MikeH
Keystone Retreat

Contrarian Perspective: Is there a VR Industry Bubble?

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MikeH
MikeH
Keystone Retreat
This thread is for the general discussion of the Article Contrarian Perspective: Is there a VR Industry Bubble?.

If you're a vacation rental nerd like me, you probably follow every media site, blog (like VRMB!), Facebook group, etc. just to glean what you can about our ever-changing industry. I was fortunate to have entered the vacation rental industry during what I think was a true inflection point; when HomeAway was founded and started a steady march to changing the old ways for good. I’ve seen many solid start-ups attempt to consolidate the industry that never materialized, and I’ve seen the new kid on the block, AirBnB, turn into the juggernaut it is today. This may not be a popular opinion right now, but what I’ve learned over these past 15+ years is to never get too comfortable, especially in times of abundance.

While there are still certain challenges day to day, we all have to be grateful that our industry has, for the most part, thrived post-Covid lockdowns. It was thrilling to see such pent-up demand in 2020 and into 2021. At Carolina Retreats we’ve had our best two years on record, even after accounting for losing part of our busy season at the beginning of 2020. It’s good to reflect on the positives, however, I can’t help but also notice from my stand point some signs of over indulgence in the greater industry. As a responsible business owner that has seen up and down cycles, we must take pause from time to time to make sure we are making appropriate decisions today that will put us on a solid foundation for the future.

So, the question is, have we come out of the COVID lockdown only to create a temporary vacation rental housing bubble? The definition of a real estate bubble is “a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse”. Bubbles like this usually start with an increase in demand in the face of limited supply, and can take a relatively extended period to replenish and increase (sounds familiar). This same logic could be applied to the huge run-up in demand in rents and bookings, in a tight window of time (supply). Now, I’m not implying we are staring at any imminent danger of some kind of collapse, but I’d be asking myself how sustainable is this current market over the long term, and if my rents dropped 10%, 15%, 25%, can I still maintain?

In any business, prudent steps can be taken to help make sure can take advantage of the good times, but also sustain during the down times. While not an exhaustive list, some steps any of us can take to balance the two may include:
  • Save some money now – This is sort of a no-brainer, especially after COVID lockdowns, but just because you CAN buy or invest in something, doesn’t mean you need to. Ask yourself, will this investment propel my company forward and not put undue risk on what I’ve already built? If it is truly a big stretch, then maybe rethink why you are pursuing. Don’t get caught up on “shiny object syndrome”. Even if the gurus tell you otherwise, it’s ok to keep cash on hand for a rainy day.
  • Don’t set your expectations that every year will be better than the next – This one is hard for me as well as I’m an eternal optimist and truly believe in my team and what we are doing. However, if we constantly reset our bar higher and higher and budget based off that, you could end up in a bad situation by overcommitting on expenses that may be hard to unwind. Set reasonable goals and if you beat them, great!
  • Stay in your lane & keep going – When everyone around you seems to be making money and talking about the next best thing, that’s when you need to double down on what works and what you do best. It can seem boring at times, but by staying true to your core business and avoiding those “shiny objects” that you may not have as much experience in, you’ll avoid splitting your focus and can compound your expertise and business results that much faster. The most successful people I know in our industry did so over decades, not months.
A lot of my basis to be cautious has to do with anecdotes I’ve witnessed in my own markets as well as following real estate groups and gurus online. I know this is not hard data from a macro point of view, but when I see people attempting to take out 2, 3, 4+ mortgages on a W2 income to “get into” STR’s and plan to have the homes pay those mortgages and provide free cash flow in perpetuity, well, I feel I’ve seen this story before. Also, the willingness to pay any price over asking, waive inspections, etc. just to “win” the bid? Are those normal fundamentals? I’d say probably not.

Ultimately, I do feel the industry has hit another inflection point. I think our floor has been completely reset with the velocity of new guests and the exposure vacation rentals have seen in the past 18+ months. I do feel this is sustainable and has certainly changed for the good. However, as with any market cycle, what goes up must eventually come down. Just make sure to take off your rose-colored glasses every once in a while and try not to get caught in the stampede.
 
