Short-Term Rental Market Update: Q3 2021

Q3 2021 in short-term rentals. 2021 was the year domestic travel came back faster than anyone had modelled, and july through september has its own shape on top of that. Here is what moved, what it meant for an owner, and what the quarter was actually for.

What was happening across the market

2021 was the year short-term rental demand came back violently. Domestic leisure travel recovered far faster than international, drive-to markets absorbed the overflow, and guests who would previously have booked a hotel booked a whole house instead. Supply had not caught up, so occupancy and nightly rates rose together, which almost never happens.

Demand outran supply for most of the year. Properties that would have struggled in 2019 filled at rates their owners had not thought possible, which made the market look easier than it was.

Mortgage rates spent most of the year near historic lows, which made financing cheap and competition for property fierce.

The seasonal shape of Q3

Q3 is peak for the mountain, lake and beach markets and the trough for the desert. It is also hurricane season on the Gulf and the Atlantic, which is the single largest source of disrupted peak weeks in the whole calendar.

Reading a quarter in isolation is how owners talk themselves into bad decisions. A thin quarter in a seasonal market is not underperformance, it is the shape of the asset, and it should have been in the model at purchase.

What Q3 is actually for

Q3 is an operating quarter rather than a strategic one. The decisions that determine how it goes were made in Q2, and what is left is execution: turnovers, guest response, pricing against real-time demand, and handling whatever breaks.

With bonus depreciation still at 100%, a cost segregation study on a property placed in service that year could accelerate the full eligible amount into year one, which made the strategy unusually powerful for high earners.

The Q3 checklist

1. Watch net revenue per available night rather than occupancy, because occupancy at peak flatters everything.
2. Respond to guest problems within minutes even when resolution takes hours, because response speed is the largest factor in whether a problem becomes a bad review.
3. Ask every departing guest for a review, once, without pressure.
4. For coastal properties, confirm the storm plan and the insurance position before the peak of the season rather than during it.
5. Log participation hours weekly. Q3 is when the hours actually happen and when they are least likely to be recorded.

The risk carried into Q3 2021

The risk nobody priced in 2021 was that the conditions were exceptional rather than normal. Buyers who underwrote on 2021 revenue and 2021 financing costs were building a model on the best year the asset class had ever had.

The right discipline in 2021 was to underwrite on pre-pandemic revenue rather than current revenue, and to buy on a basis that would survive normalisation.

The consistent thread across every quarter on this site is that the environment changes and the discipline does not. Twelve individual monthly revenue figures, a complete expense stack including reserves, and a stress test at 75% of projection that still covers debt service.

What to carry into the next quarter

July through September is one quarter of a business that is measured annually. The number that matters is not what this quarter produced but whether the year is tracking to the model, and whether the reserve is intact.

If the year is behind the model, the useful question is which input was wrong: revenue, cost, or the assumption about the market. Each has a different fix, and discounting is the right answer to only one of them.

If the year is ahead, the useful question is whether that is the property or the market. A property outperforming a flat market is a property to buy more of. A property matching a rising market has told you nothing yet.

Frequently asked questions