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The short term rental landscape is not what it once was. Between the beginning of 2021 and the end of September last year, the U.S. saw a sharp increase in supply, with almost a third (28.7%) more properties added to the market. This surge in supply was brought about by massive demand for alternative accommodation options post-pandemic. But how is the industry performing today? Has the market become so saturated that property managers are struggling to compete? Have recent economic challenges affected supply and demand?
Let’s take a look at how the sector has performed in recent years and what the outlook for 2023 may hold…
The Short Term Rental Boom
Thanks to leading booking giant Airbnb popularizing the sector and a shift in people’s work-life balance, the demand for short term rentals shot up post-pandemic. Armed with saved vacation funds and a pent-up desire to travel, as soon as restrictions were lifted people flocked to alternative accommodation all around the world, igniting the short term rental boom.
This boom continued throughout 2021 into 2022, with supply keeping up with increasing consumer demand. The majority of this growth was witnessed in the third quarter of the year (July-September), suggesting the return of peak seasons as the travel industry begins to normalize.
Industry Challenges
While this supply growth boasts the success of the sector, it has led to a heavily saturated market. Because of this, average daily rates (ADR) have been falling as property managers attempt to remain competitive and appeal to guests who have increased housing options to choose from. Where most months in 2022 reaped higher ADRs year-over-year, the increase began to slow as the year closed. In November, the ADR in the U.S. was only $7/night higher than in 2021. And December went on to mark the first month of ADR decreases, with rates being $10/night less than in 2021.
To add to this, the industry has been impacted by an ongoing cost of living squeeze. U.S. inflation peaked at 9.1% in June of 2022, affecting guests' budgets and property managers' bottom lines. Although this rate has been falling month by month, the year still ended on an annual 6.5% increase, meaning those in the industry continue to face higher operational costs.
Did Inflation Slow the Short Term Rental Boom?
From September of last year until early February, supply in the U.S. has fallen by 8.8%. While we cannot say for sure that increased costs and tighter travel budgets caused by inflation are the root cause of declining supply, there are significant data trends to support this theory.
It’s likely this decrease in supply accounts for small-time hosts and newer property managers who joined the market during the short term rental boom but struggled to remain competitive as operating costs increased. It’s even possible that some long-term, experienced property managers are taking this opportunity to consolidate their portfolios to reduce costs.
What’s Ahead for 2023?
Despite the declines in short term rental supply, the U.S. still has more available properties than the same time last year. What’s more, guest demand seems to remain strong, with short term rental bookings made in January increasing 27% year over year in the U.S. and 19% in the U.K. The observed thinning of supply is likely a direct result of an over-saturation of the market during the short term rental boom, and now the sector is simply beginning to normalize.
Key Takeaways
- 2021 and 2022 witnessed mass growth of short term rental supply
- An oversaturated market and inflation could have caused lower U.S. ADRs
- Supply fell in the final quarter of 2022 and continues to decrease
- Guest demand remains strong, suggesting a positive year ahead
Short term rental supply may have declined in recent months, but accommodation booking trends from January suggest the industry will once again give us a strong performance in 2023.
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