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Def agree about reaching an inflection point. You didn't mention regulation, but I think that will be the biggest driving factor in the coming years. As jurisdictions continue to limit short term rentals, it will create even more guest demand for those that remain.

While I agree that no bubble is forever, it does seem as if our limitation will come more from lack of properties, rather than lack of guests wanting to use them.

I'm curious about how we may need to start modifying business models in response. Increasing mid-length stays? Adding new areas?
 
Good advice as always MikeHMikeH. I tend to be the optimist as well, but the current facts are, families just don't have the free time to travel that they had when kids were home schooled and everyone was working from home, or a vacation rental. I suspect the demand will remain high in our respective core seasons for next year, but the huge gains we picked up in the other seasons cannot currently be replicated.

Another point, last year there was a group of travelers that, due to stimulus checks and their new found work status, took vacations they wouldn't ordinarily take. That may have been an extra trip, or a more expensive house than they would normally book. Either way, those dollars don't appear to be available going forward, they are working their way to the top of the economy.

On another plus side, Vacation Rentals were certainly discovered by many more people, and they will want to travel again.
 
I need to be reminded of this. Over the last 10 years I’ve faced ups and downs and a fire which took 50% of our business requiring a complete re-vamping of our business plan and team. What we all love about this industry is that no day, week, month or year is like the next. We should be experts in adapting to changes, even when they include a down turn in the market. It’s been a great ride and I hope it continues but saving for the rainy day is great advice. It will rain eventually.
 
Really enjoyed this, Mike. It made me think back to something Seneca wrote ~2,000 years ago:

If an evil has been pondered beforehand, the blow is gentle when it comes. To the fool, however, and to him who trusts in fortune, each event as it arrives “comes in a new and sudden form,” and a large part of evil, to the inexperienced, consists in its novelty. This is proved by the fact that men endure with greater courage, when they have once become accustomed to them, the things which they had at first regarded as hardships. Hence, the wise man accustoms himself to coming trouble, lightening by long reflection the evils which others lighten by long endurance.

Truly, it is when things are at their best that we should be preparing for the worst. Great advice.
 
Thanks, MikeH MikeH for the thoughtful words of wisdom, and to Matt Landau Matt Landau for providing this amazing forum. We have been fortunate to have a wonderful couple of years and have been saving like our lives (business) depends upon it. I appreciate the ideas and as we roll into our annual two-day planning retreat next week on Tuesday and Wednesday for our company, I think I will add a section called Plan B, C, D (thank you AMcConnell AMcConnell and Seneca), so we can distinguish between 1) must/shall, 2) really good idea, 3) nice to have, and 4) eliminate for 2022.
 
"""... take out 2, 3, 4+ mortgages on a W2 income to “get into” STR’s and plan to have the homes pay those mortgages and provide free cash flow in perpetuity,..."""
MikeH MikeH That behavior is a bit of the trouble I'm afraid. Price momentum and crowd mob mentality can push markets for longer than one could imagine in a reasonable world. For me, my top 3 concerns are also the contributing factors...

1. Low Rates
2. Rental Projections
3. Domestic Travel Demand

1. Rates are so low and it is so cheap to borrow that even with some properties selling for double what they did last year, the monthly carry is still justifiable "if" these new higher rental rates were able to stick (Here in NW Florida). So investors are still in bidding wars here whenever something hits the market (if it ever does get past a "pocket listing" status).

2. Rental Projections: Newbies are still (in my region) taking some of these Rental Projections put in front of them as gospel. There are STR Management companies here that always come in XX% higher than anyone else and those are the ones the agents print and take to the open houses or put those into the MLS listing to be seen. Some of them are borderline criminal IMO. There's no laws here against making up astronomical numbers...

3. Domestic Travel Demand: It's awesome. For now.
Well, it's awesome for the PMs, not the guests that are on top of each other in all these drive to markets busting at the seems and paying way more than usual for that over crowded experience.
The $64,000 question is how long does it last? And if it does subside, with all the new inventory in so many markets that has been built in the last 2-3 years, what will the RevPar and occupancy look like.

