As we enter a new decade, I wanted to reflect upon how the short-term rental industry has evolved. I will discuss current Airbnb industry trends and share tips that will help short-term rental hosts stay competitive in the next decade.
The Beginning of Short-Term Rentals
The concept of home-sharing is nothing new. There’s evidence that our prehistoric ancestors shared their caves with each other. While home-sharing has changed since then, the industry has faced challenge after challenge to get to where it is now.
Since its beginning, home-sharing has never enjoyed a good reputation. It was often seen like a second-hand car dealer kind of industry. The properties weren’t always the nicest, but they were more convenient and cheaper. The industry faced many issues with distribution
Distribution was entirely offline. People relied on newspaper advertisements to generate demand. As a result, the people who used to be customers back then are different than the ones today.
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HomeAway and Booking.Com Enter the Market in the Early 2000’s
In 2005, HomeAway entered the short-term rental market by bringing a classifieds business online. It allowed homeowners to advertise their properties through classifieds. While this was the first “marketplace” for rental properties, it did come with several problems. Because everything was on request, users had to contact hosts directly to book a property. But, calendars weren’t up-to-date and hosts often didn’t respond to requests. Bookability was a common issue.
When Booking.com started in 2008, it was the first online travel agency (OTA) to integrate vacation rentals. At the time, vacation rentals were properties that only contained the bare necessities. There was often no kitchenware and other amenities, but people stayed in vacation rentals for the convenience and cost.
Like HomeAway, Booking.com also faced many challenges. It was a bit unprofessional, and the company struggled to find supply (i.e. properties) and guests. The business was offline and relied on phone calls for communication. When it came to working with homeowners, Booking.com had to meet with them every year to renew contracts.
Airbnb Enters the Market in the Late 2000s
When Brian Chesky founded Airbnb in 2008, he created a new vertical in an existing market. Because HomeAway focused on the vacation rental market, Airbnb targeted the urban market. The urban market represented a different type of customer and grew significantly in the years after Airbnb’s start. Airbnb was able to address a sweet spot in the market. As a result, Airbnb raised a lot of capital very quickly that was put into building the brand and product. This resulted in incredible growth and valuation of the company.
Airbnb’s Impact on the Short-Term Rental Industry
Since 2008, Airbnb has created an incredible marketplace. It has probably created more entrepreneurs than any other online platform.
Because Airbnb created so many new businesses, it made tourism more available to new generations. Staying in an Airbnb was cheaper than staying in a hotel and allowed guests to have a local experience. In essence, Airbnb added a lot of value to the traditional tourism industry.
What if Airbnb Didn’t Exist?
The short-term rental industry would’ve evolved regardless of Airbnb’s presence. At the time, the real pacemaker was HomeAway. It was the first company to merge 22 companies and received the largest check in the industry of $500MM. It is arguable that Airbnb’s main contribution was speeding up industry growth.
Major Airbnb Industry Trends Continuing in 2020 and Beyond
Looking at the industry numbers, it’s clear that hosts can make a decent income. Airbnb has let the vertical grow exponentially in previous years. The company has created continuous supply and demand, as more and more people use the platform. I talked with travel industry expert, Simon Lehmann about what he thinks is coming.
Trend #1: Airbnb Supply Becomes More Professionally Managed Inventory
In the past, the industry consisted of the hotel guest (70-80%) and the vacation rental guest (20-30%). According to Simon Lehmann, CEO of AJL Consulting in the short-term rental industry, Airbnb is shifting to be professional managed.
This will have the biggest effect on the industry.
Vacation rentals were often easier, cheaper, and more convenient to book. Guests understood that the properties weren’t always the nicest. Since then, the short-term rental industry has become more urban. This shift has attracted new guests (i.e. the traditional hotel guests). These guests have different standards than traditional vacation rental guests. They have higher expectations and are pressuring property managers to become more professional.
One major prediction is that a lot of supply will become more professionally managed inventory. According to Simon, the number of independent hosts will decrease. The number of professional property managers will increase. It is important to note that someone who’s on vacation and rents out their primary residence for three weeks is not a professional.
Running a single unit is arguably easier than running 20 units. Hosts who manage 20+ units will face a critical point where it becomes impossible for them to have a day job and host on Airbnb. The more units a host manages, the more common it is to deal with late check-outs, damage, and other hosting-related issues. When hosts reach this critical point, many of them either give up and let a property manager handle it. There are some who decide to commit and grow the business themselves.
Airbnb inventory has evolved over the years. In the beginning, Airbnb was about sharing an air mattress (hence the name). It later became couch-sharing, but it has changed significantly since then. Nowadays, less than 10% of the units are shared rooms. Guests want their privacy and don’t want hosts in the property with them.
Trend #2: Availability and Bookability Continue to be Important KPI’s
Both Airbnb and Booking.com talk about the number of listings on their platforms. This number is irrelevant. Simon says it should be about what properties are bookable and their average availabilities. Counting a unit that’s only available for two weeks out of the year as a listing is a bit misleading. Those kinds of properties are low quality from an inventory perspective.
