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The 'Airbnbust' Proves the Wild West Days of Online Vacation Rentals Are Over Airbnb recently reported that 2022 was its first profitable year ever. But the deluge of new listings foreshadowed an inevitable correction.

By James Rodriguez and Dan Latu

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Arif Qazi / Insider
Short-term rentals like those listed on Airbnb and Vrbo have never been in higher demand — or in greater supply. As the industry grows up, cities can no longer afford to take a hands-off approach.

This story originally appeared on Business Insider.

Nick Sullivan was facing a sudden squeeze. For the past few years, his two Airbnb properties around Charlotte, North Carolina, had generated as much as $7,000 a month in revenue, which he and his wife stashed away for retirement. But this past fall, that income was slashed in half: Bookings dropped, his homes were empty more often than not, and his monthly revenue sank to $3,000.

His cleaner was actually the first to point out the slowdown in bookings — she told Sullivan the same thing was happening with various rentals all over town. "We started panicking and started connecting with other folks who we know have short-term rentals," Sullivan told Insider. "We don't know what's going on."

Sullivan is not alone. Whispers of an apocalyptic "Airbnbust" have spread online among short-term-rental hosts facing empty booking calendars, stiff competition for guests, and tumbling earnings. The shift has sparked fears of an irreversible slide in the business and a broader economic slowdown.

But the hand-wringing over the idea of a downturn ignores a conflicting, but undeniable, reality: The short-term-rental business is bigger than ever, and some operators are thriving like never before. The number of nights booked at US short-term rentals reached a record high in 2022, as did total revenue, according to AirDNA, which tracks properties listed on the vacation-rental sites Airbnb and Vrbo.

Rather than a collapse of the industry, the increasingly bifurcated state of the market — a bust for some, a boom for others — is a clear sign that we have hit a turning point in the long-running battle over short-term rentals. Some cities have allowed vacation-rental listings to multiply virtually unchecked, setting the stage for an oversupply that has come back to bite investors. Other places have cracked down and capped the number of permits, pacifying concerned citizens and preserving the profits of existing Airbnb owners. Regardless of their approach, most cities can't afford to lose the tourism dollars that flow from short-term rentals. That leaves local governments with a decision to make: Accept the boom-and-bust cycle that can come as a result of letting short-term rentals run wild, or craft rules to keep hosts happy and bring peace of mind to residents who fear their neighborhoods could one day be overrun by mini-hotels.

Whichever way cities go, it's clear that the Wild West days of Airbnbs are swiftly drawing to a close. The industry is growing up — and that's good news for everyone involved.

The makings of an Airbnbust

Early in the pandemic, the future of Airbnb looked grim. Bookings collapsed by more than 50% in New York, Seattle, and San Francisco, and the company's valuation plunged by $5 billion, or nearly 16%, as it prepared to go public. Some wondered aloud if home-sharing would even exist when the world emerged from lockdowns.

But not only did Airbnb and competitors like Vrbo survive — they flourished. AirDNA estimated that bookings increased year over year by about 21% in 2021 and by another 21% in 2022. Encouraged by the soaring demand and record-low mortgage rates, investors jumped into the market, buying up homes in attractive locations and marketing them to the rising wave of vacationers and remote workers. The average number of short-term rentals on the market reached nearly 1.3 million in 2022, up by roughly 19% from the previous year and by about 7% from 2019, according to AirDNA.

The sudden popularity was a boon for rental platforms — Airbnb recently reported that 2022 was its first profitable year ever. But the deluge of new listings foreshadowed an inevitable correction. As inflation ticked up and the pandemic travel frenzy died down, an oversupply of vacation rentals left hosts fighting over visitors. Jamie Lane, the vice president of research for AirDNA, said the supply shocks during the pandemic were unlike anything he'd seen in more than a decade of covering the lodging industry. Supply and demand were thrown "totally out of whack," Lane told Insider. In February, occupancy rates remained "well above pre-pandemic figures," according to AirDNA, but supply growth continued to outpace demand. As the market normalizes, some short-term-rental hosts are coming to grips with the fact that the banner days of 2021 are long gone.

