Airbnb’s business is currently booming. This popular platform reported its highest revenue and profit ever in the third quarter of 2022. The growth can be attributed mainly to the strong demand and higher daily rates. Notably, the growing vacation rental sector has now caught the attention of real estate investors and entrepreneurs, who have been amassing huge portfolios of near-term rental properties to cash in on the boom.
Tony J. Robinson, co-host of The Real Estate Rookie podcast, stated:
“Over the last three years in the world of real estate investing, short-term rentals have been sort of a gold rush.”
Similar to the real gold rushes in the 19th century, he said, most investors were drawn to near-term rental investment without the appropriate tools and skills.
“I think a lot of people who jumped in looking to make a quick buck will back out.”
Based on an article in Bloomberg Markets, most of the pop-up Airbnb empires were funded using risky loans backed not by huge down payments or borrower salaries, but by the possible future earnings of the rentals themselves. In case the near-term rental boom was to bust, it could spell some serious trouble for the investors and the banks that funded them.
Few experts now predict a full-on housing crash like the one that was seen from 2008-2014, partially because lending standards are significantly higher for residential mortgages now than they were in the years that led to the 2008 financial crisis. Yet, these loans supporting vacation rentals entrepreneurs might rest on shakier ground.
Instead of being inundated by many foreclosures from underwater homeowners, the property market – mainly in tourism-dependent regions – could easily get oversupplied by the very investors who were snapping up houses during the pandemic: Airbnb landlords.
Jaime Peters, assistant dean of accounting, economics, and finance working at Maryville University’s John E. Simon School of Business explained in an email interview:
“At a national level, a wholesale dumping of Airbnb houses would be needed to create a crash.”
Demand seems to outstrip supply in the current housing market, where most of the home buyers have shopped for several months, and made many offers, without succeeding in any purchase. According to the St. Louis Federal Reserve:
“There are less than 800,000 homes on the market nationwide. That level of inventory is still really low.”
If the Airbnb investors sold their properties and freed up supply, it could provide some relief for harried homebuyers.
A Supply Glut
Airbnb hosts keep adding some new listings at an astounding pace. Total near-term rental supply in the United States reached 1.38 million listings in September, up 23% compared with the same time in the past year, as highlighted by AirDNA, and industry Analytics Company. A staggering 62% of active listings have been added since 2020.
Geographically, the new listings appear not to be evenly distributed. The Scottsdale and Phoenix market recorded a 44% surge year over year, while Las Vegas saw a 36% growth in new listings. In the meantime, the Sun Belt cities are now experiencing some of the quickest-dropping housing prices in the US, down 4.4% and 4.8%, respectively, compared to their peaks in the spring, based on AEI Housing Center.
The number of short-term rental listings in most of the small-town and rural areas almost doubled between May 2019 and May 2022, as highlighted in a joint report by AirDNA and STR, another reputable analytics company.
This comes after a trend of US travelers looking for fresh air and solitude during the pandemic but could prove quite disastrous for Airbnb landlords in these regions in case travel patterns get back to normal. Peters said:
“Rural areas are in danger. The lack of alternative uses of grand rental mansions, with hot tubs, game rooms, and sweeping vistas in rural areas makes them particularly vulnerable. A small apartment in New York City can always be converted back into the (typically less profitable) long-term rental, but that is difficult with a seven-bedroom mansion in rural Georgia.”
Robinson manages 30 properties across the country. He shares similar worries about a possible slowdown in demand for rural vacation rentals. He mentioned:
“If I try to convert my Tennessee properties into long-term rentals, I wouldn’t make money. So I would be motivated to sell.”
Softening Demand, Growing Scrutiny
The hosts themselves have already started ringing the alarm about an “Airbnbust,” according to a viral tweet from a host in October.
This has now coincided with a backlash against Airbnb among guests and media pundits, who have relentlessly complained about high prices, confusing fees, and some disappointing rentals. Brian Chesky, the CEO of Airbnb, recently addressed these issues on Twitter, stating:
“I’ve heard you loud and clear, and promising to improve these experiences for guests.”
Yet whether due to unsatisfied guests, inflation, or the changes in travel patterns, demand for vacation rentals does not seem to be softening. In its Q3 financial results, Airbnb lowered its projections for Q4 revenue. Data acquired from AirDNA shows that occupancy (the share of available nights that are booked) has plunged by 1.2% year over year, indicating that supply is outpacing demand.
The short-term rental sector now faces other headwinds that may cause most Airbnb landlords to dump their portfolios, beyond simple supply and demand.
Buy Crypto NowInterestingly, the New Orleans City Council recently passed a temporary suspension on new short-term rentals in October. The city of Palm Springs, California, a popular vacation rental destination, placed a cap on the total number of rentals allowed per neighborhood.
Peters concluded:
“In areas where tourism is the main attraction, there are two dangers. The growing popularity and supply of Airbnbs mean more competition and, thus, lower prices. Second, when demand slows down — such as a recession — leveraged, amateur owners are likely to be the first to need to sell.”
