Short-Term Rental Demand and Supply Outpaces Hotels

The answer to the question “Which is doing better – hotels or short-term rentals?” is “depends on whom you ask and when.”

But in their latest report data firms AirDNA and the CoStar group claim that rentals are growing in demand as well as supply over hotels. 

For this report, the firms aggregated data from 2018 to 2023 to examine changing trends in supply, demand, and ADR for vacation rentals and hotels in the United States. The analysis found that rental shares of supply and demand have accelerated. Small city/rural and suburban locations drove this growth, as they provided consumers with physical space during the pandemic. Among those, larger homes also contributed to growth, with 3-bedroom rental properties accounting for a larger share of growth than 1-bedrooms. In the year ahead, the report predicts that rental share will continue to grow, and hotels are expected to feel the impact.

Rental Demand Growth

Demand growth in the accommodation market slowed from the first quarter of 2022 to the second quarter of this year. Specifically, the annual demand growth dropped from 30.0% to 11.7% for rentals and from 26.4% to -0.6% for hotels during this period. 

Despite the overall slowdown in the North American market owing to international travel, rentals continued to outpace hotels in terms of demand growth. The trend of “bleisure” travel, combining work and leisure, likely played a role in the increased demand for rentals.

Rental demand growth has seen a notable rise in all location types, particularly in small city/rural areas. By May 2023, demand growth for short-term rentals reached 24%, while hotels remained at 0%, the report found. 

Mid-sized cities, suburbs, mountains/lake resorts, and coastal resorts also experienced greater demand growth in rentals compared to hotels. However, in urban areas, both hotels and rentals had a more even demand growth rate of 12%. 

This is not surprising as urban areas had a relatively high supply of traditional hotel rooms and stringent short-term rental (STR) regulations, with cities like New York, Los Angeles implementing strict rules. 

At Skift Global Forum held in September, Airbnb CEO Brian Chesky made a remark on this addressed to the hotel lobby. 

“I think that the hotel lobby was absolutely at the table (on deciding on NYC’s short-term rental law). What I’ll just say is: I never felt like for Airbnb to win, hotels had to lose,” Chesky said. “The evidence of that is Airbnb — we had approximately 400 million guest arrivals last year, and yet last year, hotels had profits and revenue significantly higher than before we started. And the reason why is maybe three reasons. Number one, around half of our nights booked for stays longer than a week. Hotels don’t really serve that need of longer than a week that well.”

Location plays a vital role in shaping consumer preferences, but the number of bedrooms in a rental property also significantly impacts their choices, the report found. Up to May 2023, rentals with three bedrooms constituted 33% of the overall change in rental demand. 

Meanwhile, 2-bedroom rentals made up 22%, and 1-bedroom rentals comprised 14%. For larger groups, opting for a 3-bedroom vacation rental might present more favorable offers compared to booking multiple hotel rooms. 

Hotel Supply Lags

It’s not just demand, but in the real estate market, rental properties are outpacing hotel construction in terms of supply growth. Factors such as labor, land, and building material costs have caused substantial delays and raised concerns among investors, leaving several hotel projects in the planning stages. The rental sector has also encountered its share of challenges, including limited housing availability and elevated interest rates, both of which have impeded growth. Nevertheless, year-over-year supply growth for rentals consistently exceeded 15%, while hotels remained below 5% for each quarter spanning frothe beginning of 2022 to second quarter this year.

Hotel average daily rate growth (ADR) is outpacing rental average daily rate growth. In May 2023, the annual change in ADR was 7.2% for hotels, while it was 2.8% for rentals. Although the gap between the two narrowed from 2022 to 2023, hotels consistently saw a higher quarterly ADR change compared to rentals from during this period. This advancement is primarily attributed to the strong performance of hotels in the top 25 markets. 

In urban areas, hotels saw a year-over-year ADR change of 9.7%, while rentals had a change of 3.8%. Similarly, in mountains/lake resorts, hotels experienced an ADR change of 8.6%, compared to 1.3% for rentals. 

Future Projections

Even with the slowdown in these important indicators, the report predicts that a portion of demand for rentals is projected to increase, going from 14.6% in 2023 to 15.4% in 2024. Particularly for 1-bedroom and studio rentals, this share is expected to rise from 4.2% to 4.5%. 

The hotel sector will experience the consequences of ongoing growth in rental demand. For 1-bedroom/studio accommodations, it is anticipated that hotel occupancy will decrease by -2.8% in 2023 and further drop to -3.0% in 2024. Furthermore, the impact on hotel Average Daily Rate (ADR) is projected to decrease by $1.31 in both 2023 and 2024.