During a high-profile event like the Super Bowl, which draws hundreds of thousands of visitors for a weekend, hosts expect to be booked up. In past years, about 80% of available rooms in host cities like Miami and Los Angeles were taken during Super Bowl weekend. This year, however, some owners in Phoenix came up well short: As of the Thursday before the game, only 52% of rooms in Phoenix were claimed for that weekend, according to AirDNA. While occupancy creeped upwards the day before the game, some hosts had to lower prices to get rooms filled. Ric Kenworthy, who manages close to 100 properties for owners in and around the city, told Insider that in the run up to the game only half of the homes he looks after were rented out. As a result, he reduced the minimum number of nights he required for bookings and charged on average about 40% less than he'd expected. "Everyone's crying the blues right now," he said.

Phoenix's problems are part of a larger trend: In the third quarter of 2022, the occupancy rate for short-term rentals fell year over year in 31 of the 50 largest US markets, according to AirDNA. The second-largest drop was in the Phoenix-Scottsdale metropolitan area, where occupancy dipped by more than 10 percentage points. This year, the story remains the same: In February, the month of the Super Bowl, occupancy in the Phoenix-Scottsdale metro was down 13.6% year over year, despite a 60% increase in demand. The number of listings, it turned out, was up 85%. Rather than some catastrophic collapse in demand, all signs point to massive oversupply as the culprit for the "Airbnbust" fears that have gripped many STR owners over the past year.

A home located in Phoenix, Arizona.

Airbnb owners in cities that host the Super Bowl typically expect to be booked up — but occupancy ahead of this year's game in Phoenix was sorely lacking. Getty Images

Arizona's state government has encouraged the growth of short-term rentals, enacting a law in 2016 that prohibited cities and towns from placing caps on the number of vacation-rental properties. This paved the way for a surge in rentals across the state, particularly in the Phoenix metro area, where the number of listings on Airbnb alone surpassed 20,000 at the start of 2023, a whopping 68% year-over-year increase. Given the sharp rise of short-term rentals there, some local lawmakers have recently called for amending the law. One proponent of lacing new rules around Airbnbs is Solange Whitehead, a city councilwoman in Scottsdale. Whitehead said Scottsdale's local government is not interested in banning Airbnbs but hopes to exert more control over the number of rentals in the town and to weed out bad operators.

"There is a place for it," Whitehead said. "We just need regulations that protect everybody."

A tale of 2 cities

Rental hosts who've managed to avoid the bust may have their city government to thank, Nick Del Pego, the CEO of Deckard Technologies, told Insider. Del Pego, whose firm works with local governments around the country to keep tabs on short-term rentals, suggested that hosts in cities that have limited the number of rental properties have seen less of a drop-off in revenue in recent months.

"In some places, it's still the Wild West," Del Pego said. "In other places, they've put limitations, restrictions, and that in turn means that the legitimate operators tend to have a little less competition. It's certainly a mixed bag, and I've got clients on both ends of the spectrum."

Cities must perform a delicate dance when it comes to short-term rentals like Airbnbs. On the one hand, they want to prevent neighborhoods from turning into blocks of hotels masquerading as single-family homes. But short-term rentals are often essential to a healthy tourism economy, particularly in vacation destinations. This push and pull has led towns — even some just a few miles apart — to take very different approaches.

The local government in La Quinta, a resort city near Palm Springs in Southern California, stopped issuing new permits for short-term rentals in all but a few designated areas of the city in August 2020. And new rules that took effect in 2021 mandated that when a short-term-rental home trades hands, its permit expires. The total number of STR permits in the city has fallen by about 13% since January 2021, but the tax revenue collected from short-term rentals has steadily increased each year since 2019. In the first half of 2022, the city collected 30% more tax revenue from STRs than it did in the same period in the prior year, suggesting that rental operators there are prospering.

Adi Gross, whose company, PD Vacation Rentals, manages 10 short-term rentals in La Quinta, said 2023 is shaping up to be her best year in more than a decade of operations. "We've already booked out our high-season calendar for 2024 and started to book out for 2025 with a waiting list," Gross said.