I don't have a crystal ball. All three are contributing factors to the STR craze.

My biggest concern is that sale prices are far outpacing rental rate increases and it's getting harder to justify to new investors that this is a good investment (use of funds)
 
As bubbles are created by a pot of water on a cooktop, the same could be true for the VR industry - maybe some kind of "heat index" could be formulated.

If there's a nerdy number cruncher in the IC (maybe Wes Wes), I'll wager that a heat index can be calculated for most destinations by, let's say, calculating the transient guest taxes in a community/county (numerator) and then dividing by the number of second homes multiplied by the destination's residential full-time population (denominator).

Transient guest taxes would be a monetary measurement of a destination's popularity and would have to include local motels, hotels and B&Bs too. Determining the number of second homes might be tricky unless there's a savvy local real estate guru who can suss out info on the county's website (but be wary relying solely on OTAs, as we all know many second homes are listed on quite a few platforms). By including the destination's permanent population, "small town" destinations, such as Breckenridge could have a much higher heat index than "big town" destinations such as Orlando or Scottsdale.

The data would be $ per household per resident.

For many destinations, this information would be quite dynamic, so there would have to be, let's say, five years of history to cover Airbnb's "black holes" of cancellations.

Once the heat index of a community is calculated, the said number cruncher could determine if there was a correlation between the heat index and the propensity of local regulations. Even whether the destination is under- or over-ripe for investment. Vacasa should be employing something like this.

Sounds like a doctoral thesis for a statistician? Or maybe there's a much easier way?
 
MikeH MikeH, great blog and thank you for sharing.

My personal opinion on this is I have never seen the travel sector in such a delusional state.

I do not believe for a second we are coming out of covid. United States vaccination rate 59.7%. India, population 1.38 billion, vaccination rate 33.7%. Africa, population 1.37 billion, vaccination rate 7.3%. Nothing good is going to come from these numbers and I am not including the Omicron variant. Delta is still king. I am going to say it again, nothing good is going to come from these numbers.

We could very well be in a bubble but that bubble is not bursting any time soon. This bubble will not burst until world travel rebounds.

Domestic travel will be king for a least the next three years.
 
Thanks everyone for the comments on this. I certainly am not trying to be an alarmist, but lately I've just witnessed a lot of rash behaviors around "STR" investors and compete lack of understanding the long game in this industry and business. I do think we have hit a new phase in the growth of vacation rentals. That is undeniable. But when the tide starts to recede (whenever that may be), those that are paying premiums for marginal properties just to participate will be the ones left holding the bag. Just my 2 cents!
 
AMcConnell said:
Really enjoyed this, Mike. It made me think back to something Seneca wrote ~2,000 years ago:

If an evil has been pondered beforehand, the blow is gentle when it comes. To the fool, however, and to him who trusts in fortune, each event as it arrives “comes in a new and sudden form,” and a large part of evil, to the inexperienced, consists in its novelty. This is proved by the fact that men endure with greater courage, when they have once become accustomed to them, the things which they had at first regarded as hardships. Hence, the wise man accustoms himself to coming trouble, lightening by long reflection the evils which others lighten by long endurance.

Truly, it is when things are at their best that we should be preparing for the worst. Great advice.
Click to expand...
Andrew, this is incredible, you look great for being 2,000 years old!!
 
I 100% agree with this. Of the 60 properties we manage, we've had 20% change hands in the past year. TWENTY PERCENT! The real estate craze has people buying up STRs at premium prices, seeing the current rental rates, and thinking they are going to make a return. I've been trying hard to educate owners that the ADRs we see today may not be sustainable as they are driven by unusually high demand. And yet, they don't want to hear me and the realtors don't want me blowing their sales up either. Now I have these new owners asking me if we are going to push rates even higher for 2023. And while sure, we will push (or rather Rented will for us, thanks AMcConnell AMcConnell!), but that doesn't mean the market will bear it.

I don't think we are in a 2008 sized bubble necessarily but I do agree we are seeing a bubble and it's not going to be pretty when this pops. We started in 2004 and barely survived 2008. We had a ton of properties go into foreclosure and it was UGLY. So while I don't anticipate things will get that bad again, it's far better to be prepared than to be surprised.
 
