Transcription
Short-term rentals are a $100 billion market that have reshaped global tourism, accelerated a nationwide housing crisis, and created fortunes for early adopters. But now customers, the government, the public, and the hosts themselves are turning their back on a concept that started out as a fun alternative to stuffy hotel chains but became everything wrong with modern real estate. All right, the party's over for Airbnb renters. The company said yesterday that its temporary ban on parties and other large, noisy events is now permanent.
“I’ve put all my savings into into my unit,” I’m following all the rules, paying all the taxes, buying the business license. Ultimately, our goal is to get more housing back into the housing market for people to be able to rent.”
“I just uncovered a massive amount of debt that Airbnb hasn’t paid on the books that they’re hiding—tens of millions, hundreds of millions, possibly even a billion dollars plus of debt that they have not paid. So we are looking around and are saying, what can we do right away that makes more homes available?”
The short-term rental market took off when Brian Chesky and Joe Gebbia tried to rent out a spare room with an air mattress to attendees of a conference because they realized all of the hotel rooms had been booked out. They called their service AirBed and Breakfast, which was later shortened to the short-stay app that you know and love—or hate—today. Airbnb is now worth more than hotel chains like Hilton and Wyndham combined. The company is by far the largest short-term rental company, and it has achieved excellent penetration into markets around the world where other similar peer-to-peer or network market apps like Uber, DoorDash, Lyft, and even Amazon have failed to take share away from local competition.
It was a good idea. Customers loved it for giving them a cheaper alternative to outdated hotels, and hosts liked the opportunity to earn extra income on a spare bedroom or even an entire separate property. But the four parties that make the short-term rental market work—the customers, the hosts, the public, and the platforms—are all now dealing with four unique problems that are threatening to undo this market and take out a lot of other real estate investments with it.
The first problem lies with the people who it’s hardest to feel sorry for: the hosts. Airbnb and other short-term rental platforms provided a unique opportunity for people to profit off real estate in a totally new way. Having a roommate existed long before Airbnb, but the platform let homeowners offer their spare rooms to travelers who could pay up to triple what a long-term roommate would pay. Since budget was the reason that they were looking for a roommate instead of a place of their own, the extra income was nice, but the added flexibility of a short-term roommate was the biggest appeal to most people. If you had an extra bedroom to rent out in your apartment, you could find a long-term roommate, but then you run the risk that they are the type of person who is messy, loud, doesn’t pay the rent on time, or is just a clash with your own personality. With a short-term tenant, any problems are only going to last as long as their short stay. Other advantages are that payments are handled through the Airbnb platform; there was a rating system that controlled bad behavior; and if you ever wanted the house to yourself because family was coming over or just wanted a quiet week to yourself, it was as easy as blocking out those dates on the app. That was the early value proposition of Airbnb.
But sharing a spare room and staying with a random person while on vacation only appealed to a certain type of alternative traveler. Most people who Airbnb are putting up entire properties for guests to use as exclusive accommodations instead of a short-term alternative to a roommate. The market became a short-term, higher-yielding alternative to conventional long-term tenants in an investment property. Property owners could make as much as double the rent from short-term stays after paying Airbnb fees than they could from long-term rentals, even if their property was only rented out for half the year. The downside was that short-term rentals required more effort because the property needed constant cleaning between stays, and there was less guarantee of consistent income. But financial benefits were still clearly in favor of short-term rentals for properties close to cities and tourist hotspots.
