Airbnb Bust is sweeping America right now and causing big problems for Airbnb owners in certain cities. Revenues are way down. Many are struggling to break even. And some are even now losing money after paying their expenses.
This trend is especially evident in Phoenix, AZ. Where Airbnb revenues have crashed an astounding 72% over the last two years according to data from AllTheRooms.
The Airbnb Bust in Phoenix and other cities will re-shape the landscape of the US Housing Market in 2023 and 2024. As more and more of the 1.4 million short-term rental operators across America start losing money.
Many will eventually be forced to sell. Pushing inventory back onto the US Housing Market and applying downward pressure to home prices.
Phoenix Airbnb Revenue down 72% in two years
The scale of the collapse in metros like Phoenix is difficult to comprehend at first. How could revenues go down 72% over two years?
Well, it's pretty simple really. During the pandemic there was a massive short-term rental boom that took place in cities like Phoenix. With people from all over the US descending on the city to take advantage of its warm weather and lax COVID rules.
This surge in demand caused Airbnb revenues to nearly triple from 2020 to 2021. Pushing the average revenue for short-term rentals in Maricopa County to $5,500/month according to AllTheRooms.
Fast forward today and those revenues have collapsed to $1,590/month (outside of a brief upward blip due to the super bowl). That's 20% less than one could get for a long-term rental. And not even enough to break even if there's a mortgage on the property.
The Airbnb Bust in Phoenix is getting so bad that some operators are being forced to list their property for $55/night.
Airbnb Supply in Phoenix has doubled since the Pandemic Started
And ultimately this monumental collapse is being driven by the insane increase in the supply of short-term rentals.
Over the last two years in Phoenix, many Airbnb investors piled into the market and purchased houses with the intention of renting them out short-term. At the same time, many would-be home sellers decided they didn't want to sell their property in a down market. So they put it on Airbnb or VRBO instead.
The result? Short-term rental listings in Phoenix exploded from about 7,000 prior to the pandemic to nearly 14,000 today. The supply basically doubled in four years. With most of that growth coming in the last 15 months.
The massive surge in listings drove down occupancy rates in the market. Which ultimately is the biggest reason why revenue has collapsed over the last two years.
When will Airbnb owners in Phoenix start selling?
Ultimately this begs an interesting question: when will Airbnb and VRBO owners in Phoenix start selling?
Because many right now are struggling. And some will eventually opt to take the money and run through a sale rather than battle it out in a declining short-term rental market.
However, what's interesting is that right now these owners are not selling. With new seller listings in Phoenix in down 37% year-over-year in May 2023 according to Realtor.com.
Indicating that real estate owners in Phoenix - whether they be Airbnb operators, long-term landlords, or regular homeowners - are remaining stubborn. Stubbornness that has caused for sale inventory on the Phoenix housing market to plummet by 50% over the last six months.
With many local market participants now thinking that the Phoenix housing market is "recovering".
But a true, sustained recovery seems unlikely with the Phoenix's short-term rental market in decline. For instance, there's more full-time Airbnb's and VRBO's in Phoenix right now (~11,000) than there are homes on the market for sale (~9,000).
Suggesting that we could see a wave of forced selling from short-term rental owners that inundates the housing market with inventory at some point later in 2023 or 2024.
How much money are Airbnb owners in Phoenix Losing?
Because let's do some math. What is the average full-time Airbnb owner in Phoenix facing right now? And are they really going to be forced to sell?
Well, according to data from AllTheRooms, about 65% of short-term rental operators in Phoenix have their listings available full-time.
These full-time operators will earn more than the average $1,590/month because they have their property listed for more nights. In fact, they'll earn close to double that in gross revenue based on having their property available for 30 nights in a month.
With the average full-time operator in Phoenix is likely earning around $3,000/month in gross revenue, which equates to close to $36,000/year. Which actually sounds good at first.
Until you start digging into the expenses.
Airbnb takes a 3% fee. Cleaning costs will run $6,000/year. Then you have taxes, insurance, and maintenance costs to worry about. And oh yeah - many owners pay a management company up to 20% of revenue to run the Airbnb for them (I only used 10% in this proforma because not every owner will use a management company).
The result is that this hypothetical Airbnb operator will only be earning $16,000 in net income from their property (around a 3.5% cap rate).
And if they have a mortgage on the property, they'll be losing money. In this example, I assumed a 4.5% mortgage rate since many existing owners bought before rates went soaring. But even at that lower mortgage rate, the interest cost still results in a $4,000 annual loss.
That's not pretty. And it's just an average. If someone is an unskilled operator, or took out a larger mortgage, or has a higher rate, they'd be losing even more. Some owners even bought their properties with DSCR loans where the lender can initiate default if the property's cash flow dips below a certain threshold.
Mediocre Airbnb operators will get flushed out. And forced to sell.
Ultimately, I suspect that many bad and mediocre Airbnb operators in Phoenix will get flushed out and forced to sell at some point later in 2023.
Because the fundamentals are saying that Phoenix's short-term rental market has been overtaken by deflationary forces. Defltionary forces that are causing both occupancies and ADRs to decline. Just as the cost of expenses like cleaning, taxes, insurance, and mortgage interest continues to go up.
These deflationary forces are also present in Phoenix's long-term rental market. Where vacancy rates have skyrocketed, and rents are down by about 5% from peak. This declining rental market is a big reason why Wall Street investors are no longer buying in Phoenix.
Ultimately these deflationary headwinds in Phoenix's short and long-term rental markets will spill over into the for-sale housing market. And cause home prices to go down by more.
When will that happen? It's difficult to say. Right now, many participants in the Phoenix housing market are remaining stubborn, whether they're Airbnb operators or landlords. They're hinging their hopes on a sudden recovery in demand and a potential Fed pivot. And refusing to sell their properties even though they're losing money on them.
And maybe there is a sudden recovery in demand. And maybe the Fed does cut interest rates by a lot later this year. Both of those things could happen.
But they're mostly wishful thinking. The more likely scenario is that we're at the end of a 10-year growth cycle in the Phoenix Housing Market. And that there will be several more years of pain to come.
And that many of these Airbnb owners who are hanging on by a thread will sell.
Did you like the data in this post?
The data on Phoenix's short-term rental market in this post comes from AllTheRooms, a vacation rental data company. They've graciously provided me with full access to their database and I will be periodically using some of the data in future posts on the housing market.
Additionally - Airbnb guru Sean Rakidzich provided me with some valuable insights on the state of the short-term rental market in 2023.