In August 2023, the short-term rental market in Europe marked an unprecedented milestone. A staggering 53.7 million nights were booked, setting a new record for the highest number of stays in a single month, according to AirDNA’s Europe Market Review. This impressive surge in demand should, in theory, reflect a period of prosperity for hosts. However, a growing number of them report a starkly different reality – one that is increasingly grim and challenging.

In our analysis last month, we examined two contrasting reports from AirDNA and Key Data. Despite examining similar timeframes, these reports painted two starkly different pictures of the short-term rental market. AirDNA projected an optimistic outlook, while Key Data forecasted a more cautious future. 

To understand this seeming contradiction, we turned to an industry expert – Jamie Lane, the Chief Economist and Senior Vice President of Analytics at AirDNA. Our primary objective was to decode the cause behind this dissonance and provide a clearer perspective on the current state of the market. 

In this article, we present our findings from this enlightening discussion, which further illustrates how this divergence underscores the complex dynamics at play in the industry.  

Europe Relatively Healthy as Demand Surges

Despite the slowing momentum of growth in advanced European economies, as reported by the International Monetary Fund, the short-term rental market appears to be an outlier. The European market continues to see substantial demand, providing a ray of optimism amidst overall economic deceleration.

The AirDNA August 2023 Review reveals a remarkable surge in the demand for short-term rentals (STRs) over the summer months, culminating in a new record set in August. A staggering 53.7 million nights were booked in this month alone – the highest number of stays recorded in a single month. Jamie Lane points to this metric to assert that the European short-term rental market is indeed healthy.

Accelerating Supply Growth Yet Still Below Pre-Pandemic Levels

In the past year, Europe’s short-term rental market has witnessed significant supply growth, a trend that seems to have accelerated as the months progressed. According to the AirDNA August 2023 Review, last year’s peak supply was reached in July. However, this year, propelled by robust demand, hosts continued to add new listings through August. The number of available listings surged by 12.9% year-over-year (YOY) in August, reflecting a significant uptick from the 7.4% YOY listing growth reported in July.

This data suggests that, while the supply growth rate is impressive, it still hasn’t fully recovered to pre-pandemic levels. The potential for further expansion in supply is evident, but its realization might be impeded by regulatory constraints and the broader economic climate.

As we move forward, it will be interesting to monitor whether the European market mimics the U.S. trend of slowing supply growth and how this interplays with ongoing demand.

Slowdown More Pronounced for Professional Property Managers vs. Small Hosts

In 2021 and 2022, many professional property managers leveraged dynamic pricing to capitalize on the booming demand. They managed to elevate their prices substantially, outpacing individual hosts in this aspect. This strategy was largely successful as travelers were willing to pay premium prices for their stays. As a result, property managers were able to maximize their revenues during this period.

However, the landscape in 2023 presents a different scenario. Travelers are now demonstrating a reduced willingness to pay those previously high rates, and the slowdown in revenue growth might appear more pronounced for professional managers due to their high returns during the peak demand period. However, it must be noted that the current slowdown in growth does not necessarily denote a decline, but rather a return to more sustainable levels. 

Healthy Demand Doesn’t Always Mean Higher Revenue

Some property managers, guided by price trends in tools such as PriceLabs, have opted to reduce their prices. By doing so, they continue to secure bookings, albeit at a lower Average Daily Rate (ADR). For these professionals, despite a lower ADR, they still maintain a steady or even increased number of bookings, representing what might be perceived as “healthy demand,” as pointed out by Jamie Lane.

However, it’s crucial to note that this does not necessarily imply that these companies’ revenues are increasing. In fact, despite the volume of bookings remaining stable or growing, the lower ADR may result in stagnation or even a decrease in total revenue.

It’s all relative (to 2019?)

In an industry as dynamic as short-term rentals, it’s crucial to understand that all trends and outcomes are relative. This relativity becomes particularly evident when comparing the performance of professional property managers with individual hosts.

Rigid Pricing Strategy May Mean Fewer Nights Booked

In the interview, Jamie pondered why professional property managers seem to be performing worse than individual hosts. One plausible explanation could lie in their pricing strategies. Professional managers who have not reduced their prices may witness a steeper drop in nights booked—Lane’s chosen yardstick for measuring ‘health’ during the discussion.

