(Bloomberg Businessweek) -- Businessweek
Last summer, Joan Robertson and her husband, Mark, finally realized their yearslong goal of buying a second home in the Sun Belt to escape the brutal winters of Minnesota. Persuaded by one of their sons who loves amusement parks, they homed in on Kissimmee, Florida, just south of Orlando, and bought a three-bedroom townhouse in a gated community with resort access for $295,000. To help pay off the mortgage, they planned to operate the home as a short-term rental.
They upgraded the 2000s-era mustard-colored walls and oak-paneled kitchen cabinets with pastel and white paint, hired a property management company to handle the day-to-day logistics, and booked a photographer to make their listing stand out in a sea of options on Airbnb, Booking.com and Vrbo. In October, they put their home online, hoping to attract other snowbirds or visitors to Walt Disney World, which is just a 10-minute drive away.
Ten months in, things haven't panned out as they'd hoped. “We have absolutely zero bookings in August,” Robertson says. “This summer is extremely slow.”
She isn't alone in feeling the pinch. Founded in 2008 as a way for travelers to find unique and affordable places to stay around the world, Airbnb Inc. has not only disrupted the hotel industry with its success but also created a whole new class of homebuyer: the short-term rental speculator. Some people bought multiple properties, renovating once-derelict homes with stylish furnishings and renting them out year-round; others bought more house than they could afford and wound up renting out the bottom floor or a single room to make ends meet. But lately hosts have hit a wall: Short-term rentals in Orlando and the surrounding suburbs saw revenue per available room drop 6.4% in the first half of this year, according to data compiled by economist Bram Gallagher at analytics firm AirDNA LLC. Near Joshua Tree National Park in California and in towns such as Gatlinburg and Pigeon Forge in the Great Smoky Mountains of Tennessee (think: Dollywood), revenue has plummeted as much as 17% and 8.7%, respectively.
Online, it's been dubbed an “Airbnbust.” Creeping angst about the phenomenon started spreading last fall on the internet and in host chat groups. One post on social media went viral: “What's going on with Airbnb? No bookings at all.” There's a Reddit channel where hosts commiserate and share news stories with titles such as: “Is Airbnb in a Death Spiral?”
That may be an exaggeration. As a company, Airbnb is still reaping the benefits of high interest in travel, and people are still seeking out its listings around the world. It recorded 115 million nights, tours and events booked in the second quarter, up 11% from a year ago. Its share price is up over 60% this year, riding high on a recent earnings report that named this year's second quarter the most profitable one yet. But Airbnb's corporate earnings don't tell the whole story either. The market is experiencing a shakeout that will reward winners—with the right location, amenities and price—and punish losers.
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The pandemic has a lot to do with the turmoil. At first, as people sought sanctuary from crowded cities and relished the prospect of a yard and a home office, demand spiked for rentals on sites like Airbnb and Expedia Group Inc.'s Vrbo. Some people who were lucky enough to already have second homes hunkered down themselves, limiting supply. That made prices skyrocket for whatever homes were available. At the same time, others bought new homes to gain space and sanity while mortgage rates were low and property values seemed to only be going up.
As the Covid-19 restrictions subsided and people returned to their former lives in cities, they rented out the homes they'd bought, flooding the market. Airbnb ended last year with 6.6 million global active listings, excluding China, some 900,000 more than it had at the beginning of the year. By the end of the second quarter of this year, it had more than 7 million. That glut has led to as much as a 13% decline in host revenue in 32 of the top 50 largest short-term rental markets in the country in the first half of this year, according to AirDNA. (For its part, Airbnb says the typical host made an average of more than $14,000 in 2022, up almost 88% from 2019.) Many hosts said they've lowered prices to make their listings more competitive. In its second-quarter financial results, Airbnb reported that average daily rates are up 42% since 2019 to $166, but rates in North America are down 1% from a year ago.
Robertson had seen the social media posts about the bust and was warned by her real estate agent and others about the slow market, but says it's much worse than she thought. “It was made to sound like you would be booked all the time, and you could make 5, 10 grand a month,” she says. But the most she's ever gotten has been $3,500 a month and sometimes as little as $1,000. “It's not as much as we were expecting.”
It's not that people aren't traveling. Open Instagram: It seems as if half of its users are in Italy now. But what kind of travel and where has had a big impact on Airbnb hosts in the US. Americans are prioritizing trips to Europe and Asia this summer after some of the world remained closed to international travel last year, while a strong dollar is discouraging foreign guests from visiting the US. Extreme weather conditions such as the heat dome that plagued the Southwest and flooding in the Northeast have also deterred visitors.
Hotels, shunned during the pandemic for their germy common areas and elevators, are popular again, not least because they don't ask guests to take out the trash. A shift in work policies has also called more people back to the office, giving them less flexibility to skip town for weeks or months at a time.
Making good money from a short-term rental isn't as easy anymore as leaving the key in the mailbox and clean sheets on the bed. As Airbnb's popularity has increased, so have guests' expectations. The surge in demand has led to high turnover, and many hosts have come to depend on management companies to deal with cleaning and maintenance and have increased their cleaning fees as a result. With so many available properties, guests can afford to be picky. High-end kitchen appliances and modern furnishings are the new normal. Amenities such as pickleball courts and the ability to bring pets can help listings get booked.
“The types of guests that travel has expanded,” says Jeff Iloulian, who rode the first wave of Airbnb's boom, running his initial rental in Los Angeles in 2014 by subleasing another person's property while still working full time as a lawyer. In the beginning, it was “young tech people who were willing to crash on somebody's couch,” he says. “Now it's families and multigenerational travelers that are looking at this as a hotel alternative.”