Large-scale Airbnb landlords—the Airbnb Barons, if you will—designed properties with the express intention of cutting down on the effort required from them. They fitted doors with keypad locks that could be changed remotely between guests, easily cleanable surfaces, inexpensive but fashionable fittings, and preferred properties with minimal landscaping. All of this cut down on the additional efforts hosts needed to put into managing a property. But like all good things, it didn’t last forever. Airbnb advertised its platform just as hard to new hosts as it did to guests, and investors started buying multiple homes to turn them into Airbnbs. Some hosts turned managing their Airbnb properties into a full-time job, effectively purchasing a job as a hotel general manager. Other hosts took an easier approach. Realtors in high tourist areas started offering short-term property management services where, just like they would manage traditional long-term tenants, the realtors would instead manage the short-term rentals, with some services even handling the listing on Airbnb. Their fee was higher, but the higher short-term rental price meant owners still came out ahead. The additional cash flows from higher-yielding short-term rentals also made it easier to qualify for more more home loans because the additional income could be used to pay for the loan on the next property and the next property. The inevitable result was clear: for little additional effort, hosts could make more money from their properties, so the market became oversaturated, and hosts started to struggle to rent out their properties enough to make it worthwhile. Short-term rentals also made long-term rentals more expensive, so the gap between what someone can make from a short-term rental versus what they can make from a long-term rental is narrowing. For many hosts, it’s no longer worth the additional risk and effort to rent out property short-term, and for the others that could only afford their loans because of the higher rent they got from the short-term rental yields, they might be forced to sell. That’s just the first group in the collapsing market for short-term rentals, and they were one of only two that were in any way responsible for the [ __ ] storm to begin with. So it’s time to learn how money works to find out why short-term rentals got so big and failed so quickly.
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Short-term rentals were a good solution to a real problem: traditional hotels had become overpriced and didn’t cater to what a lot of people really wanted when they went away on vacation. Hotels provide a lot of amenities like housekeeping, room service, restaurants, concierge desks, meeting rooms, gyms, spas, pools, valet parking, and 24-hour security. These services are nice, but they come at a price, which is either directly baked into the price of a room or charged separately at a significant markup. These services also don’t always align with what the vacationers really want when traveling, which is a place that just feels like home in a different city. Airbnb cut out a lot of amenities that catered more towards business travelers and offered vacationers their own kitchen, multiple bedrooms for their children, and an element of privacy that couldn’t be purchased at any hotel chain. It felt like a home away from home because, in many cases, it was just someone’s home. Airbnbs were also much cheaper, especially when sharing a larger home between multiple friends or family members who would all need to book their own separate rooms if they were staying at a hotel.
A study conducted by the University of Waterloo and Daniel Gunten’s hospitality research, surveying customers booking Airbnbs and traditional hotels, found that 61% of all correspondents said that they chose the Airbnb as a budget-friendly alternative to even budget hotel chains. Despite the company’s marketing as a way to share the vacation experience with the local host that can show you around a city, most respondents said that they did not care about this aspect of the service, and 70% stayed in a home that they had all to themselves, so they didn’t have to share space with a random stranger. Despite people actually preferring not to share their short-term rental with a host, Airbnb still spends billions every year promoting this aspect of their service for a really important reason that will come up later. Get an Airbnb and get a place to yourself, anyway.
The things that made Airbnb are now either being lost or offered by competitors in three areas. The first is price: Airbnb is no longer an affordable alternative to budget hotels; it is now a premium option competing with premium five-star chains. According to the company’s own data, even though the number of bookings has only increased 70% since 2019, the gross value of all bookings worldwide has increased by 67%. Airbnb is just not cheap anymore.
The second area where the platform is losing out is its monopoly on homes away from home. Hotel chains have significantly increased their offerings of apartment-style accommodations that do away with typical hotel services in exchange for larger rooms with multiple sleeping areas and kitchens. To many customers, these semi-service departments offer a better value because they combine the known consistency of a hotel chain with the space and price of an Airbnb.
The third area that turned customers against Airbnb was service. Hosts wanted to cut down on the work they needed to put into managing their properties, so they started putting more unrealistic expectations on guests about cleaning up before they leave—exorbitant cleaning fees that will irk people, especially if you, the person staying there, has to pretty much clean the house themselves. Overall, this is just a few bad hosts, but it has given the platform a bad reputation amongst customers who expect to be charged cleaning fees on top of already high rates compared to a hotel where, as long as there is not permanent damage, housekeeping will handle everything free of of charge. If Airbnb’s business was being a middleman platform between hosts and guests, then both of these groups having a bad experience is not a good direction for the company. But there is another group that has had it worst and who are involved in the app whether they like it or not, and that’s a third reason for the Airbnb bust.
