It’s been more than lucky timing for short-term rental investors. The confluence of housing shortages relaxed COVID restrictions, and consumers’ desire for a more organic vacation experience has made short-term rentals big business and a popular choice for getaways.
In the U.S., over 200 million overnight stays were booked in 2023. Short-term rentals were a $64 billion market with over 2.4 million properties operated by 785,000 hosts at an average daily rate of just over $300 and an average return of $26,024 annually, according to analytics firm AirDNA. The short-term rental industry is anticipated to exceed $81 billion in the next 10 years.
Precedence Research lists a number of reasons the short-term rental market is growing, including:
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Short-term rental agencies such as Airbnb, Vrbo, and Yacasa streamline bookings for vacationers as well as give a platform to homeowners to advertise their property or properties.
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Corporate travel, adventure travel, and staycations are increasing demand for distinctive, cozy lodging.
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Gen Z and millennials want unique experiences they can book online.
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A higher percentage of disposable income is being used toward travel.
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Homeowners can derive income from their investments.
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Automation technologies such as self-check-in and keyless entries streamline the process.
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Eco-aware tourists like eco-friendly, energy-efficient lodgings.
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Guests like the option to prepare their own food and do their own laundry in a home environment.
This rapid growth held promise until a wave of new entrepreneurs flooded the market. AirDNA’s 2024 Outlook Report shows that, while short-term rental occupancy rates spiked to 61.3% in 2021, the increasing competition drove revenue per available room (RevPAR) down by 4.9%, slowing year-over-year growth to 6.7% in 2022. By the end of 2023, RevPAR had declined by 8.3%, with only a slight rebound of between half a percent and one percent projected for the end of 2024.
Churn, which represents the removal of listings from rental agencies, increased sharply to 4.8% of listings between March 2020 and September 2020, due to job losses, travel restrictions, and quarantine-in-place mandates, but overall has declined steadily since 2018. A small uptick in churn reemerged in early 2023 but has held somewhat steady at around 2.8%. “Nationally, daily rates [ADRs] are expected to increase by about 2.0% as inflation stabilizes,” said Bram Gallagher, AirDNA’s director of Economics and Forecasting.
However, the changes in RevPAR and churn are enough to make investors worry that an “Airbnbust” is on the way. A series of natural disasters—from an unusually active hurricane season on the East Coast to devastating wildfires in Canada and Hawaii along with back-to-back summers of extreme heat, have dampened short-term rental demand in several regions. Meanwhile, cruise bookings surged by over 78% in 2023, and demand for luxury and upscale rentals declined as consumers increasingly chose international destinations or opted for more modest accommodations.
But instead of short-term rentals declining as a whole, it’s more likely that consumers are simply trying to avoid getting overheated or otherwise having their vacations ruined by Mother Nature. TheShortTermShop.com maintains that before the pandemic of 2020, “10% of short-term rental reservations were made in rural areas, 13% in mountainous areas, and 34% in coastal regions.” By summer 2023, bookings rose to 18% in rural areas and 42% in mountainous areas, while they sank to 22% in coastal areas. In 2023, demand for short-term rentals grew by just 1.8% year-over-year because inflation and soaring prices for consumer goods made people cautious about spending.
With interest rates and recession fears easing in 2024, demand is growing. AirDNA’s mid-year outlook for 2024 and 2025 reports that demand for short-term rentals surged 6.8% higher by July 2024 and demand will end the year up 5.9% over 2023. In 2025, demand should be even stronger, resulting in an anticipated 6.8% growth rate.
It’s likely there will be little inventory added to the current supplies of short-term rentals. In 2024, there are 1,674,300 listed rentals, and forecasters say there will be 1,757,602 listed rentals in 2025. While occupancy rates have declined since reaching a peak in 2021, they’re only down 1.5% in 2024 (54%). Occupancy rates are expected to grow due to slower supply growth and continued demand but remain flat through 2025 (54.3%).
Average daily rates reversed post-pandemic declines, growing by 2.8% by mid-year 2024. Rates are projected to be flat in 2025 (2.1%). RevPAR is also reversing declines and should improve by a modest 0.6% by year-end and accelerate to 2.9% in 2025. Real personal income is rising, up 2.1% in 2024, and should grow to 2.8% in 2025.
Entrepreneurs are nothing if not resourceful. Instead of relying on short-term rental agencies, many homeowners are partnering with traditional real estate agencies to encourage longer-term rentals by the week or the month. Longer stays would increase RevPAR in slow seasons by appealing to work-from-home tenants, visiting nurses and other traveling professionals, and on-assignment personnel. Retirees, second-home buyers, transferees, and job-seekers can use longer stays to become familiar with an area before buying a property.
But it’s not only homeowners interested in maximizing their investments. Fractional home ownership through online, crowdfunded REITs like Arrived and Fundrise is appealing to many investors who want to cash in on house rentals without becoming landlords themselves. Arrived has paid 3.1% to 7.4% in annual dividends to investors, while Fundrise’s average dividend is 5.42%. Investors who invest in specific properties split the profits when a property is sold, in as long as seven years.
While gains might be modest in the short-term rental industry for now, the outlook is positive. There’s a growing sense of optimism about the economy, tamer inflation and evaporating recession worries. That’s good for both investors and consumers.
