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Property managers always look at the yield on potential investments but there’s no guarantee that it will stay the same — and that’s particularly true of the short term rental market.
The STR market worldwide grew dramatically in the years after the pandemic, and increased supply is a main factor that will hurt revenues even when demand is strong.
This is why yield shouldn’t be the only consideration when assessing a potential short term rental investment or adding to your portfolio. It’s important that STR property managers don’t underestimate the consequences of poor acquisitions, because there’s only so many levers you can pull when short term rental bookings are low.
If demand falls, competition for guests can quickly dent occupancy and force property managers to discount average daily rates (ADRs) to boost demand. This can drastically alter the financial viability of a vacation rental.
Investors and property managers making decisions about expanding their portfolio should make sure that other factors are taken into account too, to ensure properties are more resilient to downturns. Location, property price, seasonality, amenities, local attractions, transport links, annual events and — most importantly — the long-term performance of the short term rental market should all be on that list.
There’s been talk of oversupply in many areas recently. While RevPAR has been fairly flat in the UK and Europe during the first half of 2023, the US has been suffering. Inflation has continued to hurt short term rental revenues in America, thanks to changes in the balance of supply and demand. But how much care do investors need to take, and how dramatic can a collapse in key metrics be?
There Are Plenty Of Real-Life Examples This Summer
We pulled year-on-year pacing data for August stays (as of 2nd August) from across the US to illustrate how fast the decline in ADRs and occupancy can be when demand softens.
We didn’t have to look far to find extreme examples of declining occupancy and ADRs this summer and no region seems to have been immune with slowdowns seen in all kinds of markets from the big cities like New York to the wilds of Arizona.
In Brooklyn, for example, property managers have had to contend with August occupancy dropping by 34% compared to last year, forcing them to discount nightly rates by 38% to $211. While this is one of the more extreme examples, it demonstrates how wild swings in demand can place a lot of stress on STR business models.
Other examples (see table) include Milpitas, California, which has seen August ADRs drop 32% to $138 and occupancy fall by nearly a third (29%), Miami Shores in Florida, where ADRs have fallen 37% to £303 alongside a 29% decrease in occupancy and Tequesta, Florida, where occupancy has declined 29%, bringing nightly rates down 30% to $285.
In some of the locations our research highlighted, occupancy has fallen significantly. Property managers in Indian Wells in California are contending with August occupancy of 8% on average — down a massive 52% in a year. By the end of the month this will improve, but it is a clear sign that the market is facing enormous headwinds in some destinations.
Changing tastes, macroeconomic factors such as recessions in key STR feeder markets, and oversupply can all have a dramatic impact on demand and the fundamentals of running a short term rental business.
If you want to learn how to use short term rental market data to identify the best investment locations to expand your portfolio, sign up for a demo of our Key Data Dashboard.
