U.S. Market Review: Demand Continues Pattern of Strength; Future Performance Depends on Supply | AirDNA

U.S. short-term rental (STR) demand is heating up ahead of what could be a huge and extended summer season. Supply is beginning to stabilize, though existing rentals opening their calendars more often and pushing prices down to fill beds could represent concerns for hosts in some destinations. 

April was another impressive performance month for the short-term rental (STR) market, as demand increased 5.2% year over year (YOY) to well over 16.5 million nights stayed. We also saw a surprising surge in booking growth. While March saw the highest number of nights booked ever in the STR industry, April saw booking growth rates spring up to 7.5% YOY, up from 3.1% in March. Heightened booking combined with pacing that has been well ahead of previous years are strong indicators that the 2023 summer travel season will be the biggest yet for the STR market.

As more and more guests secure their travel plans, a strong summer season for demand seems like a foregone conclusion. The supply picture is less clear. Supply growth cooled for the second month in a row as well, as available listings grew only 18.3% YOY, down very slightly from 19.5% in March. The months prior to the summer demand season frequently set the tone for the year to follow as new supply comes online.

In 2022, a rapid run-up in listings meant that by April, available listings had increased by about 98,000 since the previous December, or 8.9%. This year, the increase from December 2022 to April has only been about 69,000, or 5.1%. For hosts worried about falling occupancy rates, this offers hope that occupancy will remain above pre-pandemic levels for the foreseeable future.

At a Glance: Key U.S. STR Performance Metrics for April 2023

• RevPAR declined 9.6% YOY to $165.14
• Available listings reached 1.43 million, up 18.3% YOY
• Total demand (nights) rose 5.2% YOY
• Occupancy was 8% lower YOY at 54.8% (-0.8% vs. 2019)
• Average daily rates (ADRs) fell 1.8% YOY to $301.65
• Nights booked increased 7.5% YOY

Occupancy in April declined 8% YOY as the market seeks balance after the tremendous surge in demand in 2020 and 2021 and the subsequent surge in supply in 2022. Cooling supply growth would maintain or even increase this occupancy rate in the face of strong demand this summer season. However, the new supply outlook remains dependent on an uncertain economic outlook, something that industry giant Airbnb has taken notice of in their recent communications.

Economic news this past month was ambiguous, as it has been for several months. First-quarter real GDP grew at a rate of 1.1%, according to the Bureau of Economic Analysis. This is weaker than in Q4 2022, when it grew 2.6%. On the other hand, real growth in food services and accommodations increased from 5.7% YOY in Q4 2022 to 6.9% YOY in Q1 2023.

The April jobs report from the Bureau of Labor Statistics also posted an unexpectedly strong result, with more than a quarter million jobs added. Wage growth picked up its pace as well. Although Oxford Economics is predicting a mild recession later this year, the strength in the job market and additional wages to offset inflationary prices have kept travel at the top of consumer priorities.  

Nevertheless, guests are likely turning more focus to value and affordability in the face of possible recession, as ADRs grew just a tiny 1.4% year over year in April. ADR growth declined from March to April for all location types except Mountain/Lake Resorts, which accelerated from a near standstill of 0.6% in March to 1.3% in April. This put ADR growth in each location below the inflation rate except in Small Town/Rural locations.

Jobs and wage growth are also some of the most closely watched metrics by the Federal Reserve when making decisions about rate hikes. The Fed hiked its rates 25 basis points again earlier this month in an attempt to stem inflation, and although inflation slowed in April very slightly to 4.9%, down from 5% in March, it is still well above the 2% target. Higher rates have made borrowing more costly and are seen as a brake on purchases and the construction of new housing, making this rate an important determinant of new supply in the STR market. 

