Short Term Rentals Growth Reducing Affordable Housing Opportunities?

The rise and growth of short-term rental platforms such as Airbnb, HomeAway and VRBO has created plenty of debate amongst local governments, the hotel industry, the real estate lobby, housing activists and local residents about the impact of such rentals on the availability of affordability of long-term rental housing.

According to a recent article in the Harvard Law & Policy Review the theory goes as follows: short-term rentals “reduces the affordable housing supply by distorting the housing market in two interconnected mechanisms. The first such mechanism is one of simple conversion: any housing unit that was previously occupied by a city resident, but is now listed on Airbnb year round, is a unit that has been removed from the rental market and has essentially been added to [the community’s] supply of hotel rooms. This leads to a real, but likely mild, increase in  rents, an effect that is concentrated in affluent or gentrifying neighborhoods along the [community’s] central core. More disconcertingly, conversion reduces [the community’s] already-limited supply of affordable housing. The second mechanism is “hotelization.” So long as a property owner or leaseholder can rent out a room on Airbnb for cheaper than the price of a hotel room, while earning a substantial premium over the residential market or rent-controlled rent, there is an overpowering incentive to list each unit in a building on Airbnb rather than rent to [local] residents, thereby creating “cottage hotels.” This decreases the supply of housing and spurs displacement, gentrification, and segregation.

While still a theory, more and more evidence is suggesting that these effects are in-fact real. As an example, a 2016 study from the University of Massachusetts concluded that in Boston, MA “home sharing is increasing rents by decreasing the supply of units available to potential residents [and] that a one standard deviation increase in Airbnb listings relative to the total number of housing units in a census tract is associated with an increase in asking rents of 0.4%. For those census tracts in the highest decile of Airbnb listings relative to total housing units, this increase in asking rents ranges from 1.3% to 3.1%, which equates at the citywide mean monthly asking rent to an increase of as much as $93.”

This conclusion is consistent with other independent academic studies which like this recent paper published by researchers at the National Bureau of Economic Research, the University of California, Los Angeles (UCLA) and the University of Southern California concluded that on a national basis “a 10% increase in Airbnb listings leads to a 0.42% increase in rents and a 0.76% increase in house prices. Moreover, we find that the effect of Airbnb is smaller in zipcodes with a larger share of owner-occupiers, a result consistent with absentee landlords taking their homes away from the long-term rental market and listing them on Airbnb.”

Given that the short-term rental industry has grown by 800% since 2011, it is therefore not hard to see why many people are concerned about this industry’s impact on the affordability and availability of long-term rental housing. Just think about, if a 10% increase in the number of short-term rental listings was found to lead to a 0.42% increase in rents, the actual 800% increase in short-term rental listing since 2011, would be responsible for a 33.6% rent increase over that same time period! 

Looking Ahead the Trend looks to continue

In 2023 Revenue Per Available Room (RevPAR) was expected to decline by 4.9%, the first full year RevPAR declined since AirDNA started collecting industry performance data in 2014.  While most hosts saw revenue declines, 2023 also took the U.S. short-term rental (STR) market to new heights. July saw the highest number of nights demanded in any month, and the total number of available listings topped 1.6 million by September. Meanwhile, the US economy persistently defied predictions of recession, with unemployment remaining below 4% and inflation declining markedly quickly for most of the year. Stubbornly high supply growth coupled with the effects of consumer budgets stretched thin by high prices have meant that the dramatic occupancy gains recently seen have been essentially erased. Exceptionally strong price increases in 2021 and 2022 left travelers searching hard for bargains in 2023 as well. This left existing hosts with scant pricing power and new entrants little choice but to offer low rates to attract demand. Even if stories of “Airbnbust” proved overblown, and most markets saw strong demand growth, the lower unit-performance made 2023 feel like something of a correction year after two years of remarkably strong performance.

A year of economic uncertainty and changing international travel patterns slowed demand growth in 2023, to 6.7% year-over-year (YOY). In 2024, economic growth and recovery in domestic leisure travel will reaccelerate demand growth to 10.7%.

High mortgage rates and soft per-unit performance have dampened supply growth from the extreme highs of 2022, but perhaps not as much as originally anticipated. Surprisingly strong listing growth in October and a relatively low percentage of listing churn will increase the number of available nights by 12.8% in 2023. Performance will return to long-running averages and bring supply growth back to 10.9% in 2024, striking a better balance with demand.

Occupancy has been steadily falling since the highs seen in 2021. By the end of 2023, the yearly average will land approximately at the pre-pandemic level of 54.8%. In 2024, balance in supply and demand growth will maintain occupancy at 54.7%, about the same as in 2023.Average Daily Rates (ADRs) Inflation-weary travelers looking for affordable options kept rate growth to only 0.5% in 2023.

As changes to the price level normalize in 2024, so too will ADR growth. ADRs should increase by about 2.1% in 2024.

The significant decrease in occupancy and near-standstill in ADR has caused RevPAR to decline 4.9% in 2023, the first such annual decline we’ve recorded. We can interpret the decline in 2023 as a return to more normal performance after the STR market’s meteoric rise in 2021. 2024 will see RevPAR raise by 1.9% thanks to steady occupancy and a 2.1% increase in ADR.

