Economic Changes - Lodging Newsletter December 16, 2022 Special Edition

By Wm, May
Published: 12/16/22 Topics: Lodging Newsletter Comments: 0

Every now and then, we send out letters to property owners with news, information and reminders. This one discusses the effect that economic changes are having on the vacation rental industry. Everyone wants to know - what does it mean to their vacation rental income?

Vacation rental demand has gone up and down for decades. Occupancy, rates and inventory (the number of available homes) has risen for decades. In the past, major factors were the general economy, real estate recession and even 9-11.

It was a surprise to everyone that Covid caused a large jump, faster than ever before. Now that Covid has waned, industry research has begun to show a slow down, especially since September of this year.

Although nothing in life is predictable, we do monitor every possible factor and take steps to achieve the highest possible income for owners no matter the external circumstances.

Nothing diminishes the diligent work all staff members here do. But we do want to share what we observe in the industry over time.

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It is likely you have heard and read about large layoffs at tech companies in the Northwest, including Google, Microsoft, Meta (Facebook) and others. The giant travel companies, too, have laid off staff, including the large corporate vacation rental management firms, because they are so wildly unprofitable already. AirBnB and other websites are under fire with regulations and host dissatisfaction.

Several months ago, our usual newsletter titled "We Predict" described how inflation, interest rates, home sales slow down, and other factors have now arisen.

It must be said that the future is unpredictable, but our recent newsletter trumpeted the things we can predict - such as our continued dedication to keeping homes clean and safe, advertising absolutely everywhere, and in pursuing top income for owners - no matter what.

But if you are wondering how some of the economic changes are affecting the industry, our region, and our work in particular, that answer is this: Nothing has ever diminished our commitment, since starting decades ago, but by watching the "lay of the land" we can navigate the future better.

VARIABLES

There are general factors which are indeed hurting consumers, causing some to travel less. But there are specific details that are affecting vacation rentals in particular. Here are our observations:

Inflation - Vacation Rentals have always been heavily used by families, who may be sharing the cost. If one family member can't afford the trip, the entire family may decline to come. Vacation Rentals are still a bargain for groups of 4, 8, 12 or more. But no one has unlimited funds. Vacations are easier to cut than food for the family. Eventually, inflation may benefit rentals.

Gas Prices - Most of our guests "drive to" the homes they rent. Compared to the total cost of a 2- to 10-day vacation, the gas is only a part, but gas cost is very visible and some guests will avoid going to save that money.

Layoffs - This is a double whammy for folks affected by inflation who lose their jobs and then watch their living expenses rise. For years, it has seemed that tech travelers were immune to certain downturns. But most are highly paid and dropping 10,000 or 100,000 potential guests out of the Northwest Economy is being felt by every industry. Even the juggernaut that is Amazon, is affected.

Inventory - As rentals surged, many owners put their second homes into vacation rental for the first time (a national trend) and many others purchased homes to get in on the industry. Indeed, profits were high due to Covid and had remained so during the first 2 years.

Rates - During Covid, vacation rental rates were escalated by savvy managers, like us, who have mastered dynamic rates and yield management. Rates jumped, but at the time, guests were determined to travel and happy to pay the going price to rent homes.

Investors - There are always "experts" promoting what is new and, hopefully, good to buy, so they can make a buck. Many of our competitors fell into the trap of promoting homes as investments rather than as treasured family second homes.

Some investors paid more than historical profits. Perhaps those investments will still pay off for people who bought to profit rather than to enjoy. Although it has happened regularly, no one knows if rents will match the inflated home purchase prices.

Rent By Owners (RBOs) - Now as demand decreases another variable harms rates. People who self-manage their homes from afar and who rely on too few vacation rental listing websites, begin to panic and lower rates in hopes of corralling a share of the shrinking visitor pool.

Guests are more motivated by rate than ever and lowering rates becomes necessary to compete. What seemed to some RBOs as a "get rich quick scheme", turns out to be a work-all-the-time reality. Some appear to be in a "race for the bottom."

Markets - Because we operate in a number of regional destinations, we can see what others cannot. Some places are more affected by all these factors than others.

Locations closer to where the guest lives may do a bit better than those an 8-hour drive away. Destinations with festivals and events will draw crowds as usual. Those with lifestyle activities (such as skiing) will still bring in visitors, so long as lift ticket prices don't go into the stratosphere. Urban locations still seem to be getting a reasonable number of visitors, who often come for non-vacation reasons.

In the end, the ups and downs of occupancy between similar locations is impossible to understand or to adjust. But we watch it with a microscope.

COVID SHIFT

Shortly after Covid arrived, and as consumers fell victim to "Cabin Fever" (meaning lock down in their own homes), they figured out they could go to the mountain, lake or ocean to stay in a private home AND never see another human.

The percentage of Americans who had stayed at a vacation rental grew from 40% to 60% in short order, which is a market growth of 50%, a pace previously unseen.

With Covid, people could not travel long distances. Places like Europe, Mexico, Florida, and Hawaii were devastated. But those locations are a tremendous draw for visitors. Some are once-in-a-lifetime trips.

While unable to get to those places, guests stayed closer to home. "Drive-To" places benefitted from this change. But now travelers are anxious to go to places previously closed to them. Perhaps logically, airlines are reporting exploding growth to "Fly to" destinations for that reason. Long delayed trips are being taken - the economy be damned.

Doing the math, it is clear that local places benefitted from the lockdown and fear of Covid. Now the pent up demand for fly-to locations is drawing some travelers away from local vacations.

Over time, it is expected that the balance between drive-to and fly-to trips will adjust yet again.

FOR CLIENTS

So what can clients do to compete in this now more competitive vacation rental industry? The answer is the same as it always has been:

Use a manager who employs every possible onsite, advertising and marketing tool to gain guests. That is what we do and we do it better than others.

Maintain the home in great condition with quality textiles, furniture, kitchen wares and amenities.

Add amenities if you don't have them - like hot tubs, large TV's and more. This tactic has always produced income to pay for the costs and make extra profits.

Don’t shoot the messenger as we work overtime, pushing to maintain income and offset the economy.

THE FUTURE

It has always been our mantra to explain why someone should buy a vacation rental and why not. We don’t want to exaggerate or pontificate.

In our minds - the only reason to buy a second home remains - as it has been for decades - to do so to enjoy and use it. Families get to pick exactly what they want, outfit the homes as they like, bring family and friends together, enjoy activities together and get first pick of the dates.

And then - and only then - the goal is to have the home pay for some or all of the ownership costs. This has been a reliable process over the years. But it must be said, that after decades in the industry, it is obvious that profits go up and down due to many uncontrollable variables.

Nothing has ever decreased our commitment. We have never laid off staff. We advertise in every possible place. We manipulate rates tightly and provide round the clock guest services. Better yet, we have staff who love being in the hospitality business. In the end, that is why clients hire us and what will benefit your property.

But of course, vacation rental lodging managers have no control over any of these market variables, even though we confront and work to offset them vigorously every day. The economy may not be predictable, but our work is 100% reliable.

Author: Wm, May, Vortex VIP
Blog #: 0936 – 12/16/22

Sponsor: Vortex VIP – – VortexVIP.com