AirDNA’s economists dig into the data and forecast Airbnb and Vrbo trends in the U.S. for the second half of 2023.

2023 Short-Term Rental Mid-Year Outlook | AirDNA

Economists and media outlets across the globe (including us) have been beating the same drum for months now: 2023 has been and will continue to be a year of economic uncertainty.

But that doesn’t necessarily mean doom and gloom—particularly for the short-term rental (STR) industry, which has actually defied any predictions of a slowdown or “Airbnbust” in recent months.

We expected that consumers would prioritize travel despite the economic climate, and a closer examination of recent demand and pacing trends has given us confidence that this is exactly the case. Instead of canceling plans, travelers have been hunting for value, and the STR market has been able to provide this through an unparalleled mix of offerings.

We’re also learning that expectations change when the travel bug meets economic uncertainty. For example, average daily rate (ADR) gains have been difficult to come by for hosts, as travelers are more sensitive to high costs than before.

We also anticipate that the 2023 summer travel season will be prolonged as travelers look toward less busy months for off-season rates. 

Below is a snapshot of what the data is telling us about STR trends right now.

Demand: Better-than-anticipated economic fundamentals and unrelenting enthusiasm for travel have significantly increased our demand growth forecast for 2023 to 10.4% year over year, up from 5.5%. Recovery from a mild downturn will continue demand growth in 2024 at a rate of 8.5%.

Supply: Increasing mortgage rates and declining occupancy have slowed supply growth since the first half of 2022, but house prices have declined more quickly than anticipated, while demand growth has remained persistently high. Our supply forecast in terms of listed nights has increased to 14% YOY in 2023, up from 9%.  

Occupancy: We still believe that strong supply growth will create a second year of declining occupancy. The decline is not quite as steep as previously forecasted based on demand strength, and 2023 will see an occupancy rate of 57.6%, up from 56.4% from our last forecast. 2024 will also see declining occupancy, but the predicted rate of 56.7% is still significantly higher than pre-pandemic levels. Occupancy should remain higher than pre-pandemic standards for the foreseeable future.

Average Daily Rates (ADRs): Economic uncertainty and persistent inflation have led the consumer to search out value, but better-than-expected economic conditions in the first half of 2023 have increased our forecast to 2.1% YOY in 2023, up from 1.7%.

RevPAR (revenue per available rental): The small improvement to our ADR and occupancy don’t quite add up to RevPAR growth in 2023, but our forecast is still somewhat higher at -1.1%, up from -1.6%. In 2024, RevPAR will stabilize, as the small decline in occupancy is offset by ADR gains.

It’s no surprise that economic uncertainty was a major factor in the assumptions made in our previous forecast, and those concerns largely remain—albeit on a slightly delayed timeframe. The Federal Reserve’s stricter monetary policy (beginning in March of 2022) is ongoing, with continuing speculation over the next rate hike, pause, or even cut.

Inflation—the motivation behind the Fed’s interest rate hikes—has been declining since its peak of 8.9% in June 2022, as measured by the YOY percent change in the Consumer Price Index (CPI). However, the decline has been slow, and the current rate of 5% is still well above the Fed target of 2%. 

The Fed may still be in danger of raising rates too much. With the job market remaining healthy, any pause or reversal in slowing inflation may prompt additional rate hikes which, in turn, could hinder economic growth enough to cause a recession. A series of bank failures in the U.S. and abroad since the collapse of Silicon Valley Bank in March has made its way into Fed commentary as well, a signal that caution is warranted and financial stability is precarious.

On the other hand, the biggest economic surprise by far in 2023 is the incredible strength of the labor market. Oxford Economics now anticipates that Q2 2023 employment will land about 4 million jobs higher than at the end of 2022.

The unemployment rate also reached a five-decade low in January and again in April. 

Although we still anticipate a mild recession later this year, employment will remain higher than predictions from the beginning of the year would suggest. Accordingly, the pace of demand has been revised upward.

Growth in real GDP was also positively revised since the end of 2022 and has outperformed expectations. We now anticipate a more acute but short-lived GDP growth downturn in Q3. 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.

These effects can be seen in the demand forecast, with larger increases YOY for the first half of the year compared to the second half (when economic difficulties become more noticeable).

In 2024, we expect the recovery to be relatively swift and to happen in time for the summer season, allowing for more gains.

Watch AirDNA's CEO and Chief Economist Discuss the Outlook at Skift 

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.

By estimating the shape of the booking curve, we can project the data we currently have on bookings to how many reservations will finally be made by the reservation date.

Although this method provides excellent insight into future reservations, it does come with some limitations. Most importantly, this method works best on near-term prediction because the closer we are to a reservation date, the more reservations are made, and the more of the booking curve we are able to observe. (Our testing indicates that pacing is useful up to six months out.)

Each month’s curves are also estimated separately to capture seasonal variations. Below are the curves for Coastal Resort destinations in August. (The curve for 2020 is excluded as booking patterns were so different in that year that they have no predictive power, barring another global pandemic.)

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.

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.

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.

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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%.)

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%.

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.

The locations that have seen the most dramatic RevPAR growth compared to pre-pandemic levels are Small City/Rural and Midsize City locations. A major trend over the past few years has been travelers seeking out less-traveled and less densely populated areas either for vacations or potentially to work remotely. Pacing, historical relationships with economic variables, and dynamics suggest that these two location types will continue growing for the remainder of 2023 and will both have RevPAR growth in excess of 3% for the year in total.

Resort destinations also initially experienced rapid RevPAR growth but have since stalled as rapid supply growth has lowered occupancies in these locations. Coastal locations in particular will continue to see the pattern of supply outpacing growth in the second half of 2023. Mountain/Lake resorts might see some uptick by the end of the year, but losses from earlier will produce RevPAR losses of about 1% for both location types.

Suburban locations have seen declining RevPAR since a peak in April 2022, and declining economic conditions are poised to limit demand increases in this location later in the year.

Scenario analysis for the economy and STRs

Although a mild economic downturn is the most likely scenario, per Oxford Economics, forming our Baseline assumptions, the considerable economic uncertainty means that other scenarios also have a high probability of happening. In particular, inflation may fall faster than expected, sparing the U.S. future rate increases and providing the Fed an opportunity to cut rates if the economy turns negative. A healthy labor market and a reluctance of businesses to cut staff, even if consumption slows, may allow for a soft landing for the economy in 2023.

On the other hand, higher inflation or strengthening labor market conditions, which would include higher wage increases, could spur further rate hikes, limiting credit and potentially even creating an asset price crash. The current environment is somewhat delicate, and moderate scenarios cling pretty closely to the baseline. In the severe downside scenario, GDP change is sharply negative, causing significant harm to the consumer.

However, the hospitality industry is likely better poised to handle a downturn than many industries, as consumer priorities are squarely on travel. When looking at the effect of the various economic scenarios on STR demand, then, the picture is more balanced and less weighted to downside losses compared to the economy at large. In the upside scenario, STR demand grows by an average of 18% over the next 12 months compared to 9% in the baseline scenario and just 6% in the downside scenario.

Supply is less responsive to changes in the economy than demand for two reasons: first, supply has a lagged response to sudden changes in demand. Second, the Fed’s response to changes in the economy is to cut rates when conditions weaken but to keep rates higher for longer in the face of continued inflation, creating offsetting influences on supply. This means that in the upside scenario, occupancy will increase, getting back to the 59% level the industry experienced in 2022 by 2024. In the downside scenario, occupancy will decline to 55.7% in 2024, which remains slightly higher than 2019 levels.

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 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.

2023 Short-Term Rental Mid-Year Outlook | AirDNA

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