US: If any market has seen seismic change over the last decade, it is the one for short-term rentals: the industry went from a handful of small vacation rentals to around 1.5 million units of available supply in the U.S. alone by the end of 2019.
The U.S. industry has seen a penetration rate of 10.4 per cent, over five times that of similar industry flex-office space. The industry is not going away. This begs the question- how has the industry grown, and how will it grow in the future.
Leading global real estate investment firm CBRE released a data retrospective on the decade at hand, noting both how much the industry has changed and where the industry could go from here.
Growth has slowed over the past few years, down 13 per cent from 2018, and are expected to slow to 19 per cent by 2020, a vast change from the near 50 per cent growth rates the industry saw in its infancy. This pairs along with stagnation in growth in some of the industry’s largest markets – New York, Los Angeles and Boston.
When examining penetration, the general rate across both major cities and smaller markets speaks to a decline. The 30 largest markets saw a 1.6 per cent penetration growth rate, relative to two per cent nationwide.
Five individual markets saw growth rates of under half a per cent, with the integral New York market losing penetration in 2019.
Companies like Airbnb built their businesses on the back of urban property, so what is causing the slow? Two major trends can be seen as the cause here.
Firstly, most of these cities have implemented legislation, toning down the appetite of investors to jump on the bandwagon. New York and Boston have both implemented strict limitations on how short-term rental operators can do business, with smaller cities seeming to follow suit.
The second is market saturation within these urban spaces. While short-term rentals can provide valuable room supply during busy times, competition between short-term rentals and traditional hotels means that these urban markets are becoming over-tapped.
Because of this, most growth seen in the past year comes from rural and non-major market spaces: 57 per cent of supply can be found outside of large cities. Destination travel rentals which were previously not available on short-term rental platforms have made listings, helping increase their numbers.
Mountains, beaches and lakefront property make up the largest rising segment of supply, partially because of these destination rentals. According to data platforms like AirDNA, because this growth is made up of pre-existing markets, it does not represent short-term rental competition to traditional hotels.
Growth can be irregular though and unlinked to trends. The city of Atlanta saw a 68 per cent annualised growth rate in rental supply due to the Super Bowl’s presence there in early 2019, and Miami seems set for similar growth as it hosts this year’s big game.
This flexibility and irregularity due to demand does, however, can affect the cycles of the industry. Because less time and preparation goes into the opening of Airbnb units, there is less of a gap between the rise of demand in a market and the presence of supply to fill it.
What this means for hotels is a diminished control over their own ability to control prices. Statistics reveal that the increase of RADR [Risk-Adjusted Discounted Rate] and supply at the same time keeps managers from shifting prices, leading to a complex combination of high occupancy and low rates.
This has led to a general stagnation of growth in annual daily revenue [ADR] across the industry. With the notable exception of rural and destination business.
These segments tend not to conflict with major hotel chains due to:
- The tendencies for rentals to be houses rather than rooms
- Higher prices reducing the cost saving factor of urban STRs
- Many rural short-term rentals do not have a single hotel within a one-mile radius
- Many properties have existed beforehand, but are only recently available on rental platforms
In all markets though, the growth of short-term rentals is impacting the way that hotels are valued. As it stands, traditional third party information pipelines are not adequately expressing the way that these new properties affect regional supply.
While traditional market forces still account for value with correct methods, the lack of short-term rental inclusion means that hotels will constrain themselves because of incomplete statistics. There is already evidence that low ADR increases is constraining hotel construction in urban areas.
But with discussions of the past, the question falls to the future: what is going to be the next evolution of the short-term rental concept? For many, this is the branded apartment.
The principle is: a company will purchase or lease a collection of units in a larger building, and lease them through a singular manager, or singular brand. Companies such as Sonder, Domio and Airbnb’s Niido brand are all strong leaders within the field.
By managing the individual units together, the business is easier for operators, more consistently branded, easier to integrate novel technology with, and allow for purpose-built structures, similar to hotels. The positives all should allow property managers to gain more revenue from units should they follow this type.
However, the downside is that some of these models are already becoming topics of legislation, and are part of a trend that investors are becoming skeptical of. Boston has closed a legislative loophole focused primarily on Sonder, while concerns about the master hospitality lease model have been rising.
What to take away from all this?
First and foremost, the short-term rental industry is not going anywhere. Penetration is already high, and even if urban markets are slowing, the accessibility that new platforms provide mean that growth is still in the rural market’s future.
However, it is important to note that short-term rentals fundamentally change how the industry adapts to economic fluctuations. Their ability to provide quick supply during intense periods mean hotels cannot adapt their prices quickly or fill supply on their own.
Because of this, industry statisticians need to take into account the importance of short-term rentals moving forward. Especially when possible future business models, like branded apartments, look less like room rentals and much more like traditional hotels.
To view the original report in full, visit the link at the CBRE Research website here.