Love this post and I think its asking the types of questions anyone who does this professionally should be asking, because the answer is definitely yes, although with some nuance.

I don’t think this is a bubble in the sense of a housing market bubble, I think of it as a bubble in the vein of the dot com bubble. The housing crash mostly stopped the behavior that caused it, which was out of control lending practices and a lack of regulatory oversight. Well for the dot com bubble, we have to ask if the thing that everyone thought was a good idea and provided a real benefit to its customers but also produced some pretty horribly run companies gone away? Have the ideas behind those companies gone away?


For perspective, I took a gander at a CNN article where it outlines 10 biggest dot com flops…and they are….

Webvan: A grocery delivery service
Pets.com: online store for stuff (for pets)
Geocities: Website building site that let people easily share their own personal content online
The Globle: Allowed users to share personal content easily online
Go.com: A portal to search for stuff on the internet
Flooz: Developed an online currency that could be used as real currency
Drkoop: Health Care Content Provider for the internet
Kozmo: a delivery service where people would go pick up stuff at a store and deliver it to you
Gardening.com: online retailer for gardening supplies
Source: https://money.cnn.com/gallery/technology/2015/03/02/dot-com-flops/10.html


So re-read that and sub in the below company names….



Amazon
Petsmart Online
Facebook
Facebook
Google
Bitcoin
WebMD
Uber
Amazon (although the gardening one was kind of silly because of the insanely narrow niche concept)


The dot com bubble wasn’t a result of overvaluation of the opportunity for the monetization of the internet, but instead it was a result of the undervaluation of what companies needed to do to run a successful business in a competitive and sustainable way, even if they did have a good idea, some money and traction. That’s what I think is happening now, because this isn’t really a boom, it’s the birth of an industry.

I know, I know, “the VR industry has been around long before Airbnb” ect…but in terms of consumer trial and repeat of homes rented for short periods of time, this is a brand new industry that is here to stay.



Unfortunately, I do think this is a bubble in the sense of many players in the industry new and old that are doing the types of things that kill businesses in mature industries.

Lets not forget that companies with no previous experience in running a hospitality business or management business have found crazy success in this industry by learning and teaching things like “you want to have your team built out to do all the management of day to day operations and communications so you can work ON your business and not IN your business….” If that’s not a sign of a gold rush type mentality, then I don’t know what is.



I see all sorts of red flags out there that indicate a dot com sort of situation, just as importantly, I am also concerned by what I don’t see being talked about.

I don’t see people talking about how to increase owner profitability with more efficient operations, I see the widespread acceptance of taking margin on owners for every “add on” possible. You name it, they profit off it...inventory, cleaning, check ins, maintenance and I’ve even seen companies turning onboarding fees into a profit center.

I don’t’ see companies trying to innovate on how to make cleaners’ jobs easier with investment in the operations required to do so, I see them confuse innovation in cleaning with checklists or apps that let a cleaner share picture and then take margin on cleanings because that’s the easiest way to improve margin without telling owners.

I don’t see companies trying to figure out how to INCREASE communications with guests and improve engagement with guests on value added interactions…I see companies who think automation of guest interactions is the end goal of their software tools or VA programs.

I don’t see companies trying to figure out how to do more with less in a strategic way, I see companies that think “scale” is adding co-hosts and paying them a % of commission to do PM duties…while charging the owner more as the way they capture profit. In fact, I see the term “scale” used in so many ways that induce face palms when I am listening to some of the stuff out there at this point that when the term “scale” is used it signals less business intelligence rather than someone who might know what they are talking about.

I think many PM companies see opportunity in “innovations” such as figuring out how to profit from guest fees, selling travel insurance, creating upsells on checkin or checkout times, and any other thing they can nickel and dime guests for. I think many software providers are catering to what these types of PMs want their business to be (simple and automated) vs. what it needs to be (complex and dynamic) in order to run a good VRM business that’s sustainable long term.


