Why Institutional Capital Keeps Failing at Short-Term Rentals

Written by:

Rudi Davis

Date:

30 Dec 2025

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Institutional investors have eyed the short-term rental market for years, drawn by its rapid growth and fragmented ownership. Many believed the sector was primed for consolidation and scale, similar to multifamily housing or hotels. But according to Bram Gallagher, Director of Economics & Forecasting at AirDNA, repeated failures by Wall Street-backed firms point to deeper challenges. The short-term rental business does not fit the standardized, scalable model that institutional capital depends on.

“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 says. The most recent and visible setback was Sonder’s bankruptcy earlier this year. Gallagher notes that Sonder was among the first companies aiming to channel institutional funding into large-scale short-term rental development.

Operational Complexity Limits Scale

Gallagher points out that the core problem is operational, not financial. Short-term rentals demand local expertise and active management that cannot be replicated easily from one market to another. “It’s not as easy, or as simple to just sort of plug in, expand, and then take this operation to scale,” he explains. In contrast, institutional investors thrive in sectors where they can apply a repeatable formula—something that has proven elusive in vacation rentals.

Recent years have been especially punishing for institutional attempts to gain a foothold. Gallagher highlights a key measure: monthly cash flow relative to the typical mortgage payment on a home used for short-term rental. “That metric fell pretty dramatically after 2021, after it reached a really big high in 2021, probably an all-time high, and it reached its bottom at the end of 23,” Gallagher says.

This sharp decline in cash flow coincided with broader turmoil in the housing market. “As interest rates started going up in response to inflation in 2022, we saw the housing market essentially just lock up and freeze up,” Gallagher recalls. “It became much, much more expensive to acquire a property to run out. So, the investment thesis was just not there.” Higher borrowing costs and stagnating home prices made it difficult to justify new acquisitions or scale existing portfolios.

Market Timing and Institutional Setbacks

Gallagher believes Sonder’s bankruptcy was driven more by unfortunate timing than flawed operations. “It’s these last couple of years that have been very difficult from an investment standpoint,” he says. Sonder’s collapse happened just as conditions were beginning to stabilize. The cash flow metric Gallagher tracks “is now as high as it’s been since 2022, and it’s going to continue to increase,” he says.

Several factors are contributing to this improvement. “Mortgage rates may decline a little bit. Housing prices have been holding pretty steady. There is a little softening that we’re seeing, so we’re not expecting housing prices to go up a whole lot,” Gallagher explains. Meanwhile, “performance has stabilized. Occupancy is no longer declining.” This stabilization is creating a more favorable environment for institutional investors, provided they recognize the model’s limits.

“Institutions have taken a pause when looking at short-term rental, because it’s not as easy, or as simple to just sort of plug in, expand, and then take this operation to scale,” Gallagher observes. The sector’s complexity and need for hands-on management remain significant barriers.

A More Professional, Predictable Market

Looking ahead, Gallagher sees a shift in the makeup of the short-term rental market that could eventually help institutions succeed. The post-2021 boom attracted many speculative investors, but that phase is ending. “One of the things that we saw in post 2021 is that a lot of people had dollar signs in their eyes. While you can still make quite a bit of money in the short-term rental business, it’s not a free ride. You’ve got to work for it. You’ve got to distinguish yourself among many potential hosts,” Gallagher says.

He notes that those remaining in the business are more serious about hospitality and the demands of short-term rental management. “The people that remain in this industry are people that are actually serious about hospitality and dedicated to the short-term rental premise. And these people make excellent decisions about where to invest, really carefully thought about decisions.” This professionalization could make the sector more stable and attractive for institutions seeking predictable returns.

Short-Term Rentals as a Portfolio Component

Gallagher argues that institutional investors may need to adjust their expectations. Short-term rentals are unlikely to become a dominant asset class for institutions, but they can serve as a valuable part of a diversified portfolio. “Even as Sonder announces its bankruptcy, the future still looks bright,” he says, but he emphasizes that institutions may need to view short-term rentals as a supplement rather than a core growth engine.

“I think there is renewed potential for institutional capital to start thinking about adding short-term rental as maybe one part of a portfolio,” Gallagher suggests. This more restrained approach stands in stark contrast to the large-scale consolidation attempts that previously characterized institutional interest.

Whether investment firms will accept this more limited role, or attempt another wave of large-scale expansion, remains to be seen. But for now, the sector continues to resist Wall Street’s standard playbook, demanding a more nuanced and locally grounded strategy for any institutional entrant.