#Airbnbust? The continued evolution of short-term rentals.

The short-term rental (STR) industry has grown tremendously over recent years, but what happens when the increase in the supply of properties outpaces the increase in the demand from guests? #Airbnbust. From publications like the Wall Street Journal and Business Insider to online communities like Twitter and Reddit, there has been a lot of attention focused on increased vacancy rates and steep price drops in once-hot markets like Houston, TX, and Palm Desert, CA.

But are these challenges universal to the STR asset class as a whole? We think not.

First, let’s take a second to understand how we got here. The WSJ reports that the supply of short-term rentals in the US increased over 23% from October 2021 to October 2022, outpacing the 15.8% year-over-year increase in demand over the same time period. The net result, they shared, was the average short-term rental property in the US received an average of 6% fewer nights booked.

Now, this is a bit skewed, as certain markets, like Houston, TX, and Phoenix, AZ, saw supply growth sharply outpace the average, with both markets up over 45% on a year-over-year basis. With so much supply entering these markets, prices and occupancy were bound to come down sharply amid the increased competition. Thus, #Airbnbust.

However, we saw this was coming. In fact, Richard Fertig, Founder and Chief Investment Officer at Stomp Capital, has been sharing this sentiment on his YouTube channel, STR University, for years: hosts must offer unique, differentiated experiences to stand out from the inevitable competition. The returns were simply too good for intelligent investors and entrepreneurs not to try their hand at running short-term rentals. When describing the evolution of this asset class, Richard positions it in the following phases:

• STR 1.0 (2008-2018): Any extra room or unused vacation home was listed on Airbnb and made money.
• STR 2.0 (2018-present): The advent of the professional host offering light-touch hospitality in existing residential properties.
• STR 3.0 (what we are building today): STR-specific development, custom-built properties operated with a proactive approach to hospitality as part of a portfolio of differentiated locations.
• STR 4.0 (where we are headed tomorrow): Master planned STR communities with a membership component.

We believe the bulk of incoming supply falls into the STR 2.0 category, where existing residential properties are being converted into STRs. Even with tasteful redesigns and modern aesthetics, many of these properties are not sufficiently differentiated to maintain significant price premiums and succumb to the supply pressures of other “me too” products. That’s why at Stomp, we are focused on the next evolution of the asset class, STR 3.0 and beyond.

So what does that look like in practice? At our flagship development, Edgecamp Sporting Club, in the Outer Banks of North Carolina, we’ve launched three purpose-built homes that appeal to corporate retreats, family getaways, and more. When guests book a trip, our remote concierge team reaches out to understand what a successful stay looks like to them. We then custom tailor a la carte amenities like kiteboard lessons, private chefs, sunset yoga classes, and oyster shucking experiences to make each stay memorable, creating raving fans in the process. For one guest's 60th birthday, we even flew out fire dancers from Los Angeles for an unforgettable entertainment experience. This has proven quite popular with guests, and we’ve already reached 2022 occupancy levels for 2023’s peak summer months six months in advance.

Further, with 50 acres of land banked in the fund, we have engaged top architectural talent to evaluate master planning options for the Edgecamp Sporting Club development to offer a resort-like destination full of purpose-built short-term rentals. This will further differentiate our offering from the thousands of vacation rentals on Hatteras Island and will allow us to continue to command a price premium and high occupancy rates in this attractive vacation destination.

As the asset class continues to mature, we expect an even greater bifurcation in performance between commoditized lodging (STR 1.0 & 2.0) and the STR 3.0 model. With the growth in supply showing no signs of abating, properties that are unable to differentiate themselves from the competition will continue to face increased pressure to compete on price in order to maintain occupancy levels.

To learn more about our differentiated approach to the short-term rental space, please schedule a call with our team below.