The rules in La Quinta have kept existing rental owners mostly happy. They notched another victory this fall when residents narrowly voted down a ballot measure that would have dramatically reduced the number of short-term-rentals.

Big Bear Lake, another popular vacation spot in Southern California, represents the flip side of La Quinta. The city has a permitting process for STRs but doesn't limit the number of rentals allowed to operate there. From 2020 to 2021, the number of nights available at short-term rentals there increased by 17.3%, but demand grew by only 7.2%.

"While demand is up relative to any point in their time period before or after COVID, the supply of available short-term rentals is up, and so that's causing the daily rates to go down," Del Pego, whose firm works with the city of Big Bear Lake, told Insider.

Evan Engle, the president and general manager of Destination Big Bear, which manages more than 400 rentals on behalf of homeowners in the area, has watched this play out firsthand. Engle said demand for rentals in Big Bear Lake increased sharply when COVID-19 hit, since the city offered a convenient escape for residents of Los Angeles, San Diego, and Las Vegas. Investors jumped in to capitalize on the boom, and the market soon became saturated with short-term rentals. Then the world began opening up, and Big Bear Lake fell down the list of options for travelers. In 2022, Big Bear Lake had the second-lowest occupancy rate of all US cities, at 43%, according to AirDNA. After posting record revenue numbers in 2020 and 2021, Engle's business has returned to its pre-pandemic pace, he said. But the outlook might not be so sunny for an investor who bought a home there when prices were at record highs.

"People who purchased homes within the last two years paid 30% or 40% more than the previous owner, expecting to have 30% or 40% more revenue, and that's just not happening," Engle said.

Engle said that despite the wild fluctuations of the past few years, he's skeptical of the idea that more regulation, like a cap on the number of rentals, would help owners in the long term. Instead, he's betting the market will "self-correct." If an investor isn't making the money they'd hoped for, they may just end up selling or renting out the home to a long-term tenant, Engle said.

The short-term-rental business grows up

The rise of short-term rentals during the pandemic, and the struggles of hosts confronting an oversupply, are evidence that local governments can no longer afford to ignore the impact of Airbnbs. They can take a hands-off approach or find a path for growth that ensures both residents and rental hosts end up on stable footing.

"What I think you're going to see is more caps, or at least more caps in certain neighborhoods," Del Pego said. "In a lot of places, I'm certainly seeing the idea of figuring out the right number for a community becoming more and more prevalent."

Lane of AirDNA argued that some level of regulation, like requiring hosts to obtain a permit, is necessary to help bring the industry out of the shadows and reduce risk for investors.

"If you're investing into a market and there's no regulation, you just don't know the rules of the road," Lane said. "You don't know when regulations are going to be put in place and what those regulations are going to be." But Lane, like Engle, was averse to the idea of cities capping the number of short-term-rentals, saying it creates an "almost unfair advantage" for incumbent hosts and curbs competition.

A decrease in the number of short-term rentals would probably mean higher nightly rates in the future as supply falls back in line with demand — AirDNA projects the average rate will rise to $278.19 a night this year, a roughly 2% increase. But the result of more regulation may be a better and more consistent experience for guests and their neighbors. In response to increasing concerns from residents during the pandemic, some cities have more strictly enforced rules meant to minimize noise complaints and other disruptions from short-term rentals and cracked down on hosts who don't have a license. Del Pego suggested that for guests, a more professionalized industry would also mean fewer hassles like exorbitant security deposits, hidden charges, or dirty rentals.

"I think the day has come that short-term rentals are now thought of like a lot of the other businesses: something that needs to be managed and controlled from a planning perspective so that the balance for a city or a county is healthy," Del Pego said. "A lot of cities and counties are leaning in, and I think when Airbnbs were new they were just standing back."

Reaching that balance won't be easy. But when short-term rental owners do well — without disrupting neighborhoods — cities get more tax revenue and a thriving tourism economy.

There's one thing pretty much everyone can agree on: Short-term rentals are here to stay. AirDNA has forecast that even with a drop in occupancy, the number of available listings is likely to increase to more than 1.4 million this year, which would be a 9% jump from 2022. A business the size of Airbnb "isn't going anywhere," Del Pego said. "The business is just maturing."

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