Airbnb announced in their Summer Release on May 2 that they would renew focus on private room listings, with a focus on earning guest trust through a host passport and more options for listing amenities for these listings. This is a strategy to continue listing growth even in a difficult or recessionary economic environment but also reflects increased traveler interest in budget-friendly options. After holding at about 1.35 million for nearly a year, STR listings in April jumped well past 1.4 million, though new listings remained slow. This indicates that many of the properties online are existing listings coming back online for the summer season. Although listings are still below the pre-Covid linear trend, the gap has been generally diminishing since 2021. In 2022, April, May, and June were especially important months for listing growth. Although we still have May and June to see through, April 2023 shows the early signs of a slowing in new supply growth.

Looking at new listings coming online, although 2023 started the year with the highest January level on record, new listings dropped below 2019 levels in March and below 2022 levels in April. When considering new listings not as a number but as a percentage of total available listings, the last two months suggest that 2023 is following the more sedate path of 2021 rather than the rapid growth of either 2022 or 2019. New listing trends are highly correlated with available listings, so the slowdown to a less frenetic pace may be indicating that interest rate increases have had a dampening effect on both residential real estate as well as the STR market

On the other hand, as higher interest rates dampen the dynamics of the real estate market, some hosts may be prevented from leaving the STR market, not wanting to lose the rates that they locked in before inflation took hold. This would help buoy the total available listings even when new listings slow down, as older listings which might usually churn take the place of new listings. This was certainly the case in 2022, where the proportion of available listings carried over from the previous year increased substantially in every location type. In the case of small and midsize cities and both resort locations (Coastal and Mountain/Lake), the proportion of properties still online from one year to the next is now greater than pre-pandemic levels.

So while the effects of interest rates in total may be to slow the growth of available listings, supply is still growing, and we expect occupancy to be lower throughout 2023 when compared to either 2022 or 2021—though still well above 2019.

Current hosts may be anxious about excessive listing growth as competition heats up, affecting their properties’ performance. Looking at the largest 25 U.S. markets, the negative relationship between available listing growth and the change in occupancy, along with RevPAR, is easy to discern.

This relationship is how even a strong market such as Phoenix/Scottsdale saw its occupancy decline by 15.8% YOY in February despite hosting the Super Bowl and a 56.4% YOY increase in demand! In April, the effect had mitigated some, and occupancy was only down 5.6% YOY in Phoenix/Scottsdale. 

Still, new supply usually comes online as a result of great performance in a market, so it’s not necessarily a bad sign. Turning from markets to location types, Small City/Rural locations have had the largest increase in available listings compared to pre-pandemic due to the increasing interest in new and out-of-the-way vacation destinations. Meanwhile, because of regulatory restrictions and a new aversion to crowds on the part of many travelers, Large City - Urban locations have actually seen a decline in available listings since before the pandemic and have not yet recovered.

Demand growth in April was strongest in Small City/Rural locations, which, in turn, may stimulate more growth in available listings in the future. Mid-sized cities and urban locations are seeing good growth as well, but if issues like regulation and the availability of properties for sale prevent new listings in these locations, this will limit future demand, as supply cannot keep up with demand growth.

If the growth in available listings continues along more or less like it did in 2021, we could expect performance gains as the season progresses, although there is a final mitigating factor to consider. Although the housing market has recently slowed significantly, it may have a tailwind in lowering house prices. House prices react to interest rates but with some delay. In many STR markets, home prices peaked in June 2022 when U.S. mortgage rates were around 5.5%, according to data from Freddie Mac. Mortgage rates peaked in November of the same year at 7.08% and have declined since, currently standing around 6.35%. This means that affordability has been improving in these markets for the past five months and may continue to do so, particularly if the Fed ceases its interest rate increases.

In any case, forward pacing suggests that there will be strong demand to meet whatever new supply might develop this year. After May, bookings are pacing between 9-11% higher than what was on the books at this time last year. The biggest surprise is in September pacing, which is about 25% higher. Whether budget-minded guests are booking early to lock in off-season rates or if there will be a general extension of the summer travel season beyond August remains to be seen, but a mixture of the two promises a spectacular summer travel season in 2023.

As part of our ongoing commitment to accuracy, we continuously implement data methodology improvements, leading to updates to some of the information in this report as of December 22, 2023. For further questions, please contact us.