Is the AirBnb niche dying ?

Since 2008 short-term rentals have been a booming niche. These niches have popped up for cars (Touro) and houses (Air Bnb), (VRBO). This blog is about Airbnb in particular.

Businesses are created to solve a problem or to capitalize on an area that has been neglected by big businesses. Entrepreneurs of AirBnBs saw a gap in the short term rentals industry that was predominantly cornered by big hotel chains. Since 2008 the entrepreneurs have capitalized on this gap bigly! But with rising interest rates and mortgage payments are we about to witness the death of AirBnBs?

Let’s slow down a bit and talk about the history of AirBnBs. AirBnb was founded in or around 2007 due to hotels not having any available rooms for short term stays and the overall cost of staying in a hotel being too expensive. This situation gave rise to individuals renting out their homes for shorter periods of time at a lower cost than almost all hotel chains.

That will do it! A new niche arose almost accidentally. The profitability of AirBnBs has been on a steady increase ever since. Of course with all businesses that are profitable people started to buy investment properties. How did most buy these properties? Mortgage facilities!

Let's put why we think AirBnB will die into context. The world thought that what happened in 2008 would never happen again (What happened in 2008?) you got to tune in to this blog continuously. We may discuss it. But, short synopsis: the world went into the worst recession ever! Several financial institutions went on the brink of closing (Merril Lynch) and some went over the brink and into the precipice (Lehman). Interest rates on mortgages ballooned and some “historians” of the period will say that people started to mail the keys to their homes back to the banks (crazy right?) so we thought it would not happen again. But guess what folks? Covid-19 happened and while the world seems to be getting back to normal interest rates and the consumer price index have been going up steadily.

Now fast forward to what we are really here to talk about. Initially AirBnB was seen as a cheaper alternative to hotels. You could get a modest affordable apartment or room and be comfortable for your short term stay whether for leisure or work. You only had to purchase your own food for the duration of the stay. Sounds great right? Nowadays renting an AirBnB can run you the same cost as a one or two night stay in a hotel. Why are AirBnBs running at such a high cost? Well in short the cleaning fees and service fees which the higher the cost of the former the latter will rise.

The cleaning fees similar to the cost per night for a stay is determined solely by the hosts of the AirBnB. The cleaning fees are non refundable once you have started to stay at the property, even if you cancel mid stay the cleaning fee is non-refundable. The cleaning fee for most AirBnB stays run upwards of $50. Once the cleaning fee is calculated the service charge of the AirBnB goes up. Further, when you take into account the security deposit and the base charge. Is AirBnB still the affordable alternative. After paying so much more than a hotel you still even have to buy your own food.

We are predicting that the pricing surrounding AirBnB will continue to increase. Why? The economic environment we find ourselves in is a high interest environment. Monthly payments for mortgages have gone up, cost of living has skyrocketed and salary payments have remained the same. More expenses for investment property owners. Most investors in the AirBnB sector are Mortgagee, so they will be feeling the pinch and we have seen that start to trickle down to customers.

We must also touch on those AirBnB hosts that operate under an arbitrage agreement. You might be saying yea we won’t feel the pinch. But consider this cause and effect. The owners of the properties will seek to recover the losses being reflected on their balance sheet due to the increase in interest rates and mortgage payments.The question you need to ask yourself is where will this loss recovery take place. The answer is an increase in your arbitrage rental prices. The increase in the arbitrage rental prices will then lead to an increase in the cost for an AirBnB.

There is another part of this analysis that will affect the overall future of AirBnB. Certain states have started to legislate against the use of certain properties as AirBnBs. The argument supporting this legislative move is that the use of vacation rentals is destroying the residential neighborhoods. States like New York have proposed strict legislation that will make it more difficult to operate AirBnbs. New York proposes that AirBnB owners will be required to submit the entire floor plan of the proposed AirBnB and a list of all the current owners of the Apartment. More red tape! In other states AirBnBs may be against the zoning laws and your neighbors will have the power to report you.

Though AirBnb might not be coming to an end by next week or month, there has been a deviation from the business moat that made it attractive. With the additional expectations and charges from the host , it is becoming less and less attractive to the same audience that they aimed to target. Tie those factors into the legislative changes that are coming, we might slowly be witnessing the death of AirBnBs.

Stay Educated!