular strategy over the last couple of years. I myself own one short term rental. I bought it in late 2018. It’s been doing really well for me. I’m not some super expert here. I’ve not done this five or 10 times. Rob Abasolo or Tony Robinson, way more experienced here than I am, but I do have experience running and managing and buying a short term rental.
I know a lot of people with short term rentals, so I do understand the industry and let’s be honest, first and foremost, I am a data analyst and I do understand the data that is coming out about the short term rental industry, so let’s just dive into that. As with most things economics, it sounds boring, but it boils down to supply and demand. I’m going to break down the data at first just by that. First let’s look at demand. As of May 2022, demand in the U.S. is extremely strong. The total nights that were stayed in any short term rentals in May 2022 was up 18% over 2021 and was up 26% over 2019. So we’re seeing a huge amount of demand for short term rentals, and I think it’s worth mentioning that I am getting this data from AirDNA. They’re a great data provider. I’ve used them for years. I have no affiliation with them, but they put out great data. You can go on their website and check that out.
So demand looking strong in terms of total nights. It’s also looking good in terms of new bookings. The difference here is… The first thing I said is total nights. That’s again, how many nights are stayed in all STRs and then the next stat is new bookings, which is how many new vacations essentially were booked in May, and that was up 2.6% over last year. I know 2.6% doesn’t sound like a ton, especially when total nights were up 18%, but it’s important to note that in normal times, that’s what things grow like. We’ve gotten accustom over the last few years to things growing up double digits year over year, all the time. That’s not really that normal. So 2.6% is not amazing. It’s not what we’re seeing in the rest of the industry, but it’s still up, and it’s notable because it’s a reversal of where we were in March and April.
I’ve been following this data a bit and in March and April, I was a bit concerned to see that new bookings were down in March and April over 2021 levels. Demand was falling a little bit. We weren’t seeing as many new bookings, but in May that reversed, and now we are seeing positive year over year demand. So that is all of this. All of the demand data is really strong for short term rentals right now. That is great news for anyone who’s currently an investor, or if you’re thinking about getting into this industry, you can rest assured that right now, May 2022, demand super strong for short term rentals.
The story to me though is more on the supply side, because as of May, there was 1.3 million available listings, and that is up 25% year over year, which is massive, massive growth. Take note of that. 25% year over year. That means that supply is growing faster than demand, and that has negative revenue implications. If you understand supply and demand, you know that if supply is going up faster than demand, that means that the demand is going to get spread out across supply. There were 84,000 new listings on Airbnb and Vrbo in May, and so even though demand was up, that demand was spread out amongst more properties. 84,000 more properties. That has led to the single most notable data point that I want you to remember from this episode, and that is that occupancy was down 8.6%.
This makes sense. Demand is up, which is great, but supply is also up even more than demand to the point where occupancy is starting to fall. I don’t want to be alarmist, but I do think this is a really notable shift in market dynamics that everyone who’s interested in this industry should be paying attention to. If you own a short term rental, there are basically two variables that dictate your revenue. One is your average daily rate. That’s the amount you charge. Like if you go to a hotel, you pay 200 bucks a night, that’s their average daily rate. Every short term rental also has an average daily rate. That is super important to short term rental investors. The second thing is occupancy, because you need to… If there are 30 days in a month and you get 50% of them filled, then you have 15 nights. You multiply that by your average daily rate, and that is how much revenue you have.
So, if occupancy is going down, that means that your revenue is probably going down. Now that’s important, and that’s why I want you to pay attention to this, but on the other side, it is worth mentioning that the other part of the equation, the average daily rate, which I just mentioned is up 4.6%. That is good, but it’s not up enough to counteract that occupancy in my opinion. 4.6% for an average daily rate in normal times would be great. Don’t get me wrong. In normal times that would be an excellent increase year over year, but remember inflation is 8.6%. So, the average daily rate is not keeping pace with inflation, and it is notable that this 4.6% increase year over year is the slowest rate of increase since April 2020.
So basically since pre pandemic levels, we are starting to see the pace of increase for ADR start to go down and occupancy is going down. Now don’t panic. Demand is up. Things are still looking really good, but I just want to… My job here, and what I’m trying to do here, is to tell you the whole state of the industry, and this is what’s happening. Demand is up. Supply is growing faster and occupancy is starting to fall. Again, this is a snapshot in time. This is just May 2022, but something you should keep an eye on.
