Airbnb CEO Says Platform is Fundamentally Broken—His Solutions Might Scare Investors

This story was originally published at BiggerPockets.com

Airbnb CEO Brian Chesky has admitted that the short-term rental company is in over its head and needs “to get our house in order.” The company scaled very fast, very quickly, and did not build up its systems to match, he said.  

“To use a precise metaphor, it’s kind of like we never fully built the foundation. Like, we had a house, and it had four pillars when we needed to have 10,” Chesky told Bloomberg.

The platform recently rolled out several new features to patch up the cracks in its foundation, but will it be enough to keep the short-term rental site going? Or is it a signal of bigger changes to come for the industry that could trickle down to real estate investors? 

Airbnb’s “Cracked Foundation” is Showing 

Airbnb has had growing pains before. From issues with fake listings to controversies in cities complaining about overcrowding to pushback from hotel lobby groups, the short-term rental market is not a stranger to dealing with issues.

In recent months, though, those growing pains have appeared to have gotten worse. In September, New York City tightened its rules on short-term rentals, increasing concerns that other major cities in the U.S. could follow. In Europe, Florence, Italy, has curbed Airbnb rentals amid complaints that locals are being priced out of the city, while the platform is fighting back against a short-stay levy tax in Victoria, Australia.

Related: Cities are Cracking Down on Short-Term Rentals—What Does It Mean For Investors? 

Despite the backlash across the world, available listings have jumped 13.7% year over year, to 1.53 million as of August, according to data from AirDNA. Demand cooled after a robust summer, even as nights booked at Airbnbs have climbed. In August, demand grew 7.6% year over year, compared to 9.3% record growth in July. It was also the biggest August for nights booked, with 21.2 million nights booked. Still, occupancy fell 4.2% from a year ago to 60.4%.

Other cracks are also forming in line with the overall housing market. With increased mortgage rates and an inventory shortage across the country, Nick Gerli, CEO of Reventure Consulting, says, “the Airbnb collapse is real.”

Taking data from AllTheRooms, Gerli found that revenue in major cities across the U.S. declined drastically in the past year, with places like Phoenix and Austin, Texas, seeing a nearly 50% decline. It should be noted that this data has been hotly contested

What Airbnb’s Changes Mean for Investors 

Part of CEO Chesky’s solution for fixing Airbnb was to roll out a number of features aimed at guests. One of those features is signaling to hosts that they need to focus on affordability. 

“The more affordable Airbnbs are, the more bookings we get,” he told Bloomberg. In other words, he wants hosts to shrink their margins. But he said that could be an advantage in regions with a lot of hotels, citing Airbnb data that showed while hotel prices went up 10% in 2022, one-bedroom Airbnb prices declined 1%. The platform wants to give hosts more dynamic pricing insights so they can price their homes competitively.

While he says hosts will make more money if they are able to compete with hotels by providing better deals, hosts have been complaining about shrinking profit margins. According to AirDNA data, RevPAR declined 4% in August, compared to the prior year, to $235.50. Other data from KeyData found that as occupancy rates declined in certain areas in August, the average daily rate also fell, in some cases as high as 37%.

Airbnb is also rethinking its experiences, even as its applications for new experiences remain closed. While they do not seem to be a favored feature on the platform, Chesky said experiences could be one way that Airbnb could recoup its income loss from New York City’s recent tightening of the short-term rental market. 

While Chesky hasn’t revealed all his plans for the company, it’s possible he’s trying to go beyond travel to turn Airbnb into an all-purpose app akin to a concierge service. He has long hinted about diversifying into other areas besides rooms, such as dining and even car rentals. 

For hosts, that could mean not just providing a comfortable and pleasant stay but providing extra services. Already on the Airbnb website, guests can search for experience-like stays, such as boats, tree houses, tiny homes, castles, and even luxurious properties titled OMG! 

Should Real Estate Investors Still Focus on Airbnb? 

More upgrades, reflecting a focus on core service upgrades, are coming to Airbnb in November. While that might be great for guests, it means changes for hosts. While the price comparison tool is a savvy addition, Airbnb is ultimately encouraging hosts to become more competitive by decreasing their prices in an already saturated market.

With inflation seemingly not going anywhere and increasingly higher mortgage rates, people could start cutting back on expenses like travel. If that’s the case, hosts likely won’t have any choice but to cut prices or even sell their short-term rental properties. And with the short-term rental market continuing to grow, that increased supply is likely to also hurt revenue.

In the long run, investors who have had a lot of returns on Airbnb properties may find themselves needing to adjust and provide not just a place to stay but also cater to a new type of travel where the experience of the place is just as important as how clean the property is. Whether that means the short-term rental market is over or that investors (and travelers) will need to seek out other solutions is yet to be seen.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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