Short-Term Rental Market Update: Q2 2022

Q2 2022 in short-term rentals. 2022 was the year cheap money ended and the phase-down clock started, and april through june 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

2022 split into two halves. The first looked like 2021: strong demand, rising rates, aggressive competition for inventory. The second was defined by the fastest rise in borrowing costs in decades, which changed what a property had to earn to work.

Revenue held up better than most expected while the cost of capital rose underneath it. Deals underwritten in the spring frequently did not pencil by the autumn on the same purchase price.

Rates rose sharply through the year as the Federal Reserve tightened, and the cost of financing a purchase in December was very different from March.

The seasonal shape of Q2

Q2 is when the summer-peaking markets wake up and the winter-peaking ones go quiet. Spring break carries the Gulf into April, the Smokies and the Poconos ramp through May and June, and the desert markets begin their descent toward a trough that will last until October.

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 Q2 is actually for

Q2 is the last window to fix anything before peak season. Furnishing refreshes, photography, amenity gaps and maintenance all cost far less in May than in July, because in May they cost money and in July they cost bookings.

2022 was the last year at 100% bonus depreciation, which pulled some purchases forward into December as buyers tried to place property in service before the step-down.

The Q2 checklist

1. Reshoot photography if anything changed, and reshoot regardless if the images are more than about two years old.
2. Audit the amenity gap against the current comparable set rather than the one that existed at purchase.
3. Set minimum stays and premium floor rates across the peak weeks before demand arrives, not after.
4. Confirm the cleaner bench has depth for same-day turnovers in peak season.
5. Check the reserve. Peak season is when a failure is most expensive and most likely.

The risk carried into Q2 2022

Supply caught up in several markets during 2022. The properties that struggled were the ones bought at 2021 prices on the assumption that 2021 occupancy would persist.

The discipline that mattered in 2022 was stress testing against a higher rate and a normalised occupancy at the same time, rather than one or the other.

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

April through June 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