The short-term rental market has reached a turning point after several years of volatility. Key performance metrics have stabilized, and investment conditions are improving for the first time since the pandemic-driven boom. Industry data shows occupancy rates have stopped their multi-year decline, while cash flow metrics for new acquisitions have recovered to their highest levels since 2022. This shift signals a move toward a more balanced and sustainable market environment.
Market Stabilization After Years of Decline
After the initial surge in demand during the pandemic, the short-term rental sector experienced a period of instability. Occupancy rates, which peaked at 65%, began a steady decline as new supply flooded the market. “We did see a lot of supply coming in, people trying to get in on the trend. So that caused occupancy declines to occur year after year,” says Bram Gallagher, Director of Economics & Forecasting at AirDNA.
By 2025, the market is showing signs of stabilization. Occupancy rates are now holding steady with 2024 levels, ending the prolonged downward trend. Gallagher expects a slight uptick by year-end, pointing to a strong holiday season as a potential catalyst. This marks a significant change from previous years, when each season brought further declines.
Interest Rate Impact and Investment Recovery
Rising interest rates starting in 2022 created significant obstacles for short-term rental investors. “As they started going up in response to inflation, we saw the housing market essentially just lock up and freeze up,” Gallagher says. Higher borrowing costs made it much more expensive to acquire properties for short-term rental, eroding the investment returns that had driven new entrants into the sector. The industry tracks a ratio comparing monthly cash flow to typical mortgage payments for properties commonly used as short-term rentals. This metric reached an all-time high in 2021 but then fell sharply, bottoming out at the end of 2023.
Since then, the recovery has been steady. The cash flow-to-mortgage payment ratio is now at its highest point since 2022, and new acquisitions are showing improved returns. Gallagher notes, “Mortgage rates may decline a little bit. Housing prices have been holding pretty steady with a little softening that we’re seeing. Interest rates are probably going to remain where they’re at for the foreseeable future, and performance has stabilized.” These conditions suggest that the investment environment is more favorable than it has been in recent years, though not as easy as during the pandemic boom.
Institutional Capital Struggles Continue
Despite improved fundamentals, large-scale institutional investors have not been able to establish a dominant presence in the short-term rental sector. Over the past several years, there have been multiple attempts by institutional capital to operate at scale, but few have succeeded. “We’ve tried to see institutional capital break into the short-term rental industry in a big way for years, and they haven’t been able to really crack the code yet,” Gallagher explains.
The sector’s challenges for institutional players became clear with the bankruptcy of companies like Sonder earlier this year. Scaling short-term rental operations has proven complex, with operational and regulatory hurdles distinct from those of traditional multifamily or hospitality investments. Gallagher adds, “It’s not as easy or as simple to just plug in, expand, and then take this operation to scale.” However, as financial conditions improve and the market matures, some institutional investors may renew their efforts to build portfolios in this segment, seeking to diversify beyond traditional asset classes.
Urban Markets Stage a Comeback
Urban markets, which lagged behind rural and resort destinations during the pandemic, are now seeing renewed interest. This shift is driven by several factors, including major upcoming events like the World Cup, which is generating demand in select metropolitan areas.
“Urban markets had been slept on a little bit right after the pandemic,” Gallagher says. Concerns about proximity to large groups of people and a preference for rural escapes initially drove demand away from cities. Additionally, rural markets offered more affordable real estate, making them attractive to investors seeking entry points.
Now, as housing market conditions ease slightly and travel patterns normalize, cities are regaining momentum. Markets such as Chicago, Philadelphia, and New York are benefiting from this renewed interest. In New York, strict regulations have limited growth, but neighboring New Jersey markets like Newark and Jersey City are expanding quickly as visitors seek access to the metropolitan area.
International travel patterns also play a role. While international short-term rental stays have declined about 15%, particularly from Canada due to trade policy concerns, domestic travel is on the rise. “If you’re not going to see a big European metropolis, you can see an American one,” Gallagher says, noting that urban destinations in the U.S. are attracting more domestic visitors.
Regulatory Landscape Creates Mixed Opportunities
The regulatory environment remains a key factor shaping short-term rental market dynamics. In New York, Local Law 18 led to an 80% drop in Airbnb listings, but Gallagher points out that such measures have not achieved their intended goals. “New York hasn’t become particularly affordable now that we’ve essentially outlawed short-term rentals,” he observes.
Other cities have taken different approaches. San Francisco’s strict but not prohibitive regulations have actually helped existing operators by limiting new competition. “The people that have been traditionally operating short-term rentals in San Francisco are benefiting to some extent—their occupancies are increasing, the ADR is going up because they’re shielded somewhat from competition entering very rapidly,” Gallagher explains.
Regulatory uncertainty poses the most significant risk for investors. In Atlanta, for example, laws exist but are not consistently enforced, creating confusion. “As an investor, you really need to know what the rules are before you start signing contracts and paying large sums of money,” Gallagher advises. He encourages operators to engage with local regulatory processes, joining short-term rental alliances and supporting efforts for clear, sensible rules, such as registration and occupancy taxes, similar to those for hotels.
Emerging Opportunities in Medium-Term Stays
Medium-term stays, serving guests who need accommodations for three to six months, are becoming a significant growth segment within the broader rental market. This category includes travel nurses, people relocating for work, and construction workers.
“This is an exciting segment, and it has been growing more quickly than the short-term rental industry as a whole for the last few years,” Gallagher notes. Medium-term rentals fill a gap for those needing flexibility without the commitment of a year-long lease. As work and travel patterns evolve, this segment is likely to continue expanding, offering a new opportunity for operators seeking diversification.
Market Maturation and Future Outlook
The short-term rental market is moving beyond its speculative phase toward greater maturity and balance. Gallagher observes, “The people that remain in this industry are people that are actually serious about hospitality and dedicated to the short-term rental premise. These people make excellent decisions about where to invest—really carefully thought-out decisions.”
Demand forecasts indicate modest growth of 5-7% for 2025, with some softening expected in 2026 due to broader economic uncertainty and concerns about consumer confidence. However, Gallagher expects demand to reaccelerate in 2027 as the effects of fiscal policy and improved economic conditions take hold.
Supply growth is also expected to increase slightly in 2026, reflecting improved investment conditions. These changes are incremental rather than dramatic. Occupancy rates are projected to remain stable, with forecasts of 57.2% for 2025 and 56.7% for 2026—both above pre-pandemic levels.
“I think we’ve actually really reached a point of balance in the short-term rental market,” Gallagher concludes. “The demand and supply growth are very close together in scope, and that’s good. I think the short-term rentals have really found their footing and developed and matured as a market.”
For investors considering entry into the short-term rental market, conditions are more stable and predictable than in recent years. However, long-term success will require a focus on hospitality excellence and careful operational management, as the era of easy profits has ended. The market now rewards thoughtful strategy and commitment over speculation.
