This spring the short-term rental (STR) market emerged from a winter of economic uncertainty defying expectations. Spring is here, and with it comes good news for vacation rental hosts and investors who are concerned that growing supply could diminish their occupancy rates.

U.S. Market Review: Sluggish Supply and Elevated Demand Maintain March RevPAR | AirDNA

This spring, the short-term rental (STR) market emerged from a winter of economic uncertainty defying expectations.

And with the new season comes good news for vacation rental hosts and investors who are concerned that growing supply could diminish their occupancy rates.

Supply, measured by available listings, has not grown much past 1.41 million in the past year. Meanwhile, YOY demand growth increased in March. If this trend continues, we can expect an improvement in occupancy rates over the summer. This may help revenue per available rental (RevPAR) and average daily rates (ADR) maintain their current growth performance, too, which is well above 2019 levels.

March marked the second month of increasing demand gains year-over-year (YOY) and was the biggest yet for 2023 at 15.8% YOY. This was coupled with a significant slowdown in the pace of available listings—up 20.3% YOY compared with the 26.3% YOY growth seen in February. Available listings per night also increased by only 18.3% YOY.

In 2022, major increases to supply occurred early in the year, and so February’s large increase in available listings gave some reason to believe this year would follow a similar pattern. But the March slowdown indicates it was a one-off event rather than the start of a new trend.

As mentioned before, continued demand growth and slackening of available listings bodes well for occupancy rates. This narrowed the gap in March occupancy to just 4.1% lower YOY, compared to 8.7% in February. 

2021 represented an outstanding year for the short-term rental (STR) market, where pent-up demand met comparatively few STR listings. As a result of this unique environment,  occupancy rates spiked to record levels. New supply in 2022 made for declining occupancy levels for most of the year. And a leveling off of supply in 2023 could put the STR market at a new steady-state occupancy rate—one that is meaningfully higher than pre-pandemic rates.

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

Available listings reached 1.41 million, up 19.5% YOY

Occupancy was 4.1% lower YOY at 58.34% (-5.7% vs. 2019)

Average daily rates (ADRs) fell 0.1% YOY to $313.95

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Although guests are showing an eagerness to travel this spring, they may have also been looking for values, as ADR only increased 2.2% YOY.

This enthusiasm for travel exists despite a considerable level of economic uncertainty. While March’s inflation rate of 5% (the Consumer Price Index) was a percentage point lower than February’s, it still remained higher than the Federal Reserve target of 2%. Persistently high inflation has motivated the quickest increase in interest rates ever seen from the Fed, and expectations are that the Fed will raise rates again in May.

Bank failures in the beginning of March motivated speculation that the Fed would pause raising rates; however, swift action to shore up the financial sector, as well as a solid jobs report for March, put a stop to those rumors. Fortunately for the STR market, the bright spot in this economic situation is leisure and hospitality. This sector added the most jobs in March (72,000), and its outlook remains favorable.

March booking provided more evidence of a strong year ahead for the STR market. Bookings are usually a good indicator of forward demand, and this past March, new bookings exceeded 2022 levels. March is typically the month with the highest amount of bookings in anticipation of the summer travel season. However, if lead times have shortened significantly as a result of economic uncertainty, we might expect strong April bookings as well. Accordingly, we will be paying close attention to this metric in the following months.

Demand nights are the nights stayed during that month.

Nights booked are reservations made during that month for any future date.

STR supply, after increasing rapidly in the first half of 2022, has recently remained stable, hovering near 1.35 million since July 2022. 

New listings increased very slightly in March compared with February, at 63,767 compared with 62,559. It’s worth noting that as a percentage of total available listings, new listings actually declined to 4.8% in March, compared with 5% in February. Fewer new listings, cleaving more closely to the 2021 pattern than 2022, would improve unit-level performance when combined with continued demand growth.

Higher borrowing costs on home sales are putting downward pressure on new supply. Almost immediately after the Federal Reserve rate increases began in March of 2022, growth in home sales diminished in response to higher mortgage rates. New home sales are about 17% lower than a year ago, according to the U.S. Census.

Meanwhile, existing home sales as tracked by the National Association of Realtors (NAR) were down 22.6% YOY in February. February’s figure was considered a positive as it represents a significant improvement from January, when sales were down about 37% YOY. 

Potential hosts may wait for lower rates before purchasing existing homes or constructing new properties. A common strategy in the development of new properties in times of higher rates is to borrow at a floating or variable interest rate today while keeping an eye toward refinancing later. The bank failures in March could make this strategy difficult, though, if lenders limit loans by tightening standards. Although too early to say definitively if this “credit crunch” scenario is unfolding, the possibility of it occurring likely further discourages plans to invest in new supply.

In contrast with the flat supply, demand growth in March continued its strength, with most location types growing more than in  February. Accelerations in growth occurred in Small City/Rural locations and Mountain/Lake Resorts. Following a pattern consistent since February of 2022, resort locations, having recovered earliest and most strongly, have the lowest growth rates.

Of the top 50 U.S. STR markets, 44 saw demand growth in March. The markets that saw losses include four markets in Florida, which saw massive destruction last year from Hurricane Ian and suffered a severe red tide outbreak in March. Markets with the largest YOY gains include several Northeastern markets such as Long Island (including the Hamptons) at 113.4%, Cape Cod at 68.1% and Boston at 31.5%, all on a YOY basis. These markets usually see very little traffic in March, making any additional demand during the shoulder seasons quite impactful on YOY growth rates. On the other hand, the top demand growth markets also include Phoenix/Scottsdale (+52%)  and Las Vegas (+43.8%), which are currently in high season but have still seen remarkable growth.

While the slowdown in supply and continued growth in demand is a positive sign for property level performance, an examination of the top 50 STR markets shows that the rapid supply build-up in 2022 will have an influence on YOY occupancy comparisons for at least a few more months. The majority of markets are still seeing occupancy levels somewhat lower than in 2022. 

The markets that did see occupancy gains generally had both strong demand and some technical barriers to new supply. Many of the top occupancy growth areas, for instance, have relatively restrictive regulations. This includes Long Island (46.7%), where demand has grown in a typically extremely low season, Las Vegas (+8.3% YOY occupancy growth), or Boston (+5.2%). 

Turning to ADR, all locations saw diminished rate growth in March compared to February on a YOY basis. Big City Urban saw a decline and may have been able to grow its demand at the expense of higher rates. Big City Urban ADR growth was 4.2% YOY in March, down from 5% in February.

Again, the resort locations had the smallest growth rates. Mountain/Lake Resorts fell from 1% YOY in February to 1.65% YOY in March, while Coastal Resorts fell from 3% to -0.5% YOY. 

The record number of bookings made in March is a positive sign for a strong summer travel season, and the forward bookings pace confirms this theory. Comparing the current forward bookings to forward bookings made through March of last year produces growth rates of about 10% for June through August.

 A few markets are taking advantage of excellent winter weather to extend the ski season and produce much more impressive April growth. A look at the 15 U.S. ski markets that have the highest forward pace shows that the top six were able to grow their April forward pace at an even higher rate than their March demand. Record snowfall has allowed extended seasons for several ski resorts including Mammoth Mountain (California), Deer Valley (Utah), and Big Bear (California). Mammoth Mountain snow has been so abundant that the resort is currently expected to stay open until July, potentially contributing to demand in the Mammoth Lakes market for several more months.

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.

U.S. Market Review: Sluggish Supply and Elevated Demand Maintain March RevPAR | AirDNA

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