Whether you are an investor, a home-owner, or just a traveler, the chances are that you’ve heard of the transformational change in the hospitality industry brought about by the emergence of a new sector – Short term rentals. Led by the $31 billion giant Airbnb, the short term rentals sector represents a quantum shift in the way people travel, generate income from their homes, or invest in the fastest growing sectors of real estate across the world.
If you haven’t heard of this disruptive innovation in hospitality, or wanted to understand in more detail the background, growth drivers, and forecast for this sector, here’s all you need to know about Short term rentals. Before we get into how it has changed the face of the industry, first let’s take a look at the gaps and trends in the industry that set the stage for its meteoric rise.
Market Background
First, a quick look at the broader space that short term rentals and hospitality operate in, and how they’ve been part of a larger shift in terms of consumer behavior and spending.
The Travel & Tourism sector contributed $7.6 trillion in 2016, accounts for a tenth of the global GDP, and has been growing faster than the GDP for six successive years. The sector also has a healthy forecast for the coming decade, with increasing trends in key indicators like consumer spending, disposable income, and corporate travel demand in a more globally connected economy. The trends of spending on experiences rather than things can be seen across the world, with recreation, travel, and restaurants growing at the expense of durable goods and even staples like clothing. The hospitality industry was once considered highly cyclic, but is now expected to grow sustainably and strongly on the back of strategic location expansions, increase in mid-scale experiences, traveler-facing tech, health and wellness, and disruptive new models. Restaurants have a similar outlook, with a study in America finding that 44% of the average household food budget is dedicated to eating outside. The vast majority of travelers from emerging countries are leaving their borders for the first time, injecting billions of dollars of new wealth into the industry, driving the data point of international travel departures having more than doubled from 600 million in 1996 to 1.3 billion in 2015.
Over and above this general buoyancy in the sector, a big opportunity has opened up in the form of some fundamental behavioral shifts that are reframing consumer expectations and needs amongst a digitally connected, globally mobile, young population
Market Opportunity
A Deloitte report identifies consumer expectations like modern design aesthetics, better technology for connected travelers, innovation around F&B, and reimagined communal spaces as some of the winning differentiators for the future. What’s more, in-destination spend like tours and attractions, accounts for 10% of travel revenue, twice the size of car rental, making it the third biggest segment behind flights and hotels. This particular segment is extremely fragmented, with more than half generating less than $250,000 in annual revenue, majorly working offline thus making this opportunity traditionally overlooked.
With digital tours and travel aggregators consolidating this segment, there is huge potential to integrate the travel experience and set up a bigger eco-system that not only attracts more travelers and creates new revenue streams, but also provides a valuable lens into travelers’ preferences and interests. This ties in very well with the smartphone revolution that has set up base expectations that every aspect of life should be manageable through a single small device in your hand, a phenomenon that has not only driven most offline businesses online but also created a booming model of integration and aggregation that simplifies disparate experiences for consumers into a single click.
Short Term Rentals
So far we’ve covered some of the trends that explain the meteoric rise of the short term rentals (STR) segment, which has dominated hospitality industry growth over the past few years. Airbnb alone has rapidly scaled up to more than 4 million properties in over 65,000 cities, that’s more listings than the top five major hotel brands combined. Airbnb has now penetrated 191 countries, expanding in 10 years to an extent that Hilton and Marriott haven’t been able to in a century, resulting in a valuation of $31 billion, 30% more than the nearest competitor (Hilton).
Short term rentals have already transformed the landscape and continue to further do so with their customer-centric services, rapid scaling, and decentralized platforms that are growing both in supply and demand quarter on quarter. To better understand the factors underlying this phenomenon, let’s look at some of the key drivers for this growth.
Market Drivers
The STR segment is forecasted to add $56 billion over the next 3 years to reach $194 billion by 2021. This bullish outlook on STR is based on some strong differentiators that it enjoys over the rest of the hospitality industry, and its strong positioning in a digital economy that will continue to disproportionately reward efficient marketplaces and business models. More specifically, there are 4 drivers behind the growth of STR:
Growth of the sharing economy: A PwC report estimates nearly 20% of Americans participate in some type of sharing economic activity, fueling a sharing economy that is slated to grow to $335 billion by 2025 in just five sectors – travel, car sharing, finance, staffing, and streaming. This redefinition of asset ownership has created a far more liquid market by increasing the number of transactions and players involved. Nowhere is this more strongly felt than transportation (Uber), and STR (Airbnb)
Rental homes as an investment: The sharing economy deemphasizes home-ownership, and represents a shift towards rental investments. When combined with other major trends in the real estate market like a younger demographic of Millennials and Gen-Z that isn’t as concerned with home-ownership, and rising rental yields built on consistent and sustainable demand growth, there is a resultant increase in momentum for STR as an extremely lucrative investment opportunity.
