The Rise of Short-Term Rentals
I recently asked a millennial where she likes to stay when she travels, and her exuberant response was “Airbnb, and preferably a Superhost!” The company has existed for only ten years or so, and yet Airbnb (along with VRBO and similar online platforms) has been instrumental in helping the short-term rentals (STR) market grow and thrive.
What explains the popularity of STRs? Competitive pricing and ease of booking and viewing online reviews are some clear advantages over traditional lodging. The kind of experience you can get at an STR is another. One source reports that seven in ten millennial business travelers would prefer a local host STR because of the experience they would have there as opposed to a traditional hotel. This includes the opportunity to stay in an unusual place, in a local neighborhood, and somewhere that feels like home even when you’re away from home. And while millennials represent the largest percentage of STR consumers, baby boomers are also getting in on the act.
Along with the growing popularity of STRs, the industry also faces various hurdles, including an ever-increasing amount of regulation. Some argue that STRs negatively impact neighborhoods by driving up housing prices and by attracting undesirable short-term renters who cause noise and other problems and who don’t really care about the community. As well, many cities are either limiting or prohibiting STRs so that they don’t lose tax revenue they would otherwise collect if travelers stayed in local hotels. In spite of these challenges, however, the market for STRs continues to grow. And in addition to the traditional peer-to-peer house-sharing by individual owners that helped created this market in the first place, a new sub-class in commercial real estate has begun to emerge.
Current Prospects for the Short-Term Rentals Industry
STRs are lucrative, aided by quickly-developing proptech that makes managing and renting properties easier and easier. With projected revenues for worldwide vacation rentals in 2020 approaching US$100 billion, the global market is significant. While the majority of this revenue continues to be generated in the United States (which accounts for about 20% of all vacation rental properties), other countries such as China, Germany, Japan, and the United Kingdom are gaining. As for individual cities, Paris, France is reportedly the world’s largest single vacation rental market, and although it has begun to closely regulate the short-term rental industry, the city nonetheless continues to show very positive revenue growth. In the United States, cities showing the highest year-over-year growth include the likes of Denver, CO, Dallas, TX, and Phoenix, AZ.
According to iPropertyManagement, about 70% of vacation rental companies are small, managing 1-19 units, while 20% of the companies are medium-sized, and the balance are large companies that manage over 100 units. The various online marketing platforms for STRs include companies such as Airbnb, VRBO, Homeaway, TripAdvisor, FlipKey and Craigslist.
Airbnb, which is expected to go public in 2020, is valued around US$35 billion based on its historical capital funding rounds. According to Forbes, the company’s CEO Brian Chesky said that Airbnb “[doesn’t] need to raise money, and so we haven’t been in a rush.” The success of Airbnb has caused a major disruption to the hotel industry. In fact, large hotel chains are adopting some of the best practices of the business models of Airbnb and others competing in this space, such that the lines between hotels and short-term accommodations learning have begun to blur. As STR services have become more robust and competitive, hotels have responded in kind by offering things like “greater standardization, easy check-in, and more whole-unit rentals (as opposed to bedrooms in an owner’s home).” Hotels are also becoming more locally focused. For example, Hilton is creating “locally curated” hotels which respond to local influences and tastes. Ultimately, the competition between hotels and local host services has spurred innovation, which is all good news for the consumer.
The Emergence of Short-Term Rentals as an Asset Sub-Class in Real Estate Investment
One of the more recent developments in the evolution of this space is the entry of commercial real estate investment. Big and small investors alike are purchasing millions of properties with the intent to earn returns from short-term rental revenue. One prominent CEO of property management called the market a “gold rush.” According to iPropertyManagement, “[i]n the first four months of 2016 alone vacation rental startups attracted nearly US$100 million in venture capital funding, concentrated in the US and Europe.” In 2017, Chinese companies Tujia and Xiaozhu gathered over US$500 million in new funding from investors including Ctrip.com International Ltd., Morningside Ventures, and Capital Today. And Brookfield Property Partners has recently invested US$200 million in an Airbnb joint venture where tenants can rent their units out for up to 180 days per year.
To help property owners increase returns, property management companies like Hometime in Australia are partnering with Airbnb to streamline management services utilizing cloud-based technology. Meanwhile, Marriott International and other hotel companies are starting to look into the home-sharing business. The hotel recently launched a London-based pilot home sharing program with Hostmaker, which is teaming with property management companies in order to support these alternative STR initiatives.
Another example of commercial interest in this space is developers that have begun to rent their unleased apartment space that typically exists during a normal period of lease absorption. These developers are using proptech companies to help monetize the unleased units on a short-term basis, and the concept is being referred to as “pop-up hotels.” And other start-ups like Domio in New Orleans and Sonder in Manhattan have received venture capital funding to launch apartment-hotel operations. These and similar business models are only likely to expand as interest in this space continues.
What began as part of the sharing economy and a simple platform for homeowners to rent out their homes online is now a burgeoning industry that is starting to attract serious investment interest. Despite their various challenges, STRs are emerging as a global asset sub-class in commercial real estate. With no long-term history as a gauge, however, it remains to be seen how successful the STR market will be. Those looking to capitalize should stay tuned to the regulation of this space and the opportunities that are likely to arise.
Top Images: Getty Images – vgajic