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  • Writer's pictureKCStark

Short-Term Rentals: Airbnb or AirbnBust? Market Report

Unprecedented Slump in Short-term Rentals in Palm Springs

As a licensed mortgage broker, the last few years have been historic in more ways than I care to count. From historic low rates to historic rate increases. As the housing market's roller coaster continues in 2023, new data reveals yet another swing in America's economy - the short-term rental (STR) markets.

For the first time in 12 years, Francine McDougall, a property owner in Palm Springs, California, is witnessing a slump in Airbnb and Vrbo bookings. Even after reducing her rates by one-third, she is unable to reach her annual quota of 36 short-term rentals, a stark departure from previous trends.

Short Term Rentals: Airbnb or AirbnBust? Market Report

STR: A Worrying Decline

The downturn in vacation rental demand was more noticeable over the Fourth of July holiday. Compared to previous years when McDougall's home was booked two to three months in advance, a booking this year materialized only two days before the holiday.

This trend isn't isolated to McDougall’s property, but is mirrored across Palm Springs, causing concern among rental owners.

In the 2022-2023 fiscal year, vacation rental tax revenue for the city government has fallen by about 11%. Although May revenues were expected to revive the situation, they declined by about 18% from May 2022. Simultaneously, rental rates have fallen, with some properties going for almost half their peak-season prices.

STR: Owners in Distress

The sudden decline in bookings has alarmed the Palm Springs vacation rental owners’ community, who discuss industry trends in a dedicated Facebook group. They report a significant decrease in both reservations and inquiries. To attract bookings, owners have reduced their nightly rates to a point they believe is unsustainable.

STR: Surging Competition and Declining Profits

Contrasting the 13% decline in home booking tax revenue, hotel tax revenues rose by 1.5% in the past year. Despite an initial surge in vacation rentals during the COVID-19 pandemic, an increase in new vacation rentals has put pressure on existing owners.

From the start of 2022 to the end of April, licensed vacation rental properties grew by nearly 25%. This increase in competition, paired with reduced bookings, has left many rental owners concerned about their future prospects.

STR: Mixed Experiences

However, not all rental owners are feeling the squeeze. Companies that manage vacation rental properties are still seeing profitability. Michael Flannery, owner of Acme House Company, attributes the slump in tax revenue to owners reducing rates in response to increased competition. His business, in contrast, has seen a 20% rise in bookings this summer.

Owners who invested in the market last year when it was booming, like Tammy Trull Skeath, are disappointed with the decline in business in 2023. Skeath, struggling to cover her mortgage payments, plans to hold onto her property until the real estate market improves.

STR: The New Normal?

While it is clear that the STR market is feeling the impact of the rental market slump, it is unclear whether this trend is temporary or a new normal. With the potential for increased selling or foreclosures, the long-term impact on property values remains to be seen.

The Burden of Taxes and Regulations

The downturn in the vacation rental industry has been amplified by the burden of taxes and stringent local regulations. Short-term rental owners, already grappling with decreased bookings and lower rental rates, are further strained by the obligation to pay rental taxes to the city. Local authorities have not only levied taxes but also imposed restrictions that have contributed to the challenges faced by owners.

Some, like Tammy Trull Skeath, have expressed their frustration at these constraints, stating that owning a vacation rental has turned out to be more work than profit. The current situation underscores the need for a balanced approach, where local authorities ensure that taxation and regulatory measures do not deter owners from participating in the short-term rental market, thereby maintaining the vibrancy and economic benefits of the tourism industry.

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