Short-Term Rental Market Update: Q1 2023

Q1 2023 in short-term rentals. 2023 was the year the market cooled and underwriting started to matter again, and january through march 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

2023 was the correction. Rates stayed high, supply that had been added during the boom arrived on the market, and occupancy in several previously unstoppable markets came down. The phrase that circulated was Airbnbust, which was overstated, and the underlying shift was real: revenue per property fell in markets where supply had grown fastest.

The spread between well-run and poorly-run properties widened sharply. In a market where everything fills, operational quality is invisible. In 2023 it was the whole difference.

Borrowing costs stayed high all year, and the gap between what sellers wanted and what the numbers supported was the defining feature of the market.

The seasonal shape of Q1

Q1 is the widest spread of the year between markets. Southwest Florida, the Arizona desert and the Gulf snowbird markets are at peak, while the Smokies, the Poconos and most lake markets are in their thinnest stretch. A portfolio that peaks together has one revenue season; a portfolio built across both shapes has two.

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 Q1 is actually for

Q1 is also when last year's tax position becomes final and this year's becomes changeable. The participation log either exists or it does not, and the running average period of customer use for the new year starts accumulating from January.

With bonus depreciation at 80%, a cost segregation study still produced a large first-year deduction, and the arithmetic changed enough that the study cost had to be weighed more carefully on smaller purchases.

The Q1 checklist

1. Compute last year's average period of customer use from booking-level data before filing, rather than estimating it.
2. Total participation hours by person and by property, including managers and cleaners, because two of the seven tests depend on that comparison.
3. Start this year's log in January rather than reconstructing it in December.
4. Book preventive maintenance for the spring: HVAC service before summer, and pool or hot tub servicing before the season turns.
5. Review pricing for the coming peak against the comparable set as it stands now, not as it stood when you bought.

The risk carried into Q1 2023

The properties that got into trouble in 2023 were bought at peak prices with thin reserves in markets that were absorbing new supply. None of those three alone was fatal. Together they were.

2023 rewarded buyers who could underwrite honestly and walk away. Basis mattered more than it had in years, because there was no longer a rising tide to cover an overpay.

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

January through March 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