Value for money: The average cost is $200/night for a 3BHK STR property, which is the price you’d expect to pay for the average 5-star hotel room. This has been one of the big draws for short term rentals, not only more affordable rooms for the budget-conscious traveler but also a far more luxurious, functional, and spacious stay at each price point as compared to traditional hotel rooms.
Tech platforms for distribution: It is no coincidence that STR was first popularized and established by a younger demographic of travelers that valued convenient planning interfaces, seamlessly integrated online services, and transparent access to data allowing for informed decision making. Now, a majority of travelers has switched over to online platforms to plan their trips, and the role of efficient marketplaces bringing together buyers and sellers has vastly increased. What’s more, the medium is further evolving with additional services like itinerary management, photography, security provisions etc. that have sparked further wholescale adoption.
All this makes a great case for short term rentals as a fantastic investment opportunity. Should you go out and get your new apartment to capitalize on this trend? Or maybe list your own home on Airbnb? It isn’t that easy. If it was, everyone would be making money. There are a few challenges that STR properties face, here are some you ought to know.
Market Challenges
Airbnb CEO Brian Chesky outlined a roadmap for the company that aims to host 1 billion guests by 2028, on the back of increased penetration and usage but also additional tools for personalized preferences and loyalty programs. While the current trends make the projection seem more than likely, there are a few challenges facing the industry that are becoming more relevant with size. These challenges actually represent a huge opportunity for innovative offerings and STR portfolios capable of closing these gaps that exist in the sector currently, while capitalizing on the market drivers that have given it a competitive advantage. Here are 5 challenges that make STR dependent on domain expertise and professional experience:
Regulations: As platforms like Airbnb and HomeAway decentralize short term rentals, the number of unregulated players entering the market have substantially increased and many of these operate without licenses or insurance or adequate safety mechanisms. Naturally these fragmented offerings that don’t comply with hospitality regulations end up attracting fines and stricter laws from the state. Unfortunately, most cities, states, and countries are at varying levels of regulation, making it difficult for individuals to be sure about how to comply with local rules.
Quality issues: The bigger issue with the proliferation of unregulated players in the segment is the low quality that many of them provide. While this is a smaller problem in high-end properties, the economy-range where a bulk of these players operate is increasingly having to deal with bad guest experiences in rental homes that didn’t meet expectations or where the hosts who were not professional.
Fraud: The innate risk of the sharing economy is the peer-to-peer nature of lower accountability and lack of transparency about both the customer as well as the service provider. While the large aggregators are continually improving their validation mechanisms to properly vet the users on their platforms, their speed of scaling up has meant there have been many cases of fraud. Thus, even in STR, travelers look out for professionally managed listings or host statuses like ‘Superhost’ that Airbnb certifies.
Poor management: Individual home-owners make up 65% of the STR market currently. While the risks to guests have been elaborated already, a bigger challenge is that these home-owners come without any experience in the hospitality industry and therefore do not maximize the revenue on their properties through professional tools like revenue optimization, customer service and loyalty management. Simply put, STR properties could be far more profitable than they are currently, if only they were run efficiently.
Low barriers to entry for traditional rental properties: The rental yields on short term rentals are much higher than traditional rentals, and the barriers to entry are being broken by decentralized services like Airbnb that have made it easy for individuals to seamlessly convert their rental properties to short term rentals instead. As it is, what started off as a ‘sharing-economy’ idea of renting out vacant space in an inhabited apartment, either with unused rooms or when the host is traveling, quickly became a profitable way for homeowners to rent out their second homes. This ease of supply makes it a challenge for existing STR properties to maintain profitability unless they have a substantially differentiated offering and superior services.
The Final Word
STR has fundamentally changed the real estate investment landscape. By reimagining asset ownership and enabling one’s home to generate income, disrupting the hospitality industry and unlocking powerful value in housing markets, STR has redefined the 3 H’s of real estate, and forged an impactful growth trajectory that looks set to continue into the next decade. The shake-up in the market is clear to see, with many hotels looking to expand their offerings to include apartment listings and more decentralized models of inventory. Across the world, governments are adapting to this new vision, with even China actively encouraging STR to help combat skyrocketing property prices. As an investment opportunity, it’s never been easier to effortlessly own a slice of tomorrow in the most exclusive STR portfolios across the world’s hottest growth engines and tourist destinations. Sometimes all it takes to get in on the ground floor of the future of real estate, is to look it up on Airbnb.