Big Booking Bump in Vacation Rentals
Kathleen McDowell
Money Coach, Advisor & Investor, REALTOR? / Residential Real Estate Expert, Founder of Live Richly
As an investor in short term holiday rentals, I have been holding my breath these last few months. This year has been one of economic uncertainty, and with that, unfamiliar performance in the short term rental business.
But it's not all doom and gloom—after a slow Spring, the market has sprung back, but with some interesting trend shifts. June saw the highest number of STR bookings on record!
Consumers are prioritizing travel despite the economic climate, and recent demand trends indicate that instead of canceling plans, travelers have been hunting for value, and waiting to book their holidays until the last minute. And more are traveling overseas as well.
Despite inflation, average daily rate (ADR) gains have been difficult to come by for hosts, as travelers are more sensitive to high costs than before. I have not raised my rates in 2 years, and even dropped them slightly this summer.
I am anticipating that the 2023 summer travel season will be prolonged as travelers look toward less busy months for off-season rates.?I am already seeing bookings for September, while August is only half filled.
Current Airbnb and VRBO trends (courtesy of AirDNA)
Forecasting the rest of 2023 and 2024
Although we still anticipate a mild recession later this year, employment will remain higher than predictions from the beginning of the year would suggest.? This sharp downturn is a small headwind for demand, but uncertainty surrounding the economy’s performance may already be causing shorter booking lead times in some cases, as well as encouraging guests to look for lower prices in the shoulder season.
Understanding STR pacing and the booking curve
The booking curve or pick-up method is often used by revenue managers as a means of predicting future lodging demand. Essentially, it means estimating how many more reservations will be made between now and a future reservation date. As we approach any particular reservation date, the level of reservations increases until the day arrives, when 100% of the reservations are made. When plotting the percentages of reservations made over time, a fairly regular “booking curve” is produced.
Lead times, or how early guests book rooms, have a strong influence over booking curves. Shorter lead times increase the curvature, so lead times for each location are introduced to control for this variation.
In general, lead times took a sharp dip after the outbreak of the COVID-19 pandemic but began increasing in the summer of 2021. Lead times reached a local peak in May of 2022, more than two weeks short of pre-pandemic levels, and have since been gradually declining again.
An especially compelling feature of the booking curve method is that it allows us to forecast changes to historical seasonality. In the current case, pacing indicates that September and October are seeing much higher growth in bookings than the surrounding months. This reinforces the idea that the travel season is getting longer. Especially price-conscious guests might be looking for these less-traveled months for lower rates.
Cross-border travel trends & STRs
Travelers have resumed cross-border trips, but the recovery is not being felt evenly worldwide. The strong U.S. dollar has made it relatively inexpensive for American travelers to take trips outside the U.S., which helped spur a rapid recovery of overseas travel. Total travel spend is up 15% compared to 2019, and when looking specifically at stays in STRs, the share of reservations for trips outside the U.S. is up 5% compared to 2019 after collapsing during the spring of 2020 as global borders shut down.
However, travel to the U.S. by foreign guests has yet to recover, impacted by the same strong dollar, which now makes it more expensive for potential guests. Overall travel spend to the U.S. is still 17% below 2019 levels but has seen significant recovery over the past year, up 50% YO, according to the National Travel and Tourism Office (NTTO). While demand for U.S. STRs is strong, the share of stays by international travelers is still 25% below 2019 levels and represents further opportunities for incremental demand growth, especially in the largest U.S. metros where more than 20% of demand was typically from foreign guests.
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With the summer travel season rapidly approaching, the strong dollar is expected to remain a headwind for inbound travel to the U.S., but the dollar has been weakening in recent months, and forecasts from Oxford Economics call for further declines over the back half of 2023 which could help spur demand in 2024.
STR supply & real estate trends
The main economic factors that we include in our supply forecast, along with STR performance, are mortgage rates and home values. Our rationale is that when deciding to buy or list an existing property, a potential host considers the total revenue that can be generated with that property compared either to the cost of acquiring it or the opportunity cost of holding the property rather than selling it. All other factors being equal, higher revenue leads to higher supply, as does lower cost to acquire property.?
Compared to predictions made at the end of 2022, mortgage rates have been following expectations very closely; however, home prices have declined more quickly in response to higher rates, helping to encourage marginally more transactions. Another factor leading to higher supply growth, alongside stronger demand, is the preference for existing homeowners to keep their properties that are currently financed at historically low rates. Anecdotal evidence shows that homes that may have otherwise been sold in a low-interest rate/rising home value environment are now being rented either as a short-term or long-term rental while owners wait for the market to stabilize.?
(This has led us to raise our supply forecast in terms of listed nights to 14% YOY in 2023, up from 9%.)
Understanding STR occupancy
The explosion of pent-up demand seen in 2021 is still being felt in occupancies. Supply gains ramped up quickly in early 2022 to take advantage of the once-in-a-lifetime performance gains seen in 2021 as well as low interest rates, and the result was occupancies in 2022 that were 5.3% lower than in 2021. 2023 has and will continue to see declining occupancy, but the rate of decline has slowed. Higher mortgage rates pinching supply and continued demand strength mean that 2023 occupancy will decline by only 3.2%. 2023 total occupancy will likely continue the path of the first half of the year, generally lying between pre-pandemic, 2019 levels and the occupancy seen in 2022.?
The economic recovery in 2024 will further slow the occupancy decline, to 1.6% lower than in 2023, to a level occupancy of 56.7%. The peak occupancy in July will resemble the peak of 2019; however, an important difference will remain in the higher shoulder season occupancies, which we believe will persist and lead to permanently higher occupancies moving forward than the 2019 level of 54.9%.
ADR and RevPAR trends in 2023
Hosts have been finding it difficult to raise ADR at the same pace as in the past few years as inflation squeezes budgets and economic uncertainty instills a sense of thrift in the guests. Still, we expect rates to increase more than 2% in 2023 and about 1.7% in 2024.?
The occupancy rate in 2023 will still fall too fast for the small increase in ADR to offset, and RevPAR should decline nationally by 1.1%. On the other hand, occupancy losses slow significantly in 2024 while ADR growth stays close to its 2023 level, offsetting each other with RevPAR seeing no change on a YOY basis.
2023’s economic uncertainty has not hindered STR performance
In the first half of 2023, travelers have taken advantage of the better-than-expected economic conditions by spending more nights in STRs than ever before.
Consistent double-digit demand growth over the last six months and strong pacing through the summer travel season have given us ample reason to optimistically adjust our forecasts for 2023. Occupancy declines have slowed considerably, and we forecast they will continue to slow even further.
Economic trouble may still lie ahead, sure, but recent history has shown us that the gloomy predictions of economists won’t dampen travel plans. In fact, the new focus on value is helping to propel a key STR theme: the utilization of otherwise idle resources.
And the renewed interest in shoulder seasons could mean a shift in demand that is more evenly spread throughout the year, as guests book rooms that may have spent September and October unoccupied in previous years.
The bottom line: This industry never stops evolving.