Why a recession would be a boom for vacation rental supply

It is a foregone conclusion that we are heading into 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 whole-retail sales.

As JPMorgan Chase’s CEO Jamie Dimon said at a financial conference in May, “You know, I said there’s storm clouds but I’m going to change it… it’s a hurricane. While conditions seem ‘fine’ at the moment, nobody knows if the hurricane is a minor one or Superstorm Sandy…. You’d better brace yourself.”

Growth during the Great Recession 

I started my vacation rental management business, Vantage Resort Realty, in 2007-08 in one of the greatest recessions this generation has ever seen. The mortgage markets had imploded, the housing bubble had burst, and the financial system was within inches of driving off the proverbial cliff. 

Even with all of this doom and gloom, we were fairly aggressive with our marketing and targeted just about every vacation rental owner up and down the 10-mile strip of sand that is Ocean City, MD.

We found that over the next year or two, many of the property owners that signed up into our management program had never rented before. In fact, about 25% of our new owners were from the persona we coined “First Time Frank.”

In the years leading up to the Great Recession, these people had purchased their second homes as a retreat for themselves and their families, and they never had any intentions of renting it out. 

Our anecdotal data was only confirmed by a report by HomeAway and Savills that found that 49% of vacation rental homeowners had no intention to invite anyone aside from friends or family. 

But after the 2008 crash, those same people often found themselves in a bind, unable to afford the cost of a second home, yet facing a depressed real estate market where selling a vacation property would have meant taking a significant loss. 

According to the report, of the group of second-home owners who never expected to rent, 42% not only rent out their property today, but also cover the entire cost of the home through renting and 28% turn a steady profit.

History repeats itself 

Immediately after COVID hit in 2020, I saw an influx of new buyers coming into the markets that our customers serve. We saw a large number of buyers escaping cities and suburbs and buying second homes. 

However, most of them weren’t using them as rentals. Many were just using it as a retreat for their immediate families. These homes were purchased with incredibly low rates and funded with the trillions of dollars that the federal government pumped into the system. 

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

The growth has already begun

In fact, I believe that trend has already begun. In May, the U.S. added 84,000 new listings, and after subtracting properties that left, 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 by 24.7% over the previous year and marks a new record high for listings in the U.S.

Many markets have already seen a substantial increase in supply year-over year. Houston, Texas has seen its supply increase more than 55% in the past 12 months, Austin, Texas us up 42% and Phoenix/Scottsdale, Las Vegas and Fort Lauderdale, Florida are all in the 30%-range. 

Institutional investors waiting to pounce

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

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

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

Institutions like these are sitting on the sidelines with billions in cash and just waiting to pounce. This is not a new concept and has been done for decades in long-term rental markets in cities and suburbia.

However, now these financially savvy institutions are ready to invest in the short-term vacation rental market. They are seeking higher yields and vacation rentals check that box. The acquisition of billions in real estate from private equity and REITs that are converted to short-term vacation rentals will significantly increase supply throughout the country. 

Conclusion

The impending recession will significantly increase the supply of short-term vacation rentals. This supply will be fueled by second homeowners that have never rented before and by institutional investors. However, the real question is - what will this additional supply do for the overall vacation rental market? Will it drive down rates? Will the additional supply be positive for guests? How will it affect all of the other stakeholders including management companies, OTAs and homeowners? Only time will tell.