Insights to Help You Prepare Your Airbnb Business for 2023 | Episode 11 | STR Data Lab™ by AirDNA

00:00:14:05 - 00:00:44:12

Speaker 1

Alrighty. We are live and direct together in person again, again together at last as I like to say hello. It is the STR DataLab brought to you by AirDNA. I am Mariah Kamei, VP of Marketing and of course I am just here to play sidekick to the Maestro, VP of Research, Jamie Lane. Jamie Hi, it's the holidays are upon us. Yeah, and I think you brought me a gift day.

00:00:45:01 - 00:01:12:01

Speaker 1

And I think you also brought our listeners and viewers a gift as well. That is our highly anticipated end of the year outlook report for 2023. Folks, today we are going to talk about what we are predicting. So predictions, forecasts and expectations for the coming year in our industry. And that said, the Outlook report of course, is a gift to all of us.

00:01:12:13 - 00:01:44:05

Speaker 1

However, we're not going to sugarcoat it. There is a lot of, I will say, trepidation for what is going to happen next year in the economy in lots of different areas, in particular in our little neck of the woods, short term rentals. So Jamie, let's let's just dig into it. Let's get into the details here, my friend. Of course, I'm sure a lot of folks are wondering what that means for things like their revenue and their livelihood.

00:01:44:07 - 00:02:16:04

Speaker 1

Let's talk about it. Yeah. So we put out this regular outlook report where we actually try to put out a industry forecast and there's really no getting around that the forecast for next year is it's negative. We've had a few years, what, three years now of positive results, really record years for the short term rental industry and at least on a revenue per available listing, we have revenue going down next year.

00:02:16:10 - 00:02:45:15

Speaker 1

So that is a bit concerning though. And if you look at it relative to where we were at in 2019, where we were at prior years, and this is still I would I like to call it persistent persistence at the peak. So we're at the top. We're maintaining really high levels of revenues. And yes, we do have occupancies declining.

00:02:46:03 - 00:03:36:20

Speaker 1

We had it this year. We expect it to further decline next year. ADR’s are not going to sort of outpace the decline in occupancy like we saw in 2022. And a part of that is math. We've had really high we've had really high inflation this year, which not only means that rate growth has been really high, though, if you sort of control for how high inflation's been in cost going up and we have had a real decline in rates this year, we expect similar levels next year, though we don't expect inflation to be as high.

00:03:37:18 - 00:04:21:28

Speaker 1

So that means sort of lower nominal rate. So we're expecting about one and a half percent rate growth next year. Gotcha. Gotcha. So not quite that program that everyone was on for 2020, 2021, 22 still. I love it. I get to say it right. Persistence at the Peak is one of alliteration which I and it sounds good and ADR just is average daily rate okay that is not complete mean we're not going necessarily too negative we're just seeing the growth slow revenue is going negative, revenues going negative.

00:04:21:28 - 00:04:54:22

Speaker 1

Okay. Yeah, but demand is still going to be positive. So we expect another record year for people staying in short term rentals next year. The growth of demand is not going to be as strong. So in 2022, we saw about 20% demand growth next year we're expecting about 6%. So that is a significant slowing and I think many people out there are expecting a recession.

00:04:55:14 - 00:05:27:10

Speaker 1

And broadly, there is a very high likelihood of a recession next year. We subscribe to Oxford Economics. We get their forecasts. That's the economic scenarios that sort of go into our thinking. And in Oxford's baseline scenario, they are anticipating a mild recession about in the mid part of 2023. So that is playing into the figures and is a lot of the reason why demand growth is so weak.

00:05:29:10 - 00:05:51:17

Speaker 1

So why is it going negative? That's the question I get pretty often, right? We all we all have different it's like some of your probably worst case people, some of your best case and then there’s the people in the middle. And I love that it's able to sort of look at those three different lenses and what Mariah was talking about and you'll see in the Outlook report is we do have a variety of scenarios.

00:05:51:17 - 00:06:17:17

Speaker 1

So we've got an upside scenario. It’s like game theory. What could happen. Yeah, I think the choose your own adventure. Yes, exactly. So if you don't buy into going into recession next year, right. And we're going to have a soft landing. The Fed's going to and necessarily of control of the economy and not push this into recession. We've got we've got a scenario for you.

00:06:17:17 - 00:06:54:11

Speaker 1

And if you think that the Fed's going to severely over tighten, push the economy into a deeper recession, where we're going to see significant job loss, unemployment go up, we got that scenario. Yeah, right. So we'll focus on a baseline scenario. I like a baseline and that’s the middle one between those two out. Yeah. So we do have a recession, but we do expect the sort of tailwinds for the travel and hospitality sector to outweigh any headwinds.