However, as Lane rightly points out, these observations are all relative. For instance, while growth might appear to be slowing, current numbers are still significantly higher than they were in 2019. 

That said, we could argue that comparing today’s figures to those from four years ago might not yield the most accurate picture, given how much the market has evolved since then.

Sharp Increases Make Way for Sharp Declines

Another important factor to consider is the source of the data being analyzed. Key Data’s findings, for example, are based on a product mix that includes a higher proportion of professional property managers—a demographic that only represents a small fraction of the total European supply. This skew might explain the more pessimistic viewpoints expressed by those observing steeper drops in growth, especially as their prices had risen more sharply in the past.

Now, let’s consider a scenario where these property managers add more supply to the market. Assuming demand remains robust, they can still achieve more nights booked. This increased volume of bookings could potentially signal “healthy demand”. Moreover, the additional nights sold through the new inventory could help companies maintain or even increase their revenues.

As the market continues to evolve, it’s crucial for property managers to stay adaptable and keep a close eye on these shifting dynamics. After all, the success of their business hinges not just on the current state of the market, but also on how well they can anticipate and adapt to future changes.

Individual/Small Hosts: A Less Dramatic Scenario

Unlike their professional counterparts, individual hosts did not raise their rates as dramatically during the previous boom period. As a result, they now find themselves in a position where their rates remain attractive enough to sustain demand, even amidst the current market uncertainty.

This pricing strategy has facilitated a relatively stable occupancy rate for these hosts. Their ability to provide value at competitive prices continues to attract travelers, enabling them to maintain a consistent stream of bookings.

However, it’s important to note that ‘stable occupancy’ does not automatically equate to ‘optimal profitability.’ While maintaining occupancy is certainly important, individual hosts must also pay close attention to their Average Daily Rate (ADR) and overall revenue.

Not Quite Out of the Woods Yet…

Despite the seemingly healthy demand in the European short-term rental market, there are several factors at play that warrant cautious optimism and strategic planning for both professional property managers and individual hosts.

Steady Supply Growth May Cause Concern

One key trend is the continued growth of supply in the market. The vacation rental boom of the last two years has undoubtedly sparked interest and investment in this sector. Given the time it takes to invest in and prepare a new short-term rental property, many of these investments are only now coming online. As a result, 2023 has seen a surge in new supply that was initially spurred by the boom in 2021 and 2022.

Professional property managers have managed to maintain bookings by adjusting their prices. However, it’s crucial to remember that these professionals do not represent the majority in Europe. Consequently, individual hosts who have not adjusted their strategies accordingly might be in for an unpleasant surprise.

Occupancy Growth Slowdown

Another important factor to consider is the shifting occupancy trends. Jamie Lane notes that occupancy rates are no longer skyrocketing as they once were. In fact, certain months have seen a decline in occupancy across Europe, indicating a possible deceleration in the market’s growth.

Moreover, markets that experienced a rapid boom during the post-COVID period, such as Miami, France, and the UK, are no longer growing as quickly. Some, like Miami, have even seen a decline in terms of growth. Still, while the rate of growth may be declining, most markets are still experiencing growth nonetheless.

While the European short-term rental market is showing signs of healthy demand, it’s not yet completely stable. The increasing supply, shifting occupancy trends, and slowing growth in previously booming markets all underline the importance of staying adaptable and informed. As the market continues to evolve, strategic decision-making and a clear understanding of market dynamics will be key for hosts and property managers looking to navigate these changes successfully.

Conclusion

The European short-term rental market continues to demonstrate resilience, with a steady demand indicating its enduring appeal. While declining Average Daily Rates (ADRs) might raise eyebrows, we perceive this as a sign of market stabilization rather than a cause for concern.

However, the rising supply within the market is a trend to watch closely. It could lead to increased competition and put further pressure on occupancy rates and prices.

While these observations provide a broad overview, remember that market dynamics can vary based on your specific segment and property type. Therefore, it’s critical to analyze data relevant to your market and adjust your strategies accordingly. After all, success in this evolving marketplace depends on informed decision-making, adaptability, and a deep understanding of your target market.