Twin Cities short-term rental market takes a beating: 'Our whole business shifted'

On a good month, the upper floor of Michael and Krista Browne's Minneapolis duplex near the University of Minnesota and Stone Arch Bridge could pull in $2,750 to $3,000 as an Airbnb rental. For the Brownes and many other vacation rental owners in the Twin Cities, there haven't been many good months this year.

"We were spending money to manage month to month, but not seeing income," said Krista Browne.

This spring, when COVID-19 slammed the brakes on travel and cancellations exceeded new bookings, Browne grew weary of the uncertainty. She turned the Airbnb into a long-term rental that now fetches only $1,800 a month, upending the couple's plans to convert the 1,000 square-foot unit they occupied into a short-term rental that would help fund the purchase of a house — they have a toddler and she's pregnant with twins.

"Our whole business shifted," she said. "We had to get out."

The vacation rental business has enabled a generation of gig workers and inexperienced investors to transform spare bedrooms and second homes into what they thought would be a rock-solid source of income. Now, many Twin Cities operators are revamping their business plans — and budgets — as metro-area bookings struggle to recover. The situation is especially tenuous for people who went all-in on the short-term rental concept by taking out big mortgages to buy sprawling rental properties.

Late last month Airbnb banned "all parties and events at Airbnb listings," including an occupancy cap of 16 and warned hosts and guests to abide by COVID-19 local public health mandates.

Those restrictions come at an already challenging time for metro-area rentals. This week, Airbnb said urban bookings for Labor Day weekend are down nearly 50% from last year, while demand for rural retreats has nearly doubled. That shift has been a test for Twin Cities hosts who have come to depend on the rental income.

Though vacation rentals have become the preferred lodging option for many travelers, the industry is still crawling out of an unprecedented contraction. A survey released in June by IPX 1031, a financial-services firm that tracks the vacation rental industry, said nearly half of all Airbnb hosts won't be able to cover their expenses if the pandemic lasts another six months. On average, they said they have lost $4,036 since the beginning of the pandemic.

The pandemic has also taken its toll on the technology companies that promote those listings. This summer, in a letter to employees, Airbnb co-founder and CEO Brian Chesky said the company was expecting 2020 revenue to fall 50% from last year and that it would lay off a quarter of its workforce.

With business travel almost nonexistent and leisure travelers sticking to car trips, the vacation rental industry is seeing some success attracting visitors who are looking for alternatives to hotels and other high-density lodging options.

"I certainly wouldn't be going to a Hilton right now and interacting with other people," said Thomas Keller, who operates a three-bedroom vacation rental in the Central neighborhood in Minneapolis near the Cup Foods store where George Floyd was killed.

Earlier this year Keller converted that rental into what he calls the metro's only international hostel in an effort to appeal to budget-conscious global travelers at a time when domestic travel is still lagging. "The entire industry was on hold for three to four months," he said.

He's also frustrated that at a time when bookings are scarce, the Airbnb reservation system automatically canceled three of his last-minute reservations by groups of people under age 25. He assumes that the company is trying to prevent gatherings that could become disruptive, but that's costing him several hundred dollars.

The hostel approach, which tends to attract individual travelers, seems to be working — bookings are rebounding, he said, and he expects to recover lost income as travelers get more comfortable venturing out. "People are so sick of being at home after being quarantined," he said.

To supplement the income from his hostel, he also runs an Airbnb consulting and management business that helps people turn full-time rentals into short-term rentals.

"The average person is not doing this as their sole source of income," he said.

To capitalize on the growing popularity of remote rentals, he has expanded into greater Minnesota. He and a business partner manage three vacation rentals in the Crosby area and he's helping to convert a midcentury modern house in Ely into the Atomic Lodge, which he's calling a high-end short-term rental venue.

For Labor Day weekend, the share of bookings at cabins made by U.S. travelers more than doubled compared with last year, Airbnb said, while the share of apartment bookings fell by half.

A steep decline in corporate travel has dimmed prospects for many urban rental operators, forcing investors like Tom Meckey to double down on their efforts to market their properties.

In November, he and a business partner bought a fixer-upper near his home in southwest Minneapolis to use exclusively as a whole-house vacation rental. They spent the winter fixing up the bungalow, which is within walking distance to the popular 50th and France where houses often sell for more than $500,000. When he listed it in February the goal was to focus on corporate-relocation clients who would commit to long-term stays.

"COVID shut that down," he said. "It completely dropped off."

He's now renting to snowbirds from Arizona who are going to stay through the summer. Unsure when the corporate-relocation business will return, he's positioning the property to people visiting for upcoming holidays and families that need temporary housing during remodeling projects or who have bought a house and are waiting to move into their new one.

Meckey said his business plan accounted for some vacancies, but so far he has been able to pay the bills.

"We didn't hit our financial model the way we wanted," he said. "It was unfortunate, but you don't buy those places if you can't absorb some down time."

Jim Buchta • 612-673-7376