The short-term rental industry, exemplified by platforms such as Airbnb, has experienced significant growth over the past decade. Originating in 2007, when a group of individuals devised a website to rent out their living room air mattress to transient individuals, known as "air bed and breakfast," this disruptive innovation posed a challenge to the established vacation rental market.
During the ensuing years, virtually any listing placed on Airbnb.com would yield profitable returns. However, when rates reached a nadir in 2020, this already burgeoning market witnessed accelerated expansion, leading to what is commonly referred to as "saturation." It is worth noting, though, that this saturation predominantly affects homes of mediocre quality, characterized by limited amenities, staging, and design. The saturation issue primarily resides within this segment of the market.
It is indisputable that the short-term rental space has become more precarious, with a higher propensity for financial losses than ever before. However, when managed by proficient operators, the profit potential remains well above the average. Demand for quality homes boasting ample amenities remains robust. Moreover, the cost associated with establishing such high-quality rentals acts as a deterrent, inhibiting many potential investors from participating in this market. For instance, while the demand for a three-bedroom, two-bathroom rental exhibits relative stability year over year, in the face of increasing supply, the demand for larger properties, such as a five-bedroom residence with a heated pool, has outpaced supply. It is within these upper-tier dwellings that substantial financial gains can be realized.
Furthermore, larger rental spaces offer a multitude of utilization opportunities, ranging from hosting wedding parties and birthday celebrations to accommodating corporate retreats. However, amidst the specter of an impending recession, the age-old adage of "location, location, location" assumes even greater significance. Undoubtedly, if the economy undergoes a significant downturn and one finds themselves in possession of a luxury property with waning appeal to potential travelers, the consequences are far from desirable.
Hence, my endeavor revolves around identifying locales that possess "recession-resistant" characteristics. Throughout the United States, there exists a multitude of regions that were impervious to the adverse effects of the great recession. Among the 404 metropolitan statistical areas in the country, a noteworthy 155 of them avoided any depreciation in home values during the period from 2006 to 2011, thus remaining unscathed by housing downturns. Additionally, many others experienced only mild declines. While this revelation may surprise some, it is important to acknowledge that real estate market behavior has consistently demonstrated its localized nature. Expecting a uniform nationwide behavior pattern across all local real estate markets would be far more astonishing. Indeed, such uniformity has never materialized.
The collapse of real estate prices in regions such as coastal California, Phoenix, and Las Vegas, among others, which had previously witnessed sustained upward spirals in property valuations, commenced around mid-2006. The ensuing decline accelerated rapidly, subsequently exacerbating the financial implications and culminating in a far-reaching impact on the global economy. Consequently, significant declines in employment figures reverberated across all sectors, including the hospitality industry—an area of particular interest to short-term rental investors.
While it is conceivable to locate a property in a locale boasting a historical track record of steady appreciation and resilience in the face of national housing downturns, it remains crucial to ensure that this locale garners sufficient vacationer footfall. After all, no investor harbors an affinity for negative cash flow resulting from an underperforming vacation home investment. Once again, it is evident that hospitality-driven economies represent localized phenomena.
Examining the data compiled by the Bureau of Economic Analysis, pertaining to 2,066 county-level hospitality gross domestic products (GDPs), a remarkable 694 of these GDPs demonstrated growth upon emerging from the recession, surpassing their initial levels. Even more strikingly, 33 of them did not experience a single year with a lower GDP than the preceding year. Such resilience serves as a testament to the localized nature of these hospitality-driven economies.
Therefore, by amalgamating relevant metrics and scrutinizing markets that exhibited resistance to housing downturns and broader economic recessions, we can identify the ideal combination of recession-resistant short-term rental markets. Subsequently, the ensuing pursuit predominantly revolves around balancing real estate prices against their respective rental potential.
My mission, through 20Plus Capital, lies in the discovery of high-performing short-term rentals within recession-resistant markets. At present, an incredible opportunity awaits those seeking to partake in this endeavor.
References:
Bureau of Economic Analysis. (n.d.). Gross Domestic Product (GDP) by County, Metro, and Other Areas. Retrieved from https://www.bea.gov/data/gdp/gdp-county-metro-and-other-areas
Federal Housing Finance Agency. (n.d.). House Price Index. Retrieved from https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx
Note: Please ensure to check for the most up-to-date information and specific datasets available on the respective websites of the Bureau of Economic Analysis and the Federal Housing Finance Agency.