00:06:54:17 - 00:07:29:20

Speaker 1

All be it mild headwinds in the overall economy. This could be one of the first recessions, at least in near-term memory, where we don't see significant job loss associated with that recession. And I think most importantly, we don't see any factors outwardly impacting travel where I think it was in our our first podcast, we sort of talked through like the great financial crisis, 911, COVID all impacted the travel and tourism industry way more than the broader economy.

00:07:30:05 - 00:08:02:04

Speaker 1

This one, we actually expect the broader economy to be hurt more than the travel sector broadly, the service sector. And many economists are saying that this could be called a “goods recession”. So, yes, we're sort of pulling back on spending on things, spending more on travel. There's been so much pent up demand, there's maybe fewer Amazon boxes showing up at our doorstep, albeit not now.

00:08:02:04 - 00:08:33:18

Speaker 1

During the holidays. I feel like broadly people have been pulling back on spending on goods and that's showing up. We're seeing real weakness in that part of the economy. But when you look at the service sector and specifically in all aspects of travel and tourism, hotel demand, airline demand, restaurant demand, all of that is very strong and we would expect it.

00:08:33:18 - 00:09:01:15

Speaker 1

Oxford expects that to continue into 2023. I think some of that has to do. I know I talked about this, I talked about this before, but I think we have an experiential culture, right? If you think about the folks with the buying power, millennials, elder millennials, we value those experiences a little bit more than the Amazon boxes. And it's actually a trend that's played out over the past two decades as the sort of millennials have aged.

00:09:01:15 - 00:09:28:01

Speaker 1

Yes, we've got a little bit more buying power. And we also see that with Gen X and even with Gen Z now just beginning to flex their their spending power. And we obviously saw a reversion of that during COVID, but now it's sort of pushing back. And I expect that we're could even accelerate that trend over the next few years.

00:09:28:01 - 00:10:09:00

Speaker 1

And that's I'm really, one of the ways where I'm a long term very bullish on travel, on lodging and specifically short term rentals, because I think it's really the fastest growing aspect of all of our sector. Yeah, I love that, such a good point. So that talks a lot about demand, which is where we're going. That came from a couple of I think the housing is a key component of a recession still and also very big for supply.

00:10:09:05 - 00:10:48:03

Speaker 1

Let's talk a little bit about how supply might manage to find if there's any sort of bright spots there for folks or things that they should know about, you know, Yeah, I think, good things. Good thing for operators, maybe not so good for investors. We do expect supply growth to slow. So if we didn't see all of the weakness in the housing market, rising interest rates and our supply forecast would be significantly higher and that would more than likely mean even weaker occupancy going forward, bigger declines in occupancy with rising interest rates.

00:10:48:03 - 00:11:17:18

Speaker 1

That has made investments in the short term rental sector more expensive. The monthly premium that you pay that is much higher. And we've got a chart in the report where it looks at the average monthly revenues and just a typical short term rental is earning. And then comparing that to what would be the monthly mortgage cost for a new investment in that month.

00:11:18:20 - 00:11:42:02

Speaker 1

And then where we compare essentially what the premium is that you could get in investing in a short term rental in that particular period. Put it up on the screen, right? Yeah. But what you've seen is you go from premiums of about 80%, either revenue that you'd earn is almost double what the cost of that revenue is, and that's gone down to about 10%.

00:11:42:08 - 00:12:15:17

Speaker 1

So and that indicates to me that new investment in the short term rental industry should slow. Yeah, anecdotally I'm hearing a lot about that right. Taking a little pause. Yeah. We are seeing new listings growth at least in the US, slowed pretty substantially. We expect that to continue into 2023. We don't expect the Fed to continue to raise interest rates at the rates they were at, the increases they're doing in 2022.

00:12:15:17 - 00:12:53:28

Speaker 1

We do expect that to slow down, but we don't expect them to start pulling back on interest rates in 2023. We essentially expect them to pause them, take a pause, take a pause. And that means that 30 year mortgage rates, though, are still going to be around five, 6% throughout the year. And that's going to make and the interest costs associated with buying a new home and double what it was or what it was in 2021.

00:12:54:26 - 00:13:31:14

Speaker 1

There is the other part of the equation, though, of sort of the existing second homeowners. That’s what I was just going to ask about operators or potential operators that are maybe sitting on an investment that actually could still have a high premium. Yeah. And with some weakness in the economy, with the revenue opportunity still very high for short term rental operators, many markets are still recovering, especially in large city, middle sized city areas that maybe haven't seen the supply growth that some of our destination and rural areas have.