The next thing I want to talk about with regard to the short term rental industry is tourism and hotels in general. Because while we’re mostly here talking about real estate investing, you really can’t compare short term rental market to the flipping market, or even some ways you can’t really even compare it to the traditional rental market, because demand is really more measured against the traditional tourism market. It’s measured against hotels. Let’s just quickly… I found some data. Let’s just talk about what’s going on in the tourism industry as whole to help contextualize what’s going on in the short term rental industry. In May, according to Hospitality Net, hotel occupancy went up 4.1% year over year. We just talked about short term rentals going down 8.6% in May. Hotels had occupancy go up 4.1%. CoStar, which is a big data firm, and they track this, they said that hotels have passed the very important benchmark of 60% occupancy. Record number of hotels are going above 60% occupancy rate in June. That means hotels are doing really well, but remember they got absolutely crushed over the last couple of years.
In my opinion, this is notable. We should be paying attention to the fact that hotel occupancy is growing when short term rentals are going down, but I also think that this is sort of natural and this is just my opinion. This isn’t really supported by data, but I just believe that over the last couple of years, it has been especially poised for short term rentals, because no one wanted to go to hotels. People were trapped in their house. They were afraid. The bars were closed. The restaurants were closed. There was no gyms, there was no pools, so people I think naturally went to short term rentals because it offered a better situation for pandemic era traveling. Now, as we see the world opening back up, I think it’s natural to see a reversion. More people are going to start going to hotels, because amenities are open. They’re back. Short term rentals have gotten more expensive and maybe there’s just a rebalancing here.
But again, something to keep an eye on, is is this a trend that’s going to continue? Is short term rental demand going to keep declining and hotels, are they going to start to keep seeing a higher percentage of travel nights as compared to short term rentals? That is just… I wanted to take a quick look at tourism, because I do think if you’re in this industry, you should be paying attention to hotels, because that… You are competing against other short term rentals, but you’re also competing against hotels, so you need to pay attention to the data and information that’s coming out in the hospitality industry, because that is one of your main competitors. The thing here is though, if demand for travel is going up across the board, then it’s not a zero sum game. You can have hotel occupancy rise and you can have short term rental occupancy and revenue rise at the same time as long as overall demand is increasing, which brings up a point, “Is that going to happen?”
Let’s transition now over the… The first couple minutes of the show, we’ve been talking about what is happening, what we know has happened with data. And now let’s look forward and see what might happen in the short term rental industry, especially with what might happen in a recession. Again, I want to break this down into supply and demand. Let’s look at what might happen with demand. Super hard to forecast far into the future, but I wanted to just see what’s happening this summer. This comes out in July, but we only have data back until May as of this recording. I want to see what’s going to happen this summer.
The information is overwhelmingly positive for the entire tourism industry. 73% of Americans have summer plans to travel, and that is up from 53% last year. That is a huge increase. That is almost a 50% increase. The other really notable thing is, almost 50% more people plan to travel this summer and they plan to spend $300 more on that vacation. That’s about a 10% increase. Even though inflation is about 8.6%, they’re planning to spend 10% more. That means even in inflation adjusted dollars, people are planning to spend more on their vacation and more people are going to spend. So total dollars going into the tourism industry and into the lodging industry, so short term rentals and hotels, looking real, real good for the summer right now. On the other side, I do want to just point out that there is some pullback here and that… Of the people who aren’t traveling, a lot of them are saying they’re not going to travel because they can’t afford it.
Last year, 43% said they’re not going to travel, because they can’t afford it. This year it’s 57% say that the reason they’re not going on a summer vacation, is because they cannot afford it. To me, this is probably the very unfortunate impact of all of this inflation. People’s discretionary income is being eaten up by increases in gas costs or food prices or whatever else they need to spend money on, and they have less money to go on vacation, and just the cost of lodging and vacation is a lot more expensive. That is unfortunate, and it is something to note that more and more people are not traveling because it’s more expensive, but generally speaking, demand looks very good, at least for the next couple of months. What happens beyond that is really hard to say, because honestly we don’t know if we’re going to go into a recession.
