10 years ago, nightly rentals were a novel concept, fast forward to 2024 and the number of nightly rentals has surged over 40% in the last 5 years. What does this huge increase in nightly rentals mean for real estate values? Has the real estate market gotten ahead of its skis? What is in the most recent Airbnb earnings that can provide an indication of where we head in ski real estate.
Airbnb earnings a cautionary note
Airbnb, which specializes in shared homes and vacation rentals both in urban cities and rural destinations, saw a deceleration in North American nights booked in the first quarter. Growth in the current period for nights and experiences booked — a key industry metric — will be “relatively stable” compared with the 9.5% gain it posted in the first quarter. That falls short of analysts’ expectations for a roughly 12% increase. It also represents the slowest rate of growth since 2020, suggesting that overall demand has normalized after an initial post-pandemic travel boom.
The continued recovery in international travel has been a bright spot for the travel industry including Airbnb, whose businesses in Latin America and Asia have seen faster growth than in the US.
Furthermore, the number of active listings in the first quarter grew 15% year-over-year and supply has continued to grow at a double-digit pace across all regions.
What is the risk that is “hiding” in plain sight that nobody seems to be talking about?
Short term vacation rentals like Vrbo, Airbnb, etc…. are a new risk that we have never seen in prior downturns. Furthermore the number of short-term rentals continue growing rapidly. Here are a few statistics about Airbnb. Also look at the chart above
- There are 9 million hosts on Airbnb worldwide in 2022.
- 14,000 new hosts are joining the platform each month in 2022.
- There are over 7 million listings on Airbnb worldwide in 2022.
- There are 100,000 cities with active Airbnb listings in 2022
- From 2019 to 2024, the number of nightly rentals are expected to increase by 40%
- From 2023 to 2024 the number of nightly rentals are expected to increase by 14%
Breckenridge/Summit County a cautionary tale
Breckenridge (owned by Vail resorts) is the heart of Summit County with three major resorts including Keystone and Copper Mountain. I did a quick analysis on Summit County and it shows a huge increase in nightly rentals, up 24% according to recent data. Demand cannot come even close to keeping up with the increase in supply. This is resulting in lower utilization rates that will not be able to offset by increases in nightly rates. Ultimately nightly rentals in Summit County will become increasingly less profitable as nights rented plummets while nightly rental rates in a best-case scenario stay about where they are.
“In the last couple of years, you do see an over saturation in some markets and one needs to do more research because there is so much variance in the market,” said Paul Kromidas, founder and CEO of Summer, a short-term rental operator based in New York. “People want to commodify these assets; they want to try to fit it into a box. There are opportunities in this market, but it now needs to more thought and you cannot wake up and decide to do it.”
Most short term rentals bought with leverage.
Here is an interesting statistic by Homeaway: “ Fifty-nine percent of subscribers get at least 75 percent of their mortgage covered by the rental stream.” For almost 60% of people that utilize short term rentals 75% of their mortgage is paid for by the rental income. What happens when the party stops? The last recession can give us some clues.
Not only are people renting condos, but primary residences.
The Wall Street Journal wrote an article about how people can buy more house as a result of the additional income from renting rooms in their property. For example, someone might have bought a 250k house, but instead paid 50k more so that they could rent out the additional space for a profit. This seems like a logical assessment from a homebuyer, why wouldn’t a homeowner do this? It is human nature to focus on the positives, as opposed to the negatives. What happens as the market changes and that room is no longer rented out?
Do you really think that property owners saved their earnings!
This is highly unlikely. Look at the graph below from the federal reserve. The average American saves less than 2.5% of their income annually; this includes income from short term rentals. How will the mortgage get paid?
Why this crisis will be worse.
With 60% of owners on HomeAway saying that around 75% of their mortgage is covered by short term rentals, what happens when the short-term rentals slow? Where are the additional funds coming from? With most short-term rentals bought with leverage, the mortgage, taxes, maintenance, HOA fees, etc… continue whether you are renting the unit or not.
Two items could derail the short-term rental market.
First, a pullback in consumer spending coupled with increased supply is the obvious risk. As disposable income decreases and debt service remains high, they will spend less on vacations including lodging. At the same time the supply of nightly rentals continues to increase further amplifying the supply/demand mismatch.
The second risk is regulation. Many cities are banning nightly rentals, substantially restricting them, and/or increasing the taxes. For example, the state of Colorado had proposed taxing nightly rentals throughout the state as commercial properties. This increases the taxes by around 400% and changes the economics of renting. The two risks above could be catastrophic for many short-term rental owners.
The extent of the impending problem is deeper than we think. The explosive growth in nightly rentals has led to an exposure to millions of property owners from a possible recession.