The public is sick of it. Customers can choose to stay wherever they want, and the threat posed by Airbnb and other short-term rental options has forced existing hotels to improve their offerings. Hosts were investors who need to accept that all investing carries risk; most of them still own a home or multiple homes that they can now lease out in an overpriced rental market or sell, likely for a profit. Neither of these groups have lost unless they were really stupid. The people who did lose, though, were priced out of their homes because it became more profitable to rent to vacationers than long-term residents who needed a place to live. Poor renters don’t have any power over the platform itself, but the problem of unaffordable homes in certain cities is becoming so bad that politicians are introducing new policies that will limit how many short-term rentals are allowed to exist and charging hosts additional taxes for running unregistered hotels. If hosts are not playing by the rules, this legislation will require platforms to take down those listings. Other cities have just made short-term rentals illegal without the same licensing as a normal hotel, making it so expensive that it’s not worth it for the host to bother.
The other group cracking down on short-term rentals are the people who you would least expect to be the heroes in a story about housing: homeowners associations. Owners associations in apartments and suburbs that have them are blocking owners from renting out their homes to short-term stays because residents who live in their homes don’t like loud parties and additional security risks that come with the short-term guests. Some hosts are simply ignoring these laws and taking the fines into account as a cost of doing business. A report from Mill University’s urban planning Professor David W. Smith found that 45% of all short-term rental listings in Los Angeles are legal in one way or another and that the city could have levied between $56.8 million and $32.2 million in fines in 2022 alone. The semi-legal approach to rentals is still working for some hosts, but it’s creating problems for the platform. Airbnb is spending hundreds of millions of dollars across the world fighting legal battles for the right to operate, and that’s why they still spend so much on advertising their service as a way to see a new city with a local host, even though most of their properties are rented out as whole new homes where a guest will never even see the person that owns their home. It’s much harder to regulate shared short-term stays because it’s harder to distinguish them from someone just staying with their friend. The folksy image of someone sharing their bedroom with curious travelers who want to see a new city with a local is much better PR than a multi-millionaire or institutional property investor who has just listed their 10th home with a tech company worth $80 billion. And that’s the fourth cause of the Airbnb bust: the platform is losing its control on guests, hosts, and the general public.
Airbnb has always had competitors like VRBO, but now incumbent traveler sites like TripAdvisor, Booking.com, and Expedia are launching their own short-term rental platforms like TurnKey or incorporating them into existing sites that already aggregate listings from multiple hotel and advisors. Airbnb charges a host fee of 3% to the people listing their properties and a service fee of 14% to guests. Some hosts have found it cheaper to advertise their properties through local agencies and split these savings with guests. Airbnb has about the same amount of technical overhead for a vacation stay as Uber has for food delivery or ride share, but Uber can only make a few dollars off a small charge where Airbnb can make hundreds of dollars from their 17% cut of every transaction. This has made the platform profitable where other peer-to-peer platforms have struggled to turn a profit, which is a great advantage in today’s high interest rate environment, but it is also painted a target on the back of the company that has no competitive moat around their business model apart from their brand name and recognition. There is nothing to stop these new entrants entering the marketplace from taking market share away from Airbnb by offering a better service or charging lower fees.
The bonus fifth reason behind the Airbnb bust was that the platform was never set up with longevity in mind. It has made billions in just a few years, and for its founders and early investors, everything else is just a bonus. That’s not a bad thing, but if you’re interested in businesses that have a bit more staying power, go and watch my video over on How History Works to find out what it takes for a company to last 1,000 years. If you want to watch these videos a day early and get articles that will never be made into videos for YouTube, then subscribe to my email newsletter, Compounded Daily, to keep on learning how money works.