Inflation in the United States continued to rise 2022, which may not come as that much of a shock to those of us who drive, shop, eat or, well, live. The increase in prices and costs of most goods and services has gone up drastically, and now that interest rates are on the rise, it could have lasting effects on business owners if navigated incorrectly.
With that in mind, we decided to explore how inflation impacts the vacation rental industry space and, most importantly, what property managers and hosts should do.
Short-Term Rentals Feel Inflation Pressure
When we hear about inflation, we tend to think of the CPI (Consumer Price Index), which is the most common measure of the price of a common basket of goods. From the property manager’s perspective, however, it’s more than just the cost of milk and gas. Property managers sit at the crossroads of a highly laborious industry that’s seeing rising pressure on wages and housing as well as rising prices for goods and materials to keep listings open and clean for guests.
To make sure your portfolio is in shape to deal with these inflationary pressures, access the most comprehensive future demand and historical booking data with Insights.
With inflation rising, property managers need to react quickly to changes in their costs. While some might be able to absorb rising costs, most will need to pass through the costs to the guests in the form of higher rates. We’ve already seen this happen over the past year with ADRs up as much as 30% over 2019.
This year, we’ve seen Average Daily Rates (ADR) going up by 31% between 2021 and 2022.
How To Fight Against Inflation
The first thing to do is review your marginal cost per listing, or how much it costs you to have a guest spend a night. All reservations need to be profitable, so ensure that your minimum prices are at least covering your costs at the bare minimum. Increasing the final cost to the guest is obvious, but taking this a step further, exactly what levers or mechanisms should we use? Is increasing my nightly rate the best option or just adding on to my fees?
To answer this we would suggest understanding what type(s) of inflation pressure you’re mostly experiencing. In markets with soaring rents and home prices, with an owner commission model, increasing the nightly rent (and therefore the payout to the owner) may be the preferable way as otherwise the return on the owner's capital investment (their home) will drop under your watch, making them more likely to look for other asset managers (PMs).
For those with dynamic pricing, simply raising the base prices along with inflation is a simple and straightforward strategy to keep up with rising costs.
Alternatively, if labor and material goods costs are the predominant inflationary force, then it may be better to seek out additional revenue through increased fees. Raising the nightly rent (if that’s even a possibility when rents aren’t rising) will increase the total guest cost with the majority flowing towards the owner, but they aren’t paying the expanding costs of cleaning and reservation staff which fall squarely on the PM! Instead, think about fees, and as they can generate 25-50% of total revenue to the PM per property, it could be a better mechanism to ensure rising costs are covered by those who pay them.
Not Doing Anything Is Not an Option
In this market, there’s an urgency to do something, whether it’s through nightly rate hikes or fee increases. “The run up in inflation could be due to a wrinkle in supply chains and job markets that gets smoothed out quickly or drag on for years, pumping prices even higher,” said James Breece, an economist at the University of Maine. Property managers are being squeezed by supply chains and wages, while at the same time having burgeoning demand for their inventory. These days are a true test of any hospitality entrepreneur.
Those that leave their prices flat will find themselves delivering unprofitable reservations well into 2022, while those that adjust their costs will see record-breaking revenue. The only thing for certain is that higher prices tend to attract attention and new competitors so we all need to be on top of our game.
6 Quick Tips to Add to your Short-Term Rental Strategy
1. Manage Your Owners’ Expectations:As a property manager (PM), your most important relationship is with your owner. Share your strategy for tackling inflation with owners to get ahead of any worries or concerns.
2. Retain Your Owners By Having These Conversations Early: Your business relies on client retention so by proactively talking to your owners, you may significantly reduce the possibility of an owner turning their back on the short-term rental market.
3. Attract New Guests By Keeping Up with Guest Demands for Sustainability: Consumer desires drive markets, and holiday consumers are no different. Today’s energy-conscious travelers are discerning customers who more and more are looking for sustainability when planning their holidays.
4. Consider Alternative Revenue Streams: Upsells or upgrades, for example, can be an easy, low-effort way to start. Think about adding in upsells like early or late check-in, concierge services, mid-stay cleaning, or grocery delivery on arrival.
5. Manage Guest Expectations: Your guests are quite simply, on holiday! So anything you can do to help manage what is expected of them while staying can make a difference to your profit margins.
6. Find New Opportunities for Growth: It's important to keep in mind that with inflation, more and more people will be looking to rent out their second home. Beyond Insights not only allows you to make better pricing decisions but also to see fellow listings in your area.
To make sure your portfolio is in shape to deal with these inflationary pressures, take a look through our Insights tool by signing up today.