Short-Term Rentals in 2024: Small Cities, Rural Areas May Soar

This was the year that all the occupancy gains from the short-term rental boom went away. Demand for short-term rentals declined in the U.S. as Americans opted for overseas trips and cruises.

While demand for international stays rose by 17%, domestic trips had moderate growth of 4.5%. Economic uncertainty, weak consumption growth, and unexpected events, such as wildfires and hurricanes, further added to the slowdown. 

Jamie Lane, chief economist at AirDNA wrote rather ominously: “As of November 2023, all the gains seen in U.S. short-term rental occupancy have now been erased and we are back to the average occupancy level seen in 2018 – 2019.” 

But AirDNA’s 2024 outlook predicts a rebound in demand, thanks to lower inflation rates and domestic travel picking up. 

Small Improvements in Urban Areas

The Federal Reserve has stopped raising interest rates, and could start cutting in 2024. The housing market could see a 2% decline in home prices through 2024, AirDNA predicts, but wage growth above inflation suggests increased purchasing power for consumers. Put simply, more disposable income for travel. 

AirDNA expects these factors to boost demand.

Booking windows — the time between the booking and stay — have decreased since 2018, with 2020 experiencing a notable drop due to Covid. While lead times slightly recovered in 2021, they decreased again in 2023, with suburban locations being hit the most. However, looking ahead, spring travel demand is expected to re-accelerate in March, April, and May 2024, the report said. 

The winners: Leisure demand, especially in coastal and mountain/lake resort locations, weakened in 2023 but is anticipated to recover in 2024. Coastal resorts are expected to experience significant growth due to sustained interest in shoulder seasons. 

However, mid-size and small city/rural markets are projected to lead demand growth and increase their share of the U.S. rental market.

The losers: Urban locations, which saw rapid growth in 2022 and early 2023, will face challenges in 2024 due to increased competition and regulatory restrictions. 

A Fine Equilibrium

The pandemic boom of vacation rentals convinced many a mom and pop they could quit their jobs, and become full-time Airbnb hosts. But that quickly led to an oversaturated market with a rise in supply and fall in revenue. 

The normalization is likely to balance demand and supply in 2024. Historically, a key factor in predicting future supply has been the potential return on investment — measured by typical monthly revenue versus the cost of buying a home and the monthly mortgage payment. 

The highest return occurred in the summer of 2021, with monthly revenue 31% higher than pre-Covid due to lower interest rates. That led to more supply, which gradually reduced the performance of typical rentals. Average revenues dropped 11% from the peak.

Then rising interest rates more than doubled the typical mortgage payment for a new home, hitting supply. That should continue in 2024.

The effect will be pronounced in urban markets, in particular, affected by intense regulations. Concentrated in select large cities, urban supply faces challenges due to housing affordability issues, heightened by a decade of slow development and rising prices of urban housing.