Iloulian at one point had 150 homes listed on Airbnb that he managed with a team of 15, but he's since divested most of his portfolio to run HostGPO, a business that helps hosts negotiate discounts for household supplies and furniture. These days, he says, “the bare essential, the level at which it takes to operate, has increased,” along with guests' expectations. “Certain folks in certain markets didn't used to provide amenities” such as shampoos and soaps, but that's mostly expected now. “You can no longer, quote-unquote, get away with cheap-quality furniture and linens and mattresses and not having amenities.”
Airbnb has struggled to balance the needs of hosts and guests. Airbnb Chief Executive Officer Brian Chesky has described the San Francisco-based company's more than 4 million hosts as the “core” of the business, but many hosts would disagree. One flare-up happened early in the pandemic, when the company announced a global refund policy that allowed guests full money back upon cancellation, leaving many hosts suddenly without any income. (The company rescinded its Covid-19 extenuating circumstance policy at the end of May 2022.) Then, in August 2022, hosts howled when Airbnb further changed its refund rules to give guests more time to make complaints and seek refunds; the company ended up amending some language that made hosts responsible for putting complaining guests up in other accommodations.
Since then, Airbnb has made efforts to help hosts, including doubling the number of support agents and creating a new role of global head of hosting. It also offers a variety of features to protect hosts and their homes, including liability insurance, damage protection and quicker reimbursements for damage. “We're always looking at new ways to support our Host community so they can attract more guests,” a spokesperson for Airbnb said. “Airbnb remains a strong income generator for our Host community as we continue to innovate with our Hosts in mind.”
Airbnb invested in algorithmic pricing tools for hosts starting in 2015 as a way for them to remain competitive with hotels and other listings in their area. The Smart Pricing tool automatically sets rates based on local demand. Hosts still have the ability to control settings themselves, but some said they had difficulty setting competitive prices and found the tool difficult to use. Many hosts use other tools, saying that Airbnb prices are too low and don't take enough relevant data into account.
Amber Telfer, a host of six years, laments that the Smart Pricing tool is “blind to markets with unique characteristics.” For example, she says the tool underpriced her listing in Palm Springs, California, when she wanted to maximize her return because of demand from visitors attending the annual Stagecoach and Coachella music festivals. “I had to honor the price to prevent cancellations, so I don't use it now,” she says. She and some hosts prefer third-party options such as Beyond Pricing or PriceLabs, which use different data.
Airbnb has recently redesigned the system, making it easier for hosts to add discounts and promotions, and added a new feature called “Similar Listings” to help them set a competitive price. Since it made the change, Airbnb said hosts have begun to lower their prices, which it believes will create more affordability for guests and ultimately more bookings for hosts—albeit at less money per guest.
The host crunch isn't occurring equally across the US, of course—real estate is always about location and supply and demand. Some destinations have enacted regulations to restrict the supply; it's been a cat-and-mouse game for cities such as San Francisco (hosts can list only so many properties) and Dallas (some residential neighborhoods are barred from providing short-term rentals) to stamp out a flood of now-illegal listings. In Phoenix, where there are virtually no restrictions, rental properties have proliferated like mushrooms, setting up an unprecedented imbalance. The Arizona city, which in February hosted both the Super Bowl and an annual PGA Tour golf tournament, has become the poster child for oversupply. Average monthly occupancy for the first half of the year dropped to 62%, from 68% in 2021, according to AirDNA data compiled by Bloomberg News.
That prompted Telfer to abandon plans to renovate a property she owned there and turn it into an Airbnb. Instead, she put it up for sale, after she noticed she was “hardly getting any traffic” at a condo she'd listed in neighboring downtown Scottsdale. In July, her broker Nick El-Tawil listed four other short-term rentals for sale. He said he expects to put up at least three more, including Telfer's, later this summer.
“I started thinking about selling it because prices started going down on properties,” says Telfer, a former digital marketer who's made hosting and investing in real estate her full-time gig. “And there's less inventory in my neighborhood now. So I might be able to get at least what I paid for it and not lose any money at this point.”
The revenue per available rental in cities such as Austin and Miami has fallen, but places like Boston and Oahu, Hawaii, are up more than 10% this year, according to AirDNA. Extra effort can pay off: Chris Kelley moved to Phoenix last year from Maryland to “hop on the Airbnb train,” as the area was known to be profitable for short-term rentals. He now owns two properties and manages two others, and has taken several steps to make his listings stand out among the dozen or so in the 1-mile radius around him and among hundreds more in Phoenix.
That's meant installing an outdoor kitchen and making the listings more desirable for social media by painting murals people can take photos in front of—imagine telling a would-be host a few years ago that “Instagram moments” would be a service that guests expect from their dwelling. “This current market we're in right now has definitely made hosts wanting to be more accommodating and maybe go the extra mile for guests,” to encourage them to book or leave a good review, he said.
His efforts seem to be working. Kelley is a “superhost,” a badge bestowed on hosts that have high-quality ratings. The listings on the properties he owns with his partner are filled with swooning comments from guests. People seemed to really like the outdoor kitchen in one of his listings, and appreciated the “vibe” of an artsy studio painted with a cactus and sunset motif.
Robertson, who owns the Florida property near Disney World, is willing to hold out a bit longer. Her management company has relisted her home, so now it has a “New” star badge on the listing, and she's blocked off a few days in early August so her husband and son can fly down to “jazz up the place.” They'll install a new glass-tile kitchen backsplash and get new professional photos taken while the home is vacant, and then promote it on social media.
These were not, she ruefully noted, things she thought she would have to do to get Disney fans to book her place. “I'm learning as I go,” she says.
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