Why a recession would be a boom for vacation rental supply

It is undeniable that we are heading towards a recession. The National Bureau of Economic Research (NBER), which officially declares recessions, defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and retail sales.

As JPMorgan Chase CEO Jamie Dimon told a financial conference in May, “You know, I said there are storm clouds but I’m going to change that… it’s a hurricane. While conditions look “good” at the moment, no one knows if the hurricane is minor or Superstorm Sandy…. You better get ready.

Growth during the Great Recession

I started my vacation rental management business, Vantage Resort Realty, in 2007-2008 during one of the biggest recessions this generation has ever seen. Mortgage markets had imploded, the housing bubble had burst, and the financial system was inches from the proverbial cliff.

Even with all of this misfortune, we’ve been pretty aggressive with our marketing and targeted just about every vacation rental owner on the 10-mile stretch of sand that is Ocean City, MD.

We found that over the next year or two, many landlords who entered our management program had never rented before. In fact, about 25% of our new owners belonged to the character we coined “First Time Frank”.

In the years leading up to the Great Recession, these people had purchased their second home as a place of retirement for themselves and their families, and they had never intended to rent it out.

Our anecdotal data has only been confirmed by a HomeAway and Savills report which revealed that 49% of vacation rental owners had no intention of inviting anyone outside of friends or family.

But after the crash of 2008, these same people often found themselves in a bind, unable to afford the cost of a second home, but faced with a depressed real estate market where selling vacation property would have meant suffering a significant loss.

According to the report, among the group of second home owners who never planned to rent, 42% not only rent their property today, but also cover the full cost of the home through renting and 28% make a steady profit.

The story repeats itself

Immediately after COVID hit in 2020, I saw an influx of new buyers arriving in the markets our customers serve. We have seen a large number of buyers flee cities and suburbs and buy second homes.

However, most of them did not use them as rentals. Many simply used it as a retreat for their immediate families. These homes were purchased at incredibly low rates and financed with the trillions of dollars that the federal government pumped into the system.

As we head into a recession, I firmly believe that many of these second homes will turn into short-term vacation rental inventory, just as they did in 2008.

The growth has already started

In fact, I believe this trend has already begun. In May, the United States added 84,000 new listings and, after subtracting properties that vacated, saw a net increase of 57,000 listings. There were 1.34 million unique listings available for rent on Airbnb and Vrbo, which is up 24.7% over the previous year and marks a new record for U.S. listings.

Many markets have already seen a substantial year-on-year increase in supply. Houston, TX has seen supply increase over 55% in the last 12 months, Austin, TX up 42% and Phoenix/Scottsdale, Las Vegas and Fort Lauderdale, FL are all around by 30%.

Institutional investors ready to pounce

The growth of short-term vacation rental supply will not only be accelerated by individual owners, but also by institutional investors with billions of dollars of dry powder just waiting for the housing market to deflate.

With a financial “hurricane” looming ahead, more and more people will be forced to sell their homes. Many buyers of this real estate will come from institutional investors such as private equity, hedge funds and REITs. Well-capitalized investors such as Blackstone Group, Davidson Kempner Capital Management and Harrison Street would like to build exposure to alternative hotel accommodation, according to people familiar with their research.

AvantStay, a short-term rental real estate operator, had closed a $500 million funding round to set up a company to hold its real estate assets, along with Saluda Grade, a real estate advisory and asset management firm, supporting the fund

Institutions like these are sitting on the sidelines with billions in cash and just waiting to pounce. It’s not a new concept and has been around for decades in the long-term rental markets in cities and suburbs.

However, these financially savvy institutions are now ready to invest in the short-term vacation rental market. They are looking for higher returns and vacation rentals tick that box. The acquisition of billions of dollars of real estate from private equity and REITs that are converted into short-term vacation rentals will dramatically increase supply across the country.

Conclusion

The impending recession will dramatically increase the supply of short-term vacation rentals. This supply will be supplied by second homes that are never tenants and by institutional investors. However, the real question is: what will this additional offer do for the overall vacation rental market? Will this lower the prices? Will the additional offer be positive for customers? How will this affect all other stakeholders, including management companies, OTAs and owners? Only time will tell.