The short-term vacation rental market has exploded in popularity in recent years, driven by platforms like Airbnb and Vrbo, enabling everyday homeowners and investors alike to enter the market. However, as more rental units flood the marketplace and supply begins to outpace demand, competition grows fierce.
The question becomes: who will emerge victorious when the market is oversaturated?
Like so many markets around the world, here in the Valle de Guadalupe, over the last 5 years many landowners have turned their lands into short-term rental units. We see them all over the place now. We affectionately call them “Boxes”. A “Box” is a basic four-wall room with a bed and bathroom. There is NOTHING unique about it; a place to sleep and shower. And the properties they are on are also vanilla.
Once the Valle de Guadalupe took off in 2012, casual landowners heard everyone was making money. So they built these inexpensive “boxes” to get in on the action; a common action in every growing market. The Fear of Missing Out (FOMO) brought in these latecomers. But they built bland without passion boxes and now, the market is flooded with bland inventory. Now there is too much supply while demand has stayed relatively constant. And it is now affecting prices and profits for the whole market. So, now what?
Well, let’s break down the key factors that differentiate who will be the winners from losers in this crowded market.
1. Location, Location, Location
Even in an oversaturated market, location remains a critical determinant of success. Properties in prime tourist areas, close to attractions, public transportation, or unique local experiences, will still draw in guests more consistently than those in less desirable areas.
Additionally, properties located in cities with year-round tourism (e.g., New York, Paris, or Orlando) are more resilient, as they are not reliant on seasonal trends. But this is not Paris. This is the rural wine country and it’s mostly a weekend getaway market for Northern Mexicans and the South West USA; mostly California. In fact, vacation homes in more remote areas like ours have now left owners scrambling to adjust pricing strategies or invest in costly marketing to attract guests.
Winners: Properties in high-demand locations with easy access to popular attractions, amenities, and consistent tourism flows.
2. Unique and Differentiated Properties
In a crowded market, blending in is a recipe for disaster. Owners who invest in making their rental properties stand out—through unique themes, luxurious amenities, or immersive experiences—have a competitive edge. In oversaturated markets, guests are more likely to be drawn to something that offers them an experience they can’t get elsewhere.
Whether it’s a stylish design, eco-friendly features, or a stay in a quirky treehouse, unique properties tend to attract attention on listing platforms, drawing guests who are willing to pay a premium.
Winners: Properties that offer a unique experience or feature standout amenities, giving them an edge in a sea of sameness.
3. Professional Management and Exceptional Reviews
As the supply of vacation rentals increases, guests have more options to choose from—and that means reviews and guest experiences become even more crucial. Properties managed by professional companies or experienced hosts who provide excellent customer service, seamless check-ins, and proactive communication tend to receive better reviews.
Excellent reviews lead to higher rankings on vacation rental platforms, which directly translates to more bookings, even in a saturated market. Conversely, properties with mediocre or poor reviews will fall behind as guests gravitate towards more trusted options.
Winners: Properties with consistent five-star reviews, professional management, and a reputation for exceeding guest expectations.
4. Pricing Power: Who Can Afford to Adjust?
One of the clearest consequences of an oversaturated market is the inevitable pressure to lower prices. Property owners with higher margins or deeper financial flexibility will be better positioned to weather this storm. These owners can adjust their prices to remain competitive without feeling the immediate financial pinch.
On the other hand, property owners who are heavily leveraged or those with fixed costs that make lowering prices untenable will struggle in this environment. Even though guests may be drawn to lower prices, properties offering a balance between value and quality service will win out in the long run.
Winners: Owners who can afford to adjust pricing based on market conditions without sacrificing the quality of their offering.
5. Adaptability and Flexibility
A key advantage in an oversaturated rental market is flexibility. Properties that can quickly adapt to changes in guest preferences, new regulations, or market conditions will have a distinct advantage. This includes offering flexible check-in times, pet-friendly accommodations, or implementing last-minute booking discounts.
Additionally, hosts who are nimble enough to pivot their marketing strategies, embracing newer platforms like Instagram or TikTok for exposure, can outperform those sticking solely to traditional methods.
Winners: Properties managed by adaptable hosts who stay ahead of trends and respond quickly to changes in the market.
6. Compliance with Local Regulations
As short-term rentals have grown, so have local government regulations. Many cities and municipalities have implemented restrictions or imposed additional taxes on vacation rental properties. Owners who stay compliant with these regulations and maintain all necessary licenses and permits will fare better than those who run the risk of legal troubles.
Furthermore, properties in regions that cap the number of available rentals may see an increase in demand over time as competition is artificially reduced by regulation.
Winners: Properties that comply with local laws and regulations, avoiding penalties and benefiting from areas with controlled rental supply.
7. Repeat Guests and Brand Loyalty
With so many rental options available, building a base of loyal, repeat guests can provide a significant buffer against market oversaturation. Properties that provide a high-quality experience and actively engage with their guests (perhaps by offering discounts for returning guests or incentives for booking directly) are better positioned to maintain a steady flow of bookings.
This approach helps generate a reliable stream of income even when new entrants flood the market.
Winners: Properties that foster strong relationships with guests, leading to repeat business and referrals.
The Bottom Line
When the short-term vacation rental market becomes oversaturated with supply, not all properties will succeed. Those that thrive tend to offer unique experiences, are located in prime areas, provide professional service, and are financially flexible enough to withstand competitive pressures. Adaptability to market changes, compliance with regulations, and fostering guest loyalty also play critical roles.
In a crowded market, winners are those who innovate, invest in their properties, and provide outstanding guest experiences—ensuring their rentals remain in high demand even when the market seems overrun.
In our area, the winners will be the TOP 10% of the properties that are unique and have long-standing reputations for being go-to places.
The losers will be the “Boxes”. They will have a super hard time competing because, in a nutshell, they are all basic and the same. And so all they can compete on is price. And there is a price point where the marginal value of renting does NOT outweigh the marginal cost.
And when that happens, those owners will abandon the market and just leave them standing; maybe turning them into long-term rentals or storage sheds. When that happens, which is now expected over the next 1-3 years, that inventory will be retired and a healthy equilibrium will return allowing those long-term investors in quality top competitive properties to realize their investments and win a solid financial return.
