Deep Dive: AirbnBUST is for Losers; Winners Take All

By Harman Nagi

Books or movies? Android or iPhone? Cats or dogs? Democrat or Republican? These are all polarizing topics in America. Perhaps nothing these days is more polarizing than the hotels vs Airbnb debate: people seem to either love or hate Airbnb. So this summer when a real estate blogger tweeted about an Airbnb-bust, the story went viral quicker than Barbenheimer memes. 

Is Airbnb revenue declining? Can you still make money on Airbnb? How do you stand out in saturated markets? Let’s dive in, Pixelers.

The current state of the STR market

Sevierville, TN located just outside of the Smoky Mountains National Park is perhaps the granddaddy of all STR markets: it’s been a vacation destination for close to a century and has 10k STRs. As such, it’s a microcosm of the STR industry’s trends over the past few years, a lens through which we can understand the current state of the STR market. 

In the initial months of the covid-19 pandemic, people quarantined at home and watched news conferences of Mike Pence telling us how to wash our hands (“now remember, scrub your hands for at least 20 seconds”). Unsurprisingly, travel fell off a cliff and STRs saw occupancy rates fall significantly as people canceled their reservations. Airbnb canceled their IPO and laid off 25% of their staff as a result. 

Starting in May, travel bounced back in a big way (hey, that rhymes!). Occupancy tracked ahead of 2019 levels for the remainder of the year, with a big increase in August (+24% vs 2019). Nightly rates tend to lag occupancy by a few months, as it takes hosts some time to see the increased demand and adjust prices accordingly, but in October rates shot up 15% vs the prior year. Higher occupancy X higher rates = cha-ching, cha-ching! The money was rolling in for hosts as people craved travel to outdoor destinations. These trends continued throughout the first half of 2021. 

But as basic economics dictates, higher demand leads to higher supply. Investors poured into the STR market, buying houses and converting them to STRs. This inevitably led to a decrease in occupancy starting in August ‘21. Nightly rates also dipped a few months later, but notably they remained well above 2020 levels. 

In the past couple of years, a steady increase in supply has continued to chip away at occupancy rates, which are now back to pre-pandemic levels. This is where the AirbnBUST narrative comes from. However, hosts have been able to lock in most of the pricing gains (similar to other sectors of the economy, the inflation has become entrenched vs merely being transitory), so average rental revenue is 27% higher than 2019 (a 6% CAGR). 

But house prices are up more than 27%, and factoring in today’s interest rates the mortgage payment on a new purchase would be even higher. So… 

…Can You Still Make Money in STRs?

The bad news is that the gold rush is over, gone are the days when you could throw any property on the market and make money. But the good news is that if you know how to stand out, STRs are a very profitable asset class. 

The economics of STRs (let’s call it STR-onomics) is that it’s a marketplace economy that follows the Pareto principle: profits are not distributed equally, but rather outsized gains go to the top performers. For example in Sevierville, the 95th percentile properties make more than twice as much as the average properties! 

My business professor used to tell us a product had to be “demonstrably cheaper or demonstrably better” than competitors. In other words, you’re either an interchangeable commodity and have to compete on the lowest price, or you have a superior product that people will pay a premium for. Differentiation gives you pricing power. 

Standing Out In Crowded Markets

You’re not selling a property, you’re selling an experience. ← Keep this in the forefront of your mind when setting up and marketing your vacation rental! Do Apple ads tell you the processor speed, RAM, and camera megapixels, or do they just show you the amazing photos you can take with them? Do you know the technical specifications of your iPhone, do you even care? 

Design, photos, and marketing are what set your listing apart from the average masses. 

Design doesn’t have to break the bank. It doesn’t have to be a six-figure renovation with high-end furniture. It just has to be a cohesive theme that attracts your guest avatar. On the left side is a 3 bedroom cabin in Cherry Log, GA. It was built in 2018, and is a very nice log cabin with modern amenities. But it’s bland and uninteresting. There are literally dozens of cabins just like it in the Blue Ridge mountains. On the right is the same cabin infused with a touch of elegance and warmth. A few small tweaks turned this basic-bitch cabin into the #1 3BR property in the market.

Photos are by far the highest ROI investment you can make in your STR. When I opened my property’s calendar for spring/summer bookings using the photos below on the left, it was crickets. I had gotten 3 bookings in 2 months. So I hired a photographer to take some fresh pictures. Better lighting, $100 worth of charcuterie and drinks, and the exact same property on the right side (no renovations or new amenities). Within a week of posting the new photos, 8 bookings came in, and by the end of the month 15 bookings totaling $30k. On a $700 investment, that’s a 43x ROI! 

These days, just having high-quality photos isn’t enough. Your listing needs “lifestyle photos” that help the guest imagine what they can do at your property. Remember, you’re not selling a property, you’re selling an experience.

Airbnb is to STRs what champagne is to sparkling wine. It’s a brand name that’s become so ubiquitous that people use it as a generic term to represent the entire category. Airbnb is just one of several OTAs (online travel agencies) where people can book STRs. A successful host needs to have a multi-channel approach. Being listed on multiple OTAs is table stakes. I used to think that the guests from OTAs are my customers, but that is absolutely not the case: the guests are their customers, and we hosts are just vendors.

You need to go beyond the OTAs and have a direct marketing strategy to really maximize your profits. This is two-pronged: i) marketing to your prior OTA guests to get repeat, direct bookings and ii) paid marketing to acquire your own customers. Once you set up your marketing engine, you can easily hand this off to a virtual assistant, and cover the cost of her annual salary with just 1 or 2 direct bookings (more on this in future newsletters).

In summary, the STR market is no longer a gold rush but a competitive battlefield where differentiation and superior guest experiences reign supreme. The disproportionate success of top-tier properties, underscores the importance of being not just better, but outstanding. Success will favor those who innovate, understand their market, and create memorable stays that resonate with guests. As the industry moves forward, embracing change, focusing on quality, and employing smart marketing strategies will be key to thriving in the evolving STR landscape.