00:13:31:27 - 00:13:56:18

Speaker 1

We're not yet seeing a decline in revenues, maybe won't even see a decline in revenues for those location types. And that's where maybe we could see people pulling existing inventory into the short term rental sector. We could see maybe homeowners that are moving. They don't necessarily want to give up their home with that low 3% mortgage.

00:13:56:24 - 00:14:25:08

Speaker 1

Yeah. So they'll they would look to rent it out either on a long term lease or as a short term rental. Yeah, they're looking at their market and digging into things in MarketMinder while it's really high, they could still get a decent return on short term rental for sure. Yep. I love that. Okay. Loaded question for you because I think yeah, I think there's lots of opportunity for folks to still enter the market based on the assets they already have.

00:14:26:12 - 00:15:02:19

Speaker 1

Okay. If I’m sitting there, I'm thinking, should I put some money in the stock market or should I maybe take some money and invested into real estate? Yeah, I am. I'm just personally asking you guys. Yeah, I think no easy answer. I am not a financial planner and I do not give financial advice, but I do think there's going to be pockets of investment in the short term real sector, especially in areas that are seeing falling home values.

00:15:03:14 - 00:15:39:10

Speaker 1

So in many areas throughout the country, the housing market has definitely got a bit overheated. We saw values increase substantially, bidding wars, 20, 30, 40 bids for single home, cash offers, waive the inspection the whole nine. Right? Yeah. And now that's totally flipped on its head. We have homes going to market that are getting one or two offers where you can get and potentially get seller financing, get seller to pay the closing cost.

00:15:40:00 - 00:16:15:21

Speaker 1

But because of that sort of weaker housing market, we are seeing fewer homes come to market and substantially fewer homes actually trading. And that sort of plays into the fact that sellers still have really high expectations for home values. The buyers have maybe a bit lower expectations of what they should be paying. And yeah, there's a bit of a disconnect between that and that, and that's probably going to persist for a bit. It’s going to take a while for people to come to terms with the reality of the new situation.

00:16:16:02 - 00:16:50:11

Speaker 1

Yeah. And then once, once maybe sellers realize that if we are in a recession, if they're maybe forced to sell, yeah, that we could see more price discovery, more transactions start to happen and at that price discovery phase, that's when we start to find the deals. That's when and we start saying, okay, prices are maybe 10 to 20, maybe in some markets, 30% below sort of what they peaked out at.

00:16:50:11 - 00:17:19:19

Speaker 1

And then you can use Rentalizer, use MarketMinder and understand the revenue potential for those properties and then begin to find deals. So I think I'm a buyer in 2023, maybe not today, but starting to look for those deals up and finding it out stock market, who knows. Yeah, yeah. We won’t comment on the stock market but you know, it's a balance out.

00:17:19:25 - 00:17:48:28

Speaker 1

It's going to be volatile, right? The stock maybe a little bit of real estate diversify your assets. I love this. I think it's a really interesting perspective on housing. We covered supply pretty well. What else should folks be sort of aware of going into 2023, I guess, like where are you on that, taking the baseline and taking the middle road?

00:17:50:02 - 00:18:26:02

Speaker 1

I mean, I'm not as pessimistic and Oxford is personality. If I may be. I'm probably just over 50% chance of recession next year. So its tipping the scale towards it, tipping the scale. But maybe we wouldn't have a recession in my baseline scenario, I think the the path to a soft landing or is high. We've seen continued strength in the labor market.

00:18:26:16 - 00:18:50:28

Speaker 1

I think broadly over the past year. Employers have had a hard time hiring. Now they were sort of ramping up hiring at the beginning of 2022, had a really hard time finding people. And now that they've found those people, they're going to be really reluctant to get rid of them unless there's really a deep recession and they see their revenues, their profitability really pulled back.

00:18:51:20 - 00:19:17:21

Speaker 1

So that's where I don't expect the unemployment rate to pick up substantially that employers look to hold on. And broadly, employment and employment growth is one of the best indicators of future lodging demand. So if you have your job, more than likely you're going to be traveling. If you lose the job, that's when you fantasize about your vacation.

00:19:17:27 - 00:19:45:02

Speaker 1

Yeah, so love that. So for investors and takeaways, we're going to keep watching whether we see opportunities in specific markets where we start to see those housing prices go down, everyone kind of comes back down to ground. Absolutely crazy year that 2022 was I know we talked before about how about 2022, for better or worse. But again, it was high, interest was low.

