Inflation in the United States has hit an all-time high reaching a 13-year high in June. For those of us who drive, shop, eat, or just generally live, the recent peak in inflation may not come as much of a surprise. Most economists anticipate that the recent sharp increases in the cost of most goods and services will only be transitory. Still, if mismanaged, it could have long-lasting repercussions on business owners.
In light of this, we decided to investigate how inflation affects the vacation rental sector and, more significantly, what hosts and property managers should do.
The CPI (Consumer Price Index), which is the most widely used indicator of the price of a common basket of items, comes to mind when we hear about inflation. However, from the viewpoint of property management, it goes beyond just the price of milk and gas. Property managers work in a very labor-intensive field where housing costs, salary pressure, and the cost of supplies to keep rentals open and clean for visitors are all on the rise.
Property managers must promptly adapt to changes in their costs as inflation rises. Some businesses might be able to handle increasing costs, but the majority will need to pass those costs on to their customers in the form of higher prices. This seems to have already occurred as ADRs (Average Daily Rates) have increased by as much as 30% compared to 2019 in the past year.
Reviewing your marginal cost per listing, or how much it costs you to have a guest stay a night, should be your first step. Make sure your minimum rates are at least covering your costs in order for all reservations to be profitable. It goes without saying that increasing the final cost to the guest is a good idea, but how precisely should we go about doing this? Consider, is raising your nightly rate the best course of action? Or must you merely increase your fees?
Understanding the type(s) of inflation pressure you typically experience is recommended in order to respond to this. Increasing the nightly rent (and consequently the payout to the owner) may be preferable in markets with rising rents and home prices when using an owner commission model because doing otherwise will cause the owner's capital investment (their home) to lose value under your management, increasing the likelihood that they will look for other property managers.
Alternatively, it could be preferable to seek out additional income through higher fees if labor and material goods expenses are the main cause of inflation. The majority of the increased visitor expenditures will go to the owner, if the nightly rate is increased (if that is even possible given the flat rental market). However, the owner won't be covering the rising costs of the cleaning crew or the reservation staff, which are entirely the property manager's responsibility. Instead, consider fees, which could be a better method to ensure that individuals who pay the bills are responsible for covering escalating expenditures. They can yield from 25 to 50 percent of the property manager's total revenue for each property.
There is a pressing need to act in this market, whether it be through nightly rate increases or fee increases. According to James Breece, an economist at the University of Maine, "the run-up in inflation could be attributable to a wrinkle in supply chains and employment markets that gets smoothed out fast or drags on for years, driving prices further higher." Supply chains and wages are putting pressure on property managers, while at the same time, demand for their inventory is rising. Today is a true test for anyone in the hospitality industry.
While those who change their expenses will experience record-breaking revenue, those who keep their pricing constant will continue to deliver unprofitable reservations well beyond 2022. The only thing we can be sure of is that higher pricing has a tendency to draw attention and new rivals, so it is important to be at the top of your game.