Personally, this is just speculation, it’s my guess. I do think we’re going to go into a recession. I’ve seen that a lot of forecasters say that we are about 75, 80% chance that we go into a recession. I’m going to do a whole episode about what that even means, because I know people panic when they hear recession and think housing crisis, they think back to 2008 and financial crisis. That’s not necessarily what happens in a recession. In fact, that’s not what usually happens, but I just want to say that I do think we are probably going to see a recession, at least in the traditional definition, which is two consecutive quarters of GDP declines. Now, if we go into a recession, it is hard to know what will happen, but Tony Robinson, who is the host of the BiggerPockets Rookie show did some research and found that… He looked back at the great recession and he saw that in 2008, vacation spending actually dropped 3%, which is way less than I thought it was going to be.
I thought it was going to be 10 or 15%, but there’s only 3% in 2008. 2009, we were still in a recession. It did drop 9%, which is a considerable amount. If you are a short term rental owner and your revenue dropped nine or 10%, you would feel that probably. Given that the great recession was the worst economic climate since the great depression, that’s not all that bad. To me, the worst case scenario is not that travel spending will go down all that much. Of course, it could be different this time around, but just want to provide some historical context. Thank you to Tony for providing that information. That’s where I see demand going at least for the next couple months, which is really the only thing we can forecast. Everything’s so murky, looking past three months out is really difficult.
Three months out things look really good, past that it’s hard to tell. It depends what the economy as a whole does, but Tony provides some great data that showed that worst case scenario is probably not that bad. The other side is, will supply keep increasing. Remember the thing that drove down occupancy in May, was that supply was going up so quickly. I think there is a chance supply could keep growing, but I think it’s going to slow down and I think it’s going to slow down a lot. I think that’s because of the reason the whole housing market is slowing down. Less homes are selling right now. Less homes are trading, which means fewer are probably going to get converted from either a traditional rental or a primary residence into a short term rental. I just think people have less risk appetite right now. Unless you’re a professional investor, some of you probably are, less people are likely going to be doing it.
I think there’s going to be less amateurs getting into the business. One thing… I don’t have a lot of data about supply. It’s hard to know. This is just speculations based on the larger housing market. One thing I do just want to call out and something for everyone to think about, is in a recession will some short term rental owners convert back to long-term rentals, because as I said, the reason people love short term rentals right now is the cash flow potential is great, but it’s riskier. You have no guarantee that you’re going to get a certain amount of bookings on any given month at any given night. With a long term rental, you get less revenue, but it’s pretty guaranteed if you get good tenants. I’m curious if some short term rentals are going to convert back to long term rentals, which could be good for them. Depending on your financial situation, you’d have to make that decision.
But I think it’s really interesting because if that happens, that could lower supply and that would help out all the people who stay in the short term rental industry. That is just a dynamic I’ve been thinking about. I don’t know what’s going to happen there, but again, I just want to raise that and talk about that. That’s where I think it’s going to go. Demand is really strong right now. I think the market looks really good for short term rentals at least for the next three months. Things to keep an eye on, will supply keep increasing and will occupancy keep going down? That’s where I would focus if I was interested. I am interested in short term rental market, but if I were you, thinking about what to do with your own portfolio, whether or not to jump into this market, those are the two metrics I would really be following.
Before we move on, or before we end this episode, I do want to talk about one other thing, which is about vacation home demand. I know this isn’t exactly the same as short term rentals, but I think that… You’ll see what I’m getting at, but basically second home demand… This is more like not investors. Normal people, wealthy people, who have enough money to afford their primary residence and a second home. The demand for second homes absolutely went wild at the beginning of the pandemic. It actually shot up to about 90% over pre pandemic levels in March 2021. Almost double the amount of people were looking for second homes and this makes sense, right? I mean, I think this was fueled by a bunch of things, but just to name a few, super low interest rates that fueled the whole housing market.
Then we had the stock market and crypto markets going crazy, so people had a lot of cash with which to do whatever they wanted and some people just wanted to buy a second home. Next was work from home. If you could afford a lake house and you could work from your lake house, don’t you think you would want to do that? I certainly would. People were probably doing that and if you could afford it, people were thinking about a second home. And the last thing, this is hard to quantify, but people couldn’t go on traditional vacations, so there was people who wanted to travel and couldn’t travel internationally. Maybe you go buy a lake house, you buy a beach house, buy a mountain house because you want to be able to get out of your home, get out of the city, whatever and travel.