- Best case on Foreclosures: let’s assume 10% are foreclosed on similar to the hospitality industry. There are approximately 2.6 million nightly rentals in the US this would lead to 260k foreclosures, although this is not a big number it could be concentrated in various markets
- Worst case: With a 23% drop in income the impact could be substantially worse. As mentioned above 60% of nightly rental owners get 75% of their mortgage from rentals, if this number drops precipitously the defaults could be drastically worse to the tune of 500k, note that on 2022 foreclosures were averaging about 30k a month so this would be a substantial increase
Ski towns will fare much better than other markets
I’ve said this in the past, the closer in to the core in ski markets the better off you are in the long run. As the nightly rental markets continues to flat line, a property in downtown Breckenridge will do better than one in Silverthorne as there is more demand to be able to ski in/out or walk downtown, etc…
Furthermore, ski real estate is essentially built out in every Colorado ski town so at the end of the day inventory is limited as opposed to a city like Atlanta where there is still considerable room for growth. This will limit the downside risks to ski towns as opposed to other markets.
Summary
We are in a new paradigm. Nightly rentals were just coming onto the scene after the last crisis. Now almost 3 million nightly rentals have propagated throughout the country. We know what happened to the hospitality sector after the last recession with 10% going out of business and substantially more restructuring. Furthermore, there was a 23% drop in revenue during the last recession.
Regardless of whether there is a recession or not, we are no doubt on the cusp of a huge change in the economy. Consumers have exhausted their pandemic savings while continuing their spending habits with debt. 2025 will be a reckoning for consumer spending and in turn nightly rentals even in the mountain towns.
Fortunately mountain real estate even with a pull back in nightly rentals will perform better than others, but we are already seeing a pull back in values in Breckenridge, Silverthorne, and Granby that are hot spots for nightly rentals.
Additional Reading/Resources
- https://www.bloomberg.com/news/articles/2024-05-08/airbnb-sees-growth-slowing-before-summer-travel-uptick?srnd=homepage-americas
- https://www.airdna.co/blog/2023-us-mid-year-short-term-rental-outlook-report
- https://skift.com/2023/07/21/short-term-rental-saturation-leads-to-a-correction-and-lots-of-home-sales/
- https://coloradohardmoney.com/live-like-a-local-pay-hotel-property-taxes-on-nightly-rentals/
- https://www.wbir.com/article/news/local/sevier-county-airbnb-rentals-taxed-as-commerical-properties/51-8f75c52b-d070-467d-90db-6bd2825b2d6b
- https://www.attomdata.com/news/market-trends/foreclosures/attom-q1-2022-u-s-foreclosure-market-report/
- https://www.irishtimes.com/news/hotel-profits-down-25-in-2008-1.843698
- https://ipropertymanagement.com/research/airbnb-statistics
- https://www.alltherooms.com/analytics/airbnb-ipo-going-public-revenues-business-model-statistics/
- https://scholarworks.umass.edu/cgi/viewcontent.cgi?article=1206&context=jhfm
- http://www.cpr.org/news/story/short-term-vacation-rentals-colorado-invention-are-under-gun-denver
- http://www.latimes.com/local/california/la-me-adv-mammoth-curtails-nightly-rentals-20151018-story.html
- https://www.denverpost.com/2015/02/20/mountain-towns-learn-to-love-and-regulate-short-term-rentals/
- https://www.stratosjets.com/blog/airbnb-statistics/
- http://www.corelogic.com/blog/authors/kristine-yao/2015/10/serious-delinquency-rate-of-condo-loans-drops-to-29-percent-in-top-10-markets.aspx
- https://www.washingtonian.com/2016/02/18/you-can-find-renters-to-pay-off-your-vacation-house-airbnb-vrbo-homeaway/
- https://www.wsj.com/articles/homeowners-tap-income-in-their-homesby-renting-out-space-1411333004
- https://fred.stlouisfed.org/series/PSAVERT
We are a Private/ Hard Money Lender funding in cash!
If you were forwarded this message, please subscribe to our newsletter
I need your help! Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles on linkedin, twitter, facebook, and other social media and forward to your friends . I would greatly appreciate it.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, and Florida. We are recognized in the industry as the leader in hard money lending/ Private Lending with no upfront fees or any other games. We fund our own loans and provide honest answers quickly. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all we need is our simple one page application (no upfront fees or other games).
Tags: Hard Money Lender, Private lender, Denver hard money, Georgia hard money, Colorado hard money, Atlanta hard money, Florida hard money, Colorado private lender, Georgia private lender, Private real estate loans, Hard money loans, Private real estate mortgage, Hard money mortgage lender, residential hard money loans, commercial hard money loans, private mortgage lender, private real estate lender