The cracks in Airbnb's foundation are becoming apparent.

The CEO of Airbnb, Brian Chesky, has confessed that the company is struggling and needs to reorganize itself. According to Chesky, the company grew rapidly without properly developing its infrastructure. He compared it to building a house without a solid foundation, as Airbnb only had four pillars when it needed ten.


In order to address these issues, Airbnb recently introduced several new features to fix its foundation. However, the question remains: will these changes be enough to sustain the short-term rental platform? Or is this a sign of broader changes in the industry that could affect real estate investors?


Airbnb has experienced challenges in the past, such as dealing with fake listings, disputes over overcrowding in cities, and opposition from hotel lobby groups. However, these growing pains seem to have intensified in recent months. New York City, for instance, has tightened regulations on short-term rentals, raising concerns that other major cities in the United States might follow suit. Similarly, Florence, Italy has implemented restrictions on Airbnb rentals due to complaints about locals being priced out of the city.


Despite global backlash, the number of available listings on Airbnb has increased by 13.7% compared to the previous year, reaching 1.53 million by August, according to AirDNA data. However, demand has cooled down after a busy summer season, with a 7.6% year-over-year growth in August compared to a record 9.3% growth in July. Nevertheless, August marked the highest number of nights booked, with a total of 21.2 million. Occupancy rates have dropped by 4.2% from the previous year, standing at 60.4%.


Moreover, cracks can also be seen within the broader housing market. As mortgage rates rise and housing inventory declines across the country, Nick Gerli, CEO of Reventure Consulting, suggests that the collapse of Airbnb is a real possibility. Gerli analyzed data from AllTheRooms and found that revenue in major cities in the U.S. has significantly declined over the past year, with places like Phoenix and Austin seeing a nearly 50% decrease. However, it is worth noting that this data has been subject to controversy.


Investor Implications of Airbnb's Modifications

CEO Chesky's strategy for addressing issues within Airbnb involved introducing several features targeted towards guests. One of these features involves signaling to hosts the importance of prioritizing affordability.


In essence, Chesky emphasized that the more affordable the Airbnb options are, the higher the number of bookings the platform receives. He intends for hosts to decrease their profit margins, which he believes can be advantageous in areas with a high concentration of hotels. He supported this claim with Airbnb data, which revealed that while hotel prices increased by 10% in 2022, prices for one-bedroom Airbnbs decreased by 1%. To assist hosts in maintaining competitiveness, the platform aims to provide them with insights on dynamic pricing.


Despite Chesky's assertion that hosts can earn more money by offering competitive deals that rival those of hotels, hosts have expressed concerns about diminishing profit margins. AirDNA data indicates a 4% decline in Revenue per Available Room (RevPAR) in August compared to the previous year, with a value of $235.50. KeyData's findings further support this trend, as certain areas experienced reductions in both occupancy rates and average daily rates, with declines as significant as 37%.


Airbnb is reevaluating its approach to experiences, even though they are currently not accepting new experience applications. Although this feature does not appear to be highly favored on the platform, Chesky mentioned that experiences could potentially offset the income loss caused by recent regulations imposed on the short-term rental market in New York City.


Chesky seems to be considering expanding Airbnb beyond its original purpose as a travel accommodation provider. He has hinted at diversification into other sectors, such as dining and car rentals. This shift indicates a potential transformation of Airbnb into a comprehensive app resembling a concierge service. This could entail hosts offering additional services beyond providing a comfortable and enjoyable stay. The Airbnb website already allows guests to search for unique stays, such as boats, tree houses, tiny homes, castles, and even luxurious properties labeled as OMG!


Is it Still Worth it for Real Estate Investors to Focus on Airbnb?

Airbnb is gearing up to introduce more upgrades in November, with a particular focus on enhancing core services. While this may be advantageous for guests, it will entail changes for hosts. Although the implementation of a price comparison tool is a smart move, Airbnb is essentially encouraging hosts to become more competitive by reducing their prices in an already saturated market.


Considering the persistently high inflation rates and the ever-increasing mortgage rates, individuals may start cutting back on expenses such as travel. In such a scenario, hosts may have no option but to lower prices or even contemplate selling their short-term rental properties. Additionally, the continuous growth of the short-term rental market is bound to result in an oversupply, further impacting revenue.


Over time, investors who have seen significant returns on their Airbnb properties might have to adapt and provide more than just a place to stay. They will need to cater to a new breed of travelers who prioritize the overall experience and cleanliness of the property. Whether this signifies the end of the short-term rental market or if investors (and travelers) will have to explore alternative solutions remains to be seen.