People really, really wanted second homes. Now, fast forward a year to May 2022 and demand for second homes has gone back down so far that it’s now below pre pandemic levels. Not by a lot, 4% below pre pandemic levels, but for obvious reasons. I mean, stock and crypto markets have tanked. Interest rates and affordability… Interest rates are going up. Affordability is going down. These are dynamics we’re seeing across the whole housing market, obviously going to hit second home demand first in my opinion, because when it gets less affordable, people are going to focus on the things they actually need. You don’t need a second home. And so demand to me makes sense that it’s going to go down. I also think it’s worth mentioning and it’s often really overlooked, that during the pandemic, some regulations came out from the government that added fees to mortgages for second homes, and it makes them actually even more expensive.
Mortgages are getting more expensive, because interest rates are going up, but second home mortgages are also getting more expensive, because the government added fees and for a $400,000 property, those fees can be about 13 grand. That’s 3% of the purchase price. That’s considerable amount of money, right? It’s getting less and less affordable, less and less attractive to buy that second home. Guys, I don’t think this means that the whole market is going to crash. I think actually at this point in the economic cycle, we are at peak economic activity right now. In my opinion, we are probably going to go into a recession over the next couple of months. I think that’s the most probable thing. Again, I don’t know, but that’s what I think is most likely, and at this point in the economic cycle, demand for second homes being down makes total sense to me.
I don’t think that is an indicator that the broader housing market is going to crash, but I do think that this means that in some markets we are going to start to see declines. The reason I’m bringing this up, is because we’ve been talking about short term rentals. Now I’m talking about second homes. The markets where a lot of second homes are, are also the markets where a lot of short term rentals are. These are vacation hotspots. The places people want to buy second homes are the same places that people want to go on vacation and therefore good places for investors to buy short term rentals. If I had to guess, and I am speculating here, but I think that there is a good chance we see vacation hotspots, particularly high price vacation hotspots, start to see prices retract over the next couple of months.
I don’t think there’s going to be a crash, again, but I do think in some beach towns, maybe in some lake properties, maybe in some mountain towns, we start to see these prices come down. I think that means there could be buying opportunities. If prices start to come down and there is less competition, there’s less demand for people who are in real estate for the long term, which you should be. Real estate is not a get rich quick scheme, it is a long term investment strategy. This could be a good time to consider buying if you can find a deal that pencils out and makes good cash flow and all of that. My particular short term rental is in a ski town in Colorado. It does extremely well on a cash flow basis, but I believe that the valuation… It’s gone up almost 90%, the value, in four years.
I think it’s going to come back down and that’s okay to me. I’m not planning to sell it, so it’s just a paper loss. I know that it’s still generating good cash flow, but I think that if you are holding it or thinking about selling it, there is a good chance that these prices come down, three, five, maybe even up to 10% in certain markets, but I don’t think it’s going to be crazy. That’s just my read of the situation. I could be completely wrong about that, but that’s how I’m personally thinking about it and just encourage people to keep an eye on it. If you want to get into the short term rental industry and demand remains strong, but prices start to come down, that could be a great time to look for buying opportunities.
All right, everyone. That is what I got for you today. Just to summarize what we have talked about here. Current state of the short term rental market is strong. Demand is doing really well, but supply is starting to increase faster than demand and we’re seeing occupancy go down. That’s the number one thing you should keep an eye on. Tourism, overall, looking really good for the summer, but unclear what happens after that. We need to see if we go into a recession and if people start losing their jobs, if the unemployment rate goes up, I do expect demand to drop off, but not in some crazy way. As Tony’s research showed us, it’s not going to be some disaster, but it could decline five, 10% at worst in a recession. Lastly, I do think that there is buying opportunities in some high priced vacation hotspots, because I do expect that prices could come down in some really popular beach areas or mountain areas.
It’s all going to depend on the market. The Smokies have a huge amount of demand. I don’t expect it to go down there, but there are places maybe in Florida or the Northwest or on the beach that might start to see some declines, and that can mean good buying opportunities. Overall, as a short term rental investor, I think the long term prospects are still really good, but you should keep an eye on the things that we mentioned today. If you all have any questions about this data or anything else, you can reach out to me on Instagram. My handle is @thedatadeli. I would love to hear what you think about this information and what you think about these bonus episodes, because this is something new that we’re doing, and I would love your feedback about what you like. If there’s something we could do better, that would be a super big help to us. Another big help, is if you do like this episode, to give us a five star review on either Spotify or Apple. Thank you all so much for listening. We will be back on Monday with our regularly scheduled episode.
On the Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub and a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.