00:19:46:10 - 00:20:13:21

Speaker 1

And there's still places where there's pockets, opportunity probably based on just interest in traveling and supply and demand for our host friends. How should they be thinking about optimizing their ADR? What should they be doing thinking, okay, I'm going to be a little bit more realistic about how to turn around and make next year, but I still want to short as much as I can.

00:20:13:21 - 00:20:59:19

Speaker 1

Shore up those investments make sure they are still making a return. What advice do you have for them? Yeah, that gets into sort of revenue management. 100% big topic. Big topic. You’ve got 2 minutes, right? Broadly like, you can't be resting on your laurels. You've got to be monitoring on a day to day basis if sort of looking at your booking curve, looking at what amount of bookings you were getting last year, maybe at the same time this year, at the same time, if you're not getting the bookings you would expect or what you’ve seen in prior years and it may be the time to start lowering prices even I'm slowly

00:20:59:19 - 00:21:41:14

Speaker 1

like $5 at a time. See what that threshold might be, 50% off. All of a sudden. Yeah. To start getting bookings. I would really understand your seasonality. So if you're in a market like Denver in the winter and or a market like West Palm Beach in the winter, you're going to see an entirely different seasonality. So understanding that, okay, maybe and it's not my pricing, it's just that it's off season and if I do want to get occupancy, I might have to and really discount versus what I was charging early in the summer.

00:21:42:09 - 00:22:18:14

Speaker 1

We do not suggest that people get a have a flat rate for the entire year. You've got to adjust and you've got to figure it all right. You've got to adjust. And throughout the year, on a day to day basis as sort of demand plays out and we've got lots of tools to sort of help people monitor their market book activity, their compset activity, how that compares to what they're getting at their own property so they can go in and really manage rates effectively and make sure that they're getting their fair share of bookings that are happening in that market.

00:22:18:19 - 00:22:51:16

Speaker 1

And I was just about to say, I think compset is such an under utilized tool that we have because, yeah, I have a friend. She just decided to drop her price. I just I'm dropping the prices and have you look to see what is happening with other folks in your neighborhood and then yeah, that seasonality is so huge. I think also just like not looking at your revenue, maybe through the whole year like taking a look at the next twelve months where is seasonality, where you expect to be and then like right and that's what I'm we're still seeing positive booking trends.

00:22:51:16 - 00:23:16:28

Speaker 1

So I'm looking at over the next three months demand's about 10% higher than it was during the same three months in the prior year, though supplies up a bit more than that. So we are seeing bookings sort of per listing down about 6%. You look at some of the high markets, high supply growth markets that may be down ten, 15%.

00:23:17:09 - 00:23:41:23

Speaker 1

So that's on average. And the typical host is seeing ten or 15% fewer bookings than they were seeing in the prior year. So that may mean in some areas, some some markets is concerning. And when you're in that environment of higher competition and that is when prices usually start to soften a bit. Gotcha. All really Good advice, Jamie Lane.

00:23:41:24 - 00:24:15:01

Speaker 1

I'm so excited for everyone to get an opportunity to read your full report. Lots of great data in there. And yeah, get MarketMinder to check out your compsets. Don't obviously be complacent in this time. Not a time to give up, you know, time to be cautiously optimistic and also very realistic about what could happen. It's a great time to look at the data, to look at the numbers, to start to plan out your year in advance, hopefully understanding, a little bit more what's happening on the macro level as well from Jamie's report.

00:24:15:26 - 00:25:04:27

Speaker 1

Awesome, Awesome. And if you have comments, please share them. Yes, feedback. We love it. I'm on LinkedIn and Twitter would love to sort of hear your and what's going on in your property and what is your forward bookings look like. Are you seeing significant weakness or not? I mean, I'd love to help everyone out and better utilize MarketMinder for managing the rates and if you need help with that we’re here, we like to think of ourselves as sort of champions behind data in the industry and helping and everyone out there better utilize the data that is out there to better run their business and make sure that they're maximizing the revenues and successful in the long

00:25:04:27 - 00:25:32:20

Speaker 1

term. Exactly. Yeah. We're all about making sure everyone can be as successful as possible and enable is possible through the data. Jamie is easy to get a hold of. So yeah, but but beyond Jamie we having to help. Just a tweet phone call away, smoke signal carrier pigeon and all of those we accept them all you guys well. Happy, happy holidays to everyone.

00:25:32:20 - 00:25:38:06

Speaker 1

And thank you so much for listening to this to the STR lab. Thank you. Until next time. Happy holidays.