The US short-term rental market has seen eye-watering growth over the past two years—and depending on who you are, that could be good or bad news. The market is undergoing a huge shift at the moment, and hosts and property managers face the inevitable unwinding of the post-pandemic boom.
Over the coming months, owners and operators will need to reassess their strategies in order to protect revenue and attract guests as the market faces a natural drop in both supply and demand.
The US Short-Term Rental Surge of 2022
An enormous surge in the number of property owners and managers hoping to cash in on short-term rental demand saw a spike in the number of active properties and nights sold last year, which was completely out of step with the industry’s long-term trend of steady growth.
Vacation rental supply in the US grew 28.7 percent in the two years to Q3 2022, when there were 1,760,000 active properties—the highest figure on record. In many ways, this was the golden quarter for managers and hosts, who were charging on average $118 a night and enjoying a heightened occupancy rate of 41 percent—again, the highest ever recorded.
A peak in both supply and demand was the result of a confluence of events that ignited the market in a way that simply hadn’t been seen before. The post-pandemic vacation boom was in full swing, and a shift to remote working saw millions continuing to lead flexible work lives from short-term rentals everywhere. Witnessing this unfold was an army of investors keen to get in on the action. Interest rates were low, regulation was still evolving, and there was almost no barrier to entry for those who saw property as a safe asset class, for which the superior returns provided by short-term lets was the icing on the cake. Meanwhile, for homeowners looking to move, it was an unmissable opportunity to cash in on the surge by renting out a property rather than selling up.
It took four quarters for this accelerated momentum to really build and, as demand grew, so did the revenue per available room (RevPAR) that managers and hosts were able to achieve. In the two years to Q3 2022, RevPAR rose 87 percent from $63 to $118. Over the same period, occupancy increased from 26 percent to 41 percent—a stark indication that supply failed to keep up with demand.
Economic Tightening Is Causing Many to Flee the Market
This trend may have continued were it not for the fact that the post-pandemic surge coincided with a period of global economic tightening. Almost overnight, the prospects for the short-term rental market seemed to flip, as rising inflation, a cost-of-living crisis, and a cascade of central bank interest rate rises flooded the economy. Suddenly, travelers had less money to spend, operating costs jumped, and the cost of mortgages skyrocketed. This, coupled with falling occupancy and lower RevPAR, dented yields at a stroke.
On the one hand, RevPAR has fallen from $118 at the peak to $79 in Q1 this year. It’s typical to see a drop when comparing the peak summer period with off-peak winter months because of seasonal trends, but we can see it has been extremely exaggerated this time around, meaning rewards for managers and hosts have been impacted.
Many who decided to try their hand at real estate investing during the post-pandemic demand boom found they could no longer afford it. Operators and owners who entered the market or expanded their portfolio during this peak found themselves navigating an economic slowdown, forcing many to exit the market—and subsequently causing supply to stagnate.
The Post-Pandemic Golden Year for Short-Term Rentals Is Over—or Is It?
The real question is how much disruption will be caused as the short-term rental market unwinds in parallel with a cooling housing market and continued talk of recession. Since Q3, US vacation rental supply has stagnated. The data tells us that if the market takes as long to unwind as it did to get going, there could be two more quarters of softening supply.
The big unknown is what effect this will have and how far plateauing supply will put a floor under-occupancy rates and nightly revenues. On the one hand, RevPAR of $79 represents a fall of a third from the peak in just six months. On the other, this is still a relatively healthy figure historically speaking. The industry is actually stronger on all measures over the last two years.
That will be cold comfort for anyone who has bought a property at the peak and is now unable to cover the mortgage. It will be equally troubling for those who have rented rather than sold and are now seeing their nest egg eroded and rental income collapse.
What Does This Mean for Professionals Still in the Market?
Perhaps one of the most eye-opening results of our analysis is that total short-term rental revenue in the US has actually declined 7.9 percent annually from $11.6 billion to $10.7 billion in Q1 2023 once inflation is taken into account. Meanwhile, there are 4.8 percent more rentals available (73,502) and occupancy is down three percentage points. This indicates that, while competition is easing due to falling supply, there could be more pain to come as demand and occupancy continue to tumble, too.
But, I believe there is still room for optimism.
Managers and hosts who have weathered the storm should think of the market as rebalancing over the next six months rather than crashing. This cyclical process is one of renewal and, for those who remain, strong returns on properties selected with care will still offer superior returns. Professional hosts and property managers will still be able to leverage their expertise and know-how to boost returns further. And it’s here they have the power to act now, even while the rebalancing of the market still has some way to run.
For the time being, differentiation is going to be especially important, with guests having a firmer grip on spending. Those with a quality offering will be less inclined to compete on price, so targeted and accurate marketing that makes points of difference clear to prospective guests will be one of the few ways to protect revenue. Quality will out, but operators need to make sure the market can see why their property is worth a higher daily rate. They can also protect revenue by making sure they are doing everything they can to extend stays and reduce gap nights.
Competition is easing as opportunistic hosts exit the market, but this doesn’t mean those who remain in the short-term rental market are out of the woods. Hosts and managers should expect supply to continue rebalancing as we head toward summer. This will likely support a rebound in RevPAR toward the end of the year but, for now, there’s no room for complacency. Competition continues to weigh on returns and it is those hosts who can differentiate their properties who will experience the least disruption to revenues.
Melanie Brown is the executive director of data insights at Key Data.