The Airbnb effect: Know how short-term rentals are reshaping realty in tier 2 and 3 cities

The Airbnb effect: Gone are the days of solely long-term leases and traditional hotel stays; instead, digital marketplaces now offer a plethora of accommodation options, from cosy apartments to quirky treehouses.

This shift has not only transformed the way travellers experience these locales but has also had profound effects on property prices and community dynamics.  As homeowners capitalise on the allure of short-term rentals, property values soar, raising questions about affordability and local identity.

The growth of short-term rental services or platforms, which include platforms like Airbnb, has had a major impact on the real estate scene in recent years, say experts.

Before the rise of short-term rental platforms

Vineet Chellani, CEO & Founder of Asset Deals, highlights the traditional reliance on long-term contracts for housing and hotel accommodation in tier 2 and tier 3 cities before the advent of short-term rental systems.

“Before the rise of short-term renting systems, real estate in Tier 2 and Tier 3 cities relied heavily on long-term contracts for housing and traditional hotel rooms. Rents have been largely constant, reflecting the stable tendencies and cash situation. Property owners often rent out their apartments to long-term tenants to ensure a steady profit over the years,” Chellani said.

In tier 2 and tier 3 cities, where short-term rental platforms were not prevalent, the pricing dynamics were often characterised by stability and affordability compared to major metropolitan areas. Rental and property prices tended to be more moderate in those cities, reflecting the lower cost of living and relatively subdued demand compared to urban centres. Homeownership was often within reach for a broader segment of the population, and rental rates for long-term leases were typically competitive.

According to Emerald Insights, rental costs were regularly driven by variables including location, property characteristics, and market characteristics. Tier 2 and Tier 3 cities, where tourism was not as common as in large metropolitan regions, tended to have lower rental prices, making them attractive to both residents and investors.

Real estate on rental platforms

Mohit Jajoo, CEO & Director of Shubhashish Homes, stressed the nature of the real estate scene facilitated by rental platforms.

“The real estate scene in rental structures offers quite a few options for both renters and landlords. These platforms serve as digital marketplaces where homes are indexed for rent and effectively connect tenants with homeowners. Users can browse listings, filter based on options, and instantly communicate with property owners or managers. With the increasing digitisation, rentals have become increasingly popular due to their convenience and affordability," Jajoo said.

"They provide a wide range of homes, from apartments to houses, catering to significant budgets and options. In addition, rental platforms often offer features that include digital tours and online payment options, simplifying the rental process for both parties. All in all, the rental platforms of real estate are constantly adapting, providing a seamless experience for individuals looking for rental accommodations,”Jajoo added.

Short-term rental platforms major market players

Jajoo further mentioned major market players. “The market for short-term rental platforms is extremely competitive and some dominant organisations dominate the world. Airbnb, HomeAway/VRBO, TripAdvisor, Expedia, HomeToGo, Tripping, OYO, Sonder, TurnKey, FlipKey, StayAlfred, Atraveo, OneFineStay, Interhome, 9flats, Vacasa, Marriott Homes,” he said.

Effects of short-term rental platforms

Commenting on the effects of short-term rental platforms on the realty market, Chellani added, “The real estate market has changed dramatically with the creation of quick apartment offers, including Airbnb. These structures gave owners another way to monetise their residences by renting them out short-term to tourists and travellers. As a result of increasing demand for short-term housing, apartment costs in Tier 2 and Tier 3 cities have increased.”

According to Medium, a survey’s results imply that for the average neighbourhood, Airbnb activity has increased rents by 1.9 per cent, transaction prices by 4.6 per cent and posted prices by 3.7 per cent.

Occupancy costs increased as vacationers sought unique and authentic stories in lesser-known locations, improving the marketability of short-term rentals. Property owners have taken advantage of this fad, using such websites to maximise condominium income and unlock the income potential of their homes.

Furthermore, short-term rental services have grown beyond regular lodging to offer innovative and uncommon stays. Property types such as treehouses, yurts, and even renovated aeroplanes have grown in appeal amongst adventurous travellers looking for unique experiences. This range of options reflects modern travellers' shifting needs and demonstrates the industry's dedication to creativity and technological advancement.

Increased search and booking features

Shedding light on various features that short-term rental provides, Mohit concludes by saying, “In response to changing customer preferences, short-term rental platforms have made investments in improving search and booking capabilities. Travellers may tailor their lodging options using advanced search filters, which include price range, location, amenities, and property type. Furthermore, flexible booking choices and fast booking capabilities give travellers more convenience and flexibility in acquiring their selected rooms.”

Furthermore, personalised recommendations and customised travel experiences help to create a more targeted and engaging booking process. Platforms may provide users with personalised ideas and insights, improving their travel experience. Transparent and accountable practices have become key to responsible tourism projects.

Challenges and opportunities

However, the development of short-term rentals has presented several issues for property owners and local communities. Therefore, to further explain the complexities, Chellani added, “One of the most notable challenges was regulatory uncertainty about short-term renting activities. Many communities struggled to develop legislation governing the operation of Airbnb and comparable sites, resulting in legal uncertainty and enforcement issues.”

A survey says regulating short-term rentals, the authors estimated, has led to a decline of 50 per cent in Airbnb listings and a decrease of 2 per cent in house prices and rents.

Gentrification has arisen as a serious issue, notably in tier 2 and 3 cities. As owners transformed long-term rental properties into short-term lodgings to cater to the lucrative tourist industry, the supply of affordable housing for locals decreased. This phenomenon worsened housing disparity and undermined community cohesiveness, prompting discussions about the ethical implications of short-term renting platforms.

Bridging economic and social goals

Amidst these problems, property owners and communities have attempted to manage the changing real estate scene in tier 2 and tier 3 cities. Data on rental prices, rates of occupancy, and laws and regulations have become critical tools for players in understanding the market dynamics and making educated decisions.

Property owners must balance the financial benefits of short-term rentals with the regulatory concerns and social ramifications. Communities, on the other hand, must weigh the economic benefits of tourism against the necessity to maintain accessible housing and its cultural integrity.

As these markets mature, stakeholders must work together to achieve a balance between economic success and social responsibility, guaranteeing long-term progress and fair development for everyone.

The short-term rental sector is constantly evolving and innovating, driven by shifting customer tastes and technological breakthroughs. With industry leaders like Airbnb and Vrbo at the vanguard of this shift, travellers can expect an ever-expanding range of lodging alternatives, improved booking services, and a renewed emphasis on sustainability and responsible travel.