I predict that there’s going to be a bigger fight for better quality inventory. After all, properties with bad reviews don’t perform well.
PMC’s should think about having inventory with high bookability and maximum availability. Not all units deliver the same unit economics because they vary in size and location.
Trend #3: Market Continues to be Hyper-Local
While the market continues to consolidate, it will still remain hyper-local. After all, that’s where all the know-how, assets, relationships, and service providers are. Simon predicts the industry will continue to be this way even though big companies are acquiring a lot of businesses.
There’s still plenty of room in the industry for independent players. Not all “professional” PMCs are professional. Because the market will continue to remain local, individual hosts have a competitive edge. Scaling is a lot more difficult for these larger companies because the action happens on a unit-level, not on a 20,000 property level.
While the market is increasingly competitive, smaller property managers can still stand out. They can create a unique, personal experience that larger property managers can’t. For instance, you can write a personalized welcome card for your guests.
What matters most is how well you execute on a local level. Your guests in Amsterdam won’t care how well you operate in Paris if they have a bad experience.
To ensure a positive guest experience, I’d recommend taking a proactive approach. You can spend two to three days in the property to experience it firsthand. This allows you to identify what needs to be changed and improved because you can see all the small details. For instance, if it rains during your stay and you don’t have an umbrella, you now know to include one in the property for your guests.
These small changes don’t cost a lot but can have a massive impact on raising the professionalism of your property. It’s the small things where there are the most opportunities to improve the overall quality of the property. It’s not just about having an amazing interior and a top-notch location.
However, smaller players will have one main challenge to address soon. There’s a trend of margin compression from growing competition. Industry players will need more units to have the same economics as they do now.
Commissions from these online platforms (e.g. Airbnb and Booking.com) will continue to increase. Because so much of the industry relies on these platforms, property managers will be pressured to scale their businesses. They will need to compete with margin compression, higher costs, and other competitors.
Tips for Property Managers in 2020 and Beyond
Smaller Companies or Independent Property Managers
When it comes to building your business, you want to know what your goals are. Do you want to sell your business one day? Or do you want to grow into a large PMC?
If your goal is to grow, you’ll have to figure out how. For instance, if you have capital, you may be able to buy contracts. You can do asset deals to avoid having to purchase a company or share deals. You’d be surprised by how many companies are willing to pause on their contracts for a portion of money.
If you want to sell your business, it’s in your best interests to manage it to the best of your abilities. After all, you’re going to get more out of selling your business when you’ve managed it well.
Depending on your goals, there’s going to be a right moment to scale and become a real entrepreneur. Some property managers manage 20-50 units by themselves. They want to keep costs low, so they run a one-person operation. Hosting becomes a 24/7 job for them with no vacation time.
If this sounds like you, adding more people to your team may actually allow you to scale faster and provide better service. Increasing manpower will increase costs in the short-run but the payoff in the long run by making scaling a lot easier. You’ll be able to focus on higher-level business tasks that really add value to your business. This includes improving inventory, guest experiences, and quality of cleanings. As a smaller company, you’re going to be time-constrained, so you have to be selective in what you do.
A few years ago, because the market was growing so fast, you could list almost any property on Airbnb to make money. That’s no longer possible. People’s expectations have risen, so finding quality inventory has become increasingly important. You should go after properties that make sense for your business. You shouldn’t take every unit you see because some may generate more costs than revenue.
At the end of the day, hosting is still a people business. Using new technologies isn’t going to replace the human factor.
If you run a large PMC, you should look at your business from a unit perspective. Ask yourself:
- What is a unit worth to me?
- What does a unit deliver to me in terms of real contribution
I’ve noticed that very few people take the time to dive deep into the math. You want to make cost allocations on a unit-level to see which units are worth investing in and what units aren’t actually profitable.
Simon's Predictions for Airbnb and the STR Industry
On Airbnb Going Public
I often get asked about Airbnb’s potential to go public in 2020. To me, all the signs show that they will. Their recent acquisition of HotelTonight tells me Airbnb doesn’t want to miss out on providing solutions to their guests. This is in light of how the booking window of guests is shortening. I predict that we may see one or two more acquisitions in Airbnb’s future. My best bet is that one of those will be in the transportation vertical. However, it’s still unclear how their decision to go public will impact the industry.
On Airbnb’s Vision
Airbnb’s ambition to be a travel company and to increase revenue from non-home sharing activities isn’t going to happen. Because the current brand perceptions are strong, it will remain a marketplace for short-term rentals.
Airbnb initially expanded into non-core business areas to accommodate their investors. There was pressure to leverage their existing customer base to sell them more products.
On Booking Platforms
By 2025, Simon predicts that Airbnb will have the most nights stayed in the short-term rental industry and Booking.com in the hospitality industry.
Key Airbnb industry trends takeaway
While the industry continues to change, one key trend will remain the same. Guest expectations will continue to increase. Hosts will have to meet these changing expectations to stay competitive.
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