SO my take is that when competition ramps up and margin pressures hit and companies need to compete for the most profitable guests with great hospitality, and win representation of the most profitable owners by delivering best in class profits, in order to have a successful company, I think those cookie cutter/opportunistic models that are now being widely used will be the ones that are first to go unless they can sell their contracts to Vacasa so that Vacasa goes down with that ship when they run out of money.


All of that will eventually lead to a bubble burst or perhaps more of a slow and painful deflating as this sort of thing will likely correct over time as supply and demand shifts towards surplus. My honest advice for companies right now would be:

Be innovative on how to run your operations more efficiently and at a lower cost while doing more for owner profitability and guest experience. If your management fees on gross revenue (including fees and margin taken on cleaning) are above 25%, do the exercise on what you would need to do to get to 25%....now is the time to solve that problem, not when you are forced to in order to stay competitive.

Be innovative on how you provide a great guest experience. Are you getting worse reviews than the top listings in the area? Why? Fix that by figuring out how to create guest experiences that lead to glowing reviews. You should take it personally if someone is getting better reviews than you are, at least I know I do.

Reduce costs on tech stack and find solutions that work for what you want to do, not the other way around. There’s lots of cool stuff out there, but you should know what you are looking for and go find what fits that need. My opinion is that current large PMS options are way too broad and focused on simplicity and automation for a company that wants to develop innovative capabilities to use. So we have to piece it together, and I’ll say that I think tech stacks of the future will not look very much like they do now for successful, larger companies…so start thinking about if the one size fits all approach is what you need to run your business how you want to run it, and if it doesn’t start thinking and researching how you can do things the way you need to do them with different solutions.



I think if VRMs/PMs had some focus on those areas, they will find themselves in a competitive advantage on guest experience, owner profitability, and operations when they need it vs. after its too late (thankfully this community is full of such businesses that I think are likely to create such advantages).
 
JPrugh said:
As bubbles are created by a pot of water on a cooktop, the same could be true for the VR industry - maybe some kind of "heat index" could be formulated.

If there's a nerdy number cruncher in the IC (maybe Wes Wes), I'll wager that a heat index can be calculated for most destinations by, let's say, calculating the transient guest taxes in a community/county (numerator) and then dividing by the number of second homes multiplied by the destination's residential full-time population (denominator).

Transient guest taxes would be a monetary measurement of a destination's popularity and would have to include local motels, hotels and B&Bs too. Determining the number of second homes might be tricky unless there's a savvy local real estate guru who can suss out info on the county's website (but be wary relying solely on OTAs, as we all know many second homes are listed on quite a few platforms). By including the destination's permanent population, "small town" destinations, such as Breckenridge could have a much higher heat index than "big town" destinations such as Orlando or Scottsdale.

The data would be $ per household per resident.

For many destinations, this information would be quite dynamic, so there would have to be, let's say, five years of history to cover Airbnb's "black holes" of cancellations.

Once the heat index of a community is calculated, the said number cruncher could determine if there was a correlation between the heat index and the propensity of local regulations. Even whether the destination is under- or over-ripe for investment. Vacasa should be employing something like this.

Sounds like a doctoral thesis for a statistician? Or maybe there's a much easier way?
Click to expand...
Man I wish I had the time . . . this sounds like a wonderful way to evaluate markets!
 
I very much appreciate your article. While we too have enjoyed outstanding sales these past 2 years...I remain very conservative and have continued to market and work "sales" as before "Covid" and never take anything for granted. We too worked have hard during the 2008 recession to assist our homeowners with home refreshes and competitive pricing as well as assist our guests in working with their budgets and wish lists. This has not changed at all. We are now seeing a slow down of the "booking frenzy" and are realistic that anything can change in a moment. Very much appreciate all of your thoughts and comments.
Joanne Logie
New England Vacation Rentals CAPE COD
 
I wanted to revisit this discussion as it appears to me that we have definitely "burst" or at least is not thriving like the post-pandemic boom and has returned to pre-pandemic numbers.

I know everyone has strong feelings on "airbnbust" but aren't we just experiencing the ebb and flow cycle of a new/fragmented/consolidating/contracting industry?

"never get too comfortable, especially in times of abundance" is definitely the throughline here...
 
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