by Karl Finkelstein, MAI, MRICS
Vice President of Marketing and Business Development
Senior Managing Director, Valbridge Property Advisors | Charleston
Over the past five years, short-term rentals have become an attractive investment thanks to the potential for greater cash flow. But they also bring new challenges for investors more familiar with traditional long-term rental properties, from fast turnover between guests to extra regulations. And the rise in interest rates has put pressure on cash flows for many owners. So much so that many experts say the bubble is going to burst.
The concept has existed in a limited format for decades – with small local operations and corporate housing outfits dotting the nation. platforms like Airbnb and VRBO then revolutionized the market, steadily becoming a primary means of travel lodging for the common consumer – attaining over 500,000 average stays per night by 2018. At the same time, the 2010s real estate cycle saw a wave of new Class A apartment buildings delivered largely around downtown submarkets nationwide. Given the valuable locations and amenity sets of these apartment buildings, an underground market emerged on STR platforms for these units. A new crop of startups arose to legitimize and streamline this market, with the most successful among them creating independent national platforms with hundreds of branded, furnished apartments.
Many of these platforms first began by partnering with existing multifamily properties to deploy a small sample set of units. For example, WhyHotel targeted newly delivered multifamily assets in lease-up – offering to fill the rooms until full-term leases could be signed for 90%+ units. Several other platforms decided to begin on a smaller scale, ownership-based model. These operators focused on purchasing smaller three-flat and garden-style apartments, converting them to short-term rentals as proof of concept.
In 2019, many of these operators grew to a national scale, master leasing entire buildings for short-term rentals. Stay Alfred has established operations providing over 2,500 units in 33 cities across the country. Lyric has received funding from Airbnb for its portfolio of assets across thirteen markets. WhyHotel has announced a new subdivision called Hospitality Living that will be dedicated to building ground-up short-term rental developments.
Business travelers made up 15% of Airbnb bookings, with the STR platform looking to expand to 30% by the end of 2020. The global business travel industry is estimated to be over $1T. Over 700,000 companies have already utilized Airbnb for employee travel lodging. Short-term platforms that can provide consistent, guaranteed accommodations with high proximity to downtown offices will be the premier choice for business travelers.
Today’s short-term rental market does not exactly lend itself to the casual Airbnb host. There’s increased competition, more rental channels, higher guest expectations, new cleanliness standards, and unprecedented booking behaviors. All of this has amounted to a huge wave of professionalization and a growing desire to leverage the power of an Airbnb property management company. We have seen multiple companies enter the local market and the number of rental offerings has increased significantly over the past two years.
The increase in demand for STR properties has had a direct effect on the housing market. A Los-Angeles specific study led by Hans Koster from Vrije Universiteit Amsterdam found that between 2014 and 2018, Airbnb was responsible for a more than 30% increase in housing prices in Venice, as well as large price increases in other major tourist destinations in Los Angeles. Valbridge Property Advisors has seen similar impacts in many of the markets we appraise around the United States. The Folly Beach and Downtown Charleston markets are examples where short-term stay rentals have placed upward pressure on property values.
As we enter 2024, there are headwinds in many markets. According to the real estate guru Nick Gerli, income from Airbnb properties is collapsing in locations across America. That includes major cities like Phoenix and Austin, where STR revenues are reported to be down by almost half compared to last year. Investors who ploughed their savings into such properties are in a tight spot, but it’s even tighter for those who took out mortgages. Squeezed between falling revenues and rising interest rates, many owners could be forced to sell. With the number of short-stay properties exceeding the number of homes currently for sale in the US, a panicky mass exit could push beleaguered housing markets over the edge.
The reality is that the STR market will most likely NOT resemble the market crash of 2008. It’s important to remember that reckless lending to high-risk borrowers with little to no cash down exacerbated the 2008 market fall. Most of today’s STR investors purchased the property with higher equity requirements 25-50% and therefore should be able to withstand a “rush for the exits.” More importantly, there are over 16,300 short-term rental markets in the United States, each independent of one another. VBRO has over 2,800 markets with a 50% or better score in terms of investment viability and revenue growth, including Las Vegas (98 overall score), Key West (98) Louisville (97), and Charleston (99).
The more likely scenario will be some location-specific changes. As with most all real estate investments, the specific location metrics will have a large effect on the performance. Short-term rentals are a niche property type that straddles the worlds of residential and commercial real estate; professional guidance by those who have experience in this property type can make the difference between a sound investment decision and a fail. If you need help with value-driven decision-making surrounding your STR, reach out to Valbridge Property Advisors for an appraisal.