AMA - Short Term Rentals and Covid-19

David from Anchorage in Alaska asks

1. AirBnB was founded in 2008 at the height of the Great Recession. In the past 12 years, the travel and leisure sectors of the economy have exploded. There have been various dips in the economy, but the modern short term rental market has not been tested against a major downturn.

Hotels and resorts have historically taken a large hit during economic decline, but do vacation rentals get lumped in with hotels or do they offer a cheaper alternative and continue steady?

2. Markets set aside. The Vacation Rental season is almost upon us in Alaska. Unless you’ve just come back from off the grid, you likely have heard that a COVID-19 “pandemic” is also almost upon us.

As a STR owner myself, I am curious. There is no historical precedence for modern STR's and platforms like AirBnB during a "crisis" event. How will the escalation of COVID-19 affect the STR market? Will it affect an AirBnB IPO in 2020?

David,

That’s a great question.

The obvious answer is it depends.

There’s clearly a linkage between travel and hospitality. A portion of the short term rental market is made up of medium term stays. Some estimates put the proportion at about 20%. I received this number from an employee at AirBnB directly back in November. Of course this number varies by market.

You need to look at how people arrive at the destination. How many arrive by air, how many by car and so on. For example for your market, I don’t expect that many people are going to be driving to Alaska compared with those who fly. The Corona Virus is clearly having a massive impact on air travel.

We own several short term rental properties in the Rockie Mountains near some major ski resorts and a national park. A high percentage of the traffic to our properties comes from within driving distance. But if air travel is reduced and occupancy falls in hotels, we can expect prices to fall across the breadth of the market, including short term rentals. We won’t see as high a nightly rate as we might have seen in past seasons.

Short term rentals cater to a different market than hotels. While there is some overlap, the reduction in air traffic will have a significant impact. In our market we routinely see plane loads of tourists from China and Japan in the summer months. During the peak season we see essentially full occupancy and nightly rates that are over $600 a night. Air traffic from Asia is down by 90% at the moment. If that continues into the peak summer months, it will be a problem.

We’ve seen that vacancy in the short term rental market doesn’t hit the market uniformly. Properties with the best reviews and the highest ratings get a disproportionate number of nightly stays. Even during low season, many of our properties have seen very high occupancy, far above the market average. By offering a superior product, competitively priced you can get more than your share of occupancy. The vacancy will tend to go to the junk in the market.

Active daily management of pricing is essential to keeping units full.

We are at a moment when history is being made. We don’t know what the outcome will be. Be prepared for a bumpy ride in the short term rental market this holiday season.

Finally, to answer the last part of your question.

Whether AirBnB will delay its IPO remains to be seen. I have no inside information. A downturn in the hospitality industry could easily create unfavourable conditions for an IPO. When hotel stocks and airline stocks are falling, it will be hard for AirBnB to convince investors that they're different.