11 months ago
That's a wrap for 2022 -- the year the world began its transition to a semi-normal, post-pandemic state. As it relates to the rental market, 2022 can be summarized by 1) continued rental demand during the peak season; 2) low occupancy during the off-season; 3) quickly growing supply (mostly from investors and owners who purchased in 2020 or after); 4) increasing number of owners with investor-first / personal use-second mentalities and 5) continuous convergence of the hotel and vacation rental industry leading to increased guest expectations, for better or worse. See here for a full report on the 2022 rental market.
As we enter 2023, we expect demand for vacation rentals to remain high, however, with over 21% increase in inventory over the past 12 months, the rental market has become ultra-competitive. The “Class A” properties (top tier properties that have great amenities, professional design, and clean, up-to-date finishes) will realize rent growth and should sustain occupancy levels compared to the prior two years. “Class B” and “Class C” properties will experience a decline in average nightly rates and occupancy, resulting in lower annual revenue per property. With the substantial increase in quality supply, it will take an honest assessment of your property's market fit to avoid a considerable reduction in revenue, especially as recession fears loom. Our advice -- reinvest in your property. A good rule of thumb should be to invest 5-10% of rental revenue back into your property per year. Not only will you enhance the revenue you're able to generate in future years, but you will simultaneously create value in your home.
Despite interest rates on the rise, we expect property values to fall only slightly as inventory constraints remain. Distressed opportunities will remain rare as owners who wish to sell likely hold long-term debt at extremely attractive interest rates, which may prompt them to try their luck on the rental market before taking an offer that they deem “unattractive”.
We expect new construction to flood the rental market more than ever before, but likely last minute as developers hold on for as long as they can in attempt to sell. This will mostly affect Class A properties. With construction costs rising (i.e., labor, materials, financing fees) and a shrinking buyer pool, developers will choose to rent before selling for a marginal profit, if not a loss -- so long as they are able to refinance or execute extension options on their construction loans.
Institutional investors will continue to jump into the vacation rental market. There is simply no other real estate asset type that has the risk-adjusted returns that vacation rental properties located in premier vacation destinations do. On average we are seeing unlevered annual returns in the 7-8% range, and history shows an annual appreciation of 5%+. Strong returns coupled with high liquidity (single family homes are the most liquid real estate asset you could own), investors are vying for exposure, which will apply increased pressure to amateur hosts. The industry has been found, and the glory days for individual homeowners are nearing their end.
With a constantly changing industry and real estate market, we too are making changes. We summarize these changes below:
We are simply infatuated with vacation homes - every aspect from buying, designing, renting, and managing. Every year we make improvements to existing services (and add new ones) as it is our goal to serve you throughout the entire lifecycle of owning a vacation home. Thank you for your continued support and using us as your go-to resource for your vacation home. We wish you a happy and healthy year ahead and look forward to growing our partnership.
Bryan Fedner and Alex Goldstein
Co-Founders and Co-CEOs