Demand growth slowed considerably in 2023, as did nights booked. A combination of economic uncertainty, weak consumption growth in Q2, and the delayed effect of inflation rates reaching a generational high worked together to weaken aggregate demand for stays. In addition, several unanticipated events further dampened demand, including a record-breaking heat wave in August, devastating wildfires in Hawaii and across Canada, and a hurricane passing through Florida’s Big Bend region near the peak of the travel season. September, October, and November experienced a re-acceleration in demand, bearing out predictions of additional interest in shoulder season travel.

The weak demand for STRs across the U.S. this summer wasn't necessarily because guests were pulling back travel but because Americans were once again traveling overseas and taking more cruises. Over this past summer, STR demand was up 17% for stays in international locations, while trips to domestic destinations increased just 4.5% YOY. Air travel was also up 12.5% over the past year, while trips on cruises rose over 78%.

Throughout the year, demand growth was weakest in coastal (+2.8%) and mountain (+4.9%) locations, which were the two markets that benefited most from higher domestic demand in 2021 and 2022. Surprisingly, demand continues to be the strongest in small and mid-size cities across the country. Demand maintained double-digit growth through 2023,  which has been helped by healthy listing growth in those same areas.

An examination of market-level performance reveals considerable differences, but generally, demand growth was positive. Some of the weakest markets were those affected by the aforementioned disasters.

Phoenix/Scottsdale managed to weather the hottest temperatures ever recorded in a U.S. metropolitan area to grow its demand by more than 25%, thanks in large part to Super Bowl LVI.

Jersey City/Newark also saw large demand increases, as the enforcement of severe restrictions in New York City sent travelers across the Hudson as a substitute.

Here are Some of the Emerging Trends in the Short Term Rental Space in 2024:

1. Rising Demand in Quiet, Rural Areas

The shift towards remote work and the desire for more space, not only a want but a requirement for many emerging from the Covid-19 pandemic has propelled the demand for short term rentals in rural areas. Properties near national parks, quaint towns, and scenic mountain ranges are predicted to see continued high demand, driven by the desire for quality time in nature. This trend suggests a lasting change in the vacation rental pricing strategy, as rural locations that were last-pick options are now becoming sought-after destinations for privacy, relaxation, and a hub from everything from a remote work escape to a family adventure.

2. Sustainability Focus

The environmental impact of travel and real estate has heightened the demand for eco-friendly rentals. Investing in properties with sustainable features, like solar panels and energy-efficient appliances, aligns with the growing conscientiousness among guests, making it a prudent and forward-thinking investment decision.

3. Luxury STR Properties Surge

The luxury segment of the STR market has seen a notable uptick, particularly following the COVID-19 pandemic. Travelers are increasingly seeking private, high-end accommodations offering ample space and exclusive amenities. Even rural properties outfitted with high-end amenities, from hot tubs to saunas, and theaters to game rooms end up becoming destinations themselves. This trend suggests that investment in luxury STRs could yield considerable returns, as demand for high-quality, private vacation experiences continues to grow.

4. Rise of Management Companies

With the STR market's expansion, the need for professional property management services is more pronounced than ever. Management companies, are becoming vital for property owners, particularly those who live far from their rental properties. These companies leverage market data to set rates and increase occupancy rates, handling everything from guest communications to maintenance, thus simplifying the process of earning passive income from

Here were the Top 9 Short-Term Rental Hotspots of 2023:

9. Columbus, Ohio: Known for its top-ranked universities and vibrant sports culture, Columbus was the highest-searched city on our list. Since 2022, available listings have increased 37% year over year.

8. Tampa, Florida: A vibrant Cuban community, famous theme parks, museums, and sports teams make Tampa an attractive destination for visitors. Last year, short-term rental listings grew 25%, with the most significant growth among suburb homes.

7. Charlotte, North Carolina: Charlotte, home to NASCAR and several art museums, saw a 23% YOY supply growth in short-term rental listings. With affordable homes valued at around $330K.

6. St. Petersburg, Florida: Known as the "Sunshine City," St. Petersburg is a beach city with a record of 768 days of consecutive sunshine. Short-term rental listings grew 16% over the last year, with the strongest growth among suburban homes.

5. San Antonio, Texas: Home to The Alamo and the River Walk, San Antonio's vibrant history and Tex-Mex cuisine draws visitors from around the globe. Listings in this historically rich city grew 28% YOY, with the most significant growth among suburb homes

4. St. Louis, Missouri: This transportation hub offers family-friendly fun and is known for its iconic arch. St. Louis has seen a 33% YOY growth in listings, making it a city of great potential for short-term rental owners.

3. Houston, Texas: Houston's rich blend of art, food, and culture, coupled with its strong job economy, has led to a 19% YOY growth in short-term rental listings. The city added 3,200 new listings last year, the second-largest number on our list.

2. Dallas, Texas: Known for its hearty cuisine, lively music scene, and thriving business hub, Dallas has experienced a supply growth of 18% YOY. With home values averaging $350K, it's an attractive destination for short-term rental investors.

1. Phoenix/Scottsdale, Arizona: A beacon for outdoor enthusiasts, Phoenix/Scottsdale has seen a staggering 60% YOY increase in listings. The city's sunny climate and scenic landscapes continue to attract a diverse array of visitors.