While no one wishes for a recession, it is hard to ignore multiple predictions that one is coming. As we look at travel sectors that flourish during a recession period, historically vacation rentals in domestic leisure markets have seen notable growth during down markets.
Reasons Vacation Rentals in US Leisure Destinations Perform Well During a Recession
1. Second home owners who don’t normally rent their homes, put them in the rental pool
With a lack of home buyers in the marketplace and mortgages that need to be paid, owners of vacation properties have historically added their second homes to the rental market to supplement lost income from other investments. In the last recession, US leisure markets also saw an increase in the number of property management service providers and in the number of homeowners deciding to rent-by-owner instead of using a property manager.
2. Leisure markets in the U.S. are fed by repeat travelers and drive-to markets
When making vacation decisions during a recession, travelers sought out ease, comfort, and value. Leisure vacation rental markets checked these boxes. Destinations that are familiar, are easily accessible, provide relaxation and comfort, and offer a more affordable vacation option experienced increased popularity during past recession periods.
3. Domestic travel upstages international travel
Historically in recession periods, leisure travelers in the US have opted for domestic travel over international travel. As a lower cost alternative, domestic leisure vacations were preferred over overseas travel between 2008 and 2010.
4. In the last recession, travelers gravitated to family travel in vacation homes
While the industry hasn’t performed adequate research on the subject, there appeared to be a psychological phenomenon during the last recession that drove vacationers to opt for family travel. One of the largest growth periods in the vacation rental industry occurred between 2006 and 2012 as second home owners entered the rental market, and many turned professional and built vacation rental management companies on their own. Besides the growth in local destinations, Airbnb was founded in 2008, and Vacasa was founded in 2009.
5. Vacation rental management companies have asset-light business models
As service businesses, vacation rental management companies in leisure markets do not operate with heavy assets. As a result, vacation rental management companies have the ability to pivot as consumer needs shift.
According to Deloitte, “The hotel companies that outperformed the rest of their industry in the last downturn didn’t ramp up their capital investments in tangible property as the top-performing airlines did. Instead, they embraced an asset-light strategy that made them less dependent on discretionary consumer spending and made their fee revenue more stable and recurring. Other hotels that had a more asset-intensive strategy took the brunt of the financial cycle as asset prices fell, liquidity dried up, and risk aversion tightened.”
Will Urban Short-term Rental Markets Thrive in a Recession as Leisure Markets Have?
Are urban short-term rental markets at risk during a recession?
In short, we do not know. It has been over a decade since the last recession, and a significant amount of venture capital has been invested in unproven urban short-term rental providers over the last five years.
For urban rental providers who rely on business travel, historically, business travel activity declines sharply during a recession period; and in 2020, businesses have an increased ability to meet remotely instead of spending on costly face-to-face meetings and conferences. And many of these urban providers are locked into guaranteed lease models which increase exposure in a down market.
In addition, with the rising popularity of city centers, it remains to be seen if leisure travelers will continue to gravitate to major cities for vacation activity during a recession period.
“Leaders whose companies went through the last downturn can take a specific, explicit look at what steps the companies took then and evaluate the results that ensued,” according to Deloitte. “The principle that ‘not every play from back then will work now’ is a strong general case. But the specific case of your own company’s experience can make it stronger.”
Great commentary on the impact of a recession on the vacation rental community. As an owner of vacation rentals in rural America (yes!), points 2, 3, 4 and even 5 are appropriately true. I’m going to take issue with the summary that addresses “urban short-term rental markets.”
The vacation rental community is justifiably oriented toward urban and second-home markets where more expensive properties coalesce with opportunities to scale vacation rental management.
However the rural vacation rental owner is becoming increasingly marginalized, perhaps ignored because the properties are widespread with lower occupancy and nightly rates. As with properties overseen by VRMs, most owners are simply attempting to offset the costs of ownership and/or improvements.
Points 2, 3, and 4 certainly apply to small towns and rural areas, but the emphasis of this article overlooks the obvious. There may be many reasons for this. Travel media rarely, if ever, covers opportunities to travel in small town / rural areas which gives rise to the impression that there is “nothing to do in small towns that are dying anyway.” This mistaken expression short-circuits rational thought so that any traveler would, of course, travel to large cities or destinations populated with second-homes.
Then there is the alleged urban/rural divide. Yes, there are differences, but this divide is simply another expression of tribalism, perhaps with political overtones. Another argument touches on altruism. For example, a traveler to New York City may spend $3000. This will have negligible, if any, impact there. But if a traveler visits York, Nebraska even $1500 will have a significant impact on the local community, supporting small businesses, restaurants and local artisans. There is an opportunity here to study the impact of travel to small town / rural areas.
VRM Intel is right where it needs to be: helping VRMs and their vendors manage properties in large cities and second-home communities. But so much of small town / rural is dismissed.