Alternative accommodations, such as short term rentals, have enjoyed impressive growth with a 10.4% penetration rate to traditional hotel units in 2019, up from 0.7% in 2014, based on a recent CBRE report.
The urban market contributed the largest share of rental supply, an estimated 46% in 2014, but their share has declined to around 21% of the total short term rental supply in 2019. The slowing supply is attributed to more regulations and market saturation as well as growth in the leisure/resort market. However, the strong growth of rental units in the leisure/resort areas as the data seems to imply is related more to reporting of existing property supply that was not previously tracked than with new properties entering the market. To some extent, the urban slowdown is distorted given that the leisure/resort area growth is “inflated.” The CBRE report cautioned on not over-extrapolating the data:
Leisure/destination/resort areas have dominated the list of fastest growing markets over the past five years, which confirms that these platforms are being used more by owners and property managers for vacation rentals. While these units are new to the platforms tracked by AirDNA, they may not be new short term rental competition, having been rented in other ways by their hosts or property managers.
CBRE research points to a ceiling for short term rental supply penetration in the urban markets. Once short term rentals reach 10% of the hotel supply, growth slows. That percentage rises to 15% to 20% of hotel supply for popular urban destination markets.
Once the volume of short term rental units reaches approximately 10% of the total hotel supply in urban/suburban markets, growth rates start to slow significantly. Only those urban/ suburban markets with a large destination/ resort demand orientation likely have the potential to reach a short term rental penetration rate of 15% or more. These examples show that 15% to 20% penetration rates may be the ceiling in large urban and suburban markets.
In high occupancy, high ADR leisure traveler markets like Los Angeles and Miami, about 22.3% and 19.2% of their hotel room share, respectively, are accounted for by short term rentals.
Short term rental’s value proposition has always been price and, to some, extent benefits like kitchens and laundry facilities. Short term rental prices were 20% to 30% cheaper than hotels in the more expensive urban markets like New York (-32.6%), San Francisco (-25.3%) and Los Angeles (-25.1%). This lower price makes them a compelling alternative.
Interestingly, CBRE research suggests that urban markets with high levels of short term rental penetration, hotel businesses are relatively unaffected and remain strong for high demand destinations where hotels are fully occupied during peak periods. This finding demonstrates the value short term rentals bring to the hospitality market where they actually expand the market by offering more supply.
The availability of short term rentals allows markets to capture more overnight guest demand than ever before. “There may be a considerable number of guests who would have otherwise stayed outside of the core trade area, or perhaps would not have made the trip at all, but because of short term rental options are now able to stay closer to their optimally desired location.”
New supply from both traditional and alternative units have satisfied much of the demand that had historically been displaced and have induced new demand and broadened the lodging consumer base in the market.
What are the key takeaways on the urban short term rental market?
- Has stabilized after a period of rapid growth and has found its niche in hospitality.
- Fills a necessary need in the demand and supply equilibrium of the hotel market and even expands the market by boosting markets that lack hotel supply.
- Resonates with travelers who are price sensitive.
- Can account for nearly 25% of the hotel supply given the right market conditions.
- Provides the lodging market flexible inventory to meet seasonal or special event demands.
- Will pressure hotel RevPAR and impact ADR growth because short term rentals are a cheaper alternative.