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Travel has always revolved around choices—where to visit, what activities to engage in, and, significantly, where to lodge. Whether you're a family in pursuit of an authentic local experience or a business traveler attending an annual conference, you've likely encountered the age-old quandary of hotels versus vacation rentals. The COVID-19 pandemic exacerbated this decision-making process, pushing more travelers to embrace short-term rentals, especially in less densely populated settings.
In partnership with a leading hotel data provider, we delve into the transformation of the U.S. accommodation landscape from 2018 to 2023 and contemplate the future of the industry.
Demand Shifts Disrupt the Status Quo
Prior to the pandemic, both hotels and vacation rentals experienced robust demand growth (30% and 26.4% year-over-year, respectively). However, by Q2 of 2023, this growth had decelerated to 11.7% for rentals and -0.6% for hotels. What instigated this change? The resurgence of European travel played a role, impacting both rentals and hotels. Nonetheless, the emergence of "bleisure," the fusion of business and leisure travel, may have upset the equilibrium. The remote work revolution has led many individuals to extend their stays, gravitating toward rentals with more amenities. Additionally, the trend toward less densely populated or rural areas, where rentals constitute a larger portion of the lodging supply, also bolstered the short-term rental sector.
Notably, by May 2023, short-term rentals in small city and rural locations had witnessed a demand growth of 24%, compared to 0% for hotels. Rental demand growth also outpaced hotel demand growth in mid-sized cities, suburbs, mountain/lake resorts, and coastal resorts. However, in larger urban settings, both vacation rentals and hotels experienced a 12% growth in demand, attributed to stricter rental regulations and an abundance of conventional hotel rooms.
The Supply Aspect of the Narrative
When it comes to supply, vacation rentals once again take the lead. Year-over-year supply growth for short-term rentals consistently exceeded 15%, whereas for hotels, it remained below 5% between Q1 2022 and Q2 2023. Two primary drivers of this discrepancy are size and location. Short-term rentals are expanding more rapidly in rural and suburban areas, at 18% and 14%, respectively, while in urban areas, where short-term rentals face size limitations similar to hotel rooms, they are growing at 8%. Furthermore, larger properties are gaining popularity, with over 300,000 three-bedroom units becoming available, surpassing one and two-bedroom units by more than 70,000 each. Notably, three-bedroom units have experienced the highest growth in demand among all property sizes.
Rate Realities: ADR Trends
The average daily rate (ADR) paid has also undergone significant changes in recent years. While hotels saw faster year-over-year ADR growth (7.2%) compared to short-term rentals (2.8%), this growth was largely driven by performance in the top 25 markets, including urban areas and mountain/lake resorts. Short-term rentals remain approximately 20% more cost-effective than hotels in urban areas, but rentals are slightly pricier in other location types, reflecting their capacity to offer more spacious accommodations and additional amenities outside of cities.
What Lies on the Horizon
As we look ahead to the remainder of 2023 and beyond, both short-term rentals and hotels are expected to see growth in supply and demand, albeit at a decelerated pace. Nonetheless, the share of demand for short-term rentals will continue to expand, increasing from 14.6% in 2023 to an estimated 15.4% in 2024.
The pandemic acted as a catalyst for the lodging industry, accelerating existing trends and introducing new ones. However, as short-term rentals maintain and even increase their share, hotel operators can draw lessons from what attracts guests to short-term rentals, just as rental operators have learned from hotels about professionalism. As we navigate the evolving landscape, one thing remains clear: the accommodation game is evolving, and competition is intensifying.