California’s short-term rental (STR) market continues forward growth in preparation for what industry analysts are expecting to be banner years. Since the pandemic, property owners and investors have expanded their operations, scaling their property portfolios and engaging management companies to promote their stay experiences. Standing on the front lines of a growing market niche, the state’s STR industry has taken the lead nationwide. And as larger-than-life industry growth takes shape, STR investors and market-watchers are anticipating their next moves.
Today, over 25 percent of Joshua Tree’s 4,000 single-family homes are listed STRs. Short-term rentals in the area were up 69% between April 2019 to April 2021. While the pandemic swept through the state, high construction expenses combined with low-interest rates created windfall opportunities in untapped markets. All signs indicate that portfolio-making growth is here to stay.
A Market in the Making
According to California law, an STR is any property that can be rented for less than 30 consecutive days. ‘STR revenue continues to fill a cash-flow void where other emerging industries have been unable to deliver,’ says Emir Dukic, CEO of Rabbu. Rabbu is a full-service asset management company that helps investors source, optimize, and sell short-term rental properties ‘Most rental operations today are a textbook example of the power of circular economies; a well-needed win-win.’
In Los Angeles, the average rental length in May of 2020 was 11 days, and that was after California Governor Gavin Newsom had implemented mandatory stay-at-home orders. The following year, as the lockdowns were still in effect, average stay lengths hit 17 days, representing a 75% increase.
The legality of short-term rentals varies from city-state to neighborhood, but larger scale efforts to ban or limit STRs have mostly proven to violate local law. Efforts made to limit STR activity have since been reversed. California might be notorious for its stringent STR regulations, but they haven’t impacted the sector’s growth; rent values have skyrocketed in smaller towns throughout the northern, central, and southern regions which continue to drive the larger industry forward.
Small Town Victories
Santa Barbara STRs enjoyed healthy business until a city ruling in 2015 categorized them as hotels, effectively banning operations. Almost overnight, STR listings in the area dropped from 115 to 6. The city had permitted vacation rentals if property owners registered their units with the city, had a business license, and paid transient occupancy taxes. Under pressure from a private HOA, Santa Barbara city council issued a directive mandating STRs to be included with hotels under the city’s zoning code. The move meant that STRs, now considered as hotels, would be prohibited in the city’s residential districts.
In 2018, the ban was removed as it violated the state’s Coastal Act. A court ruling said that private HOAs did not have the jurisdiction or authority to ban STRs. Implementing such regulations in the city’s coastal zone was the responsibility of the California Coastal Commission. When first enacted, median home prices stood at $1.03 million. Three years later, after the ban was lifted, home prices had experienced small growth at $1.19 million. It wasn’t until August 2020, with the statewide lockdowns still underway, that median home prices began their 18-month surge from $1.19 to $1.65 million by the end of Q4 2021. During the boom, the lawful operation of STRs added secondary revenue streams and lucrative portfolio diversity to many new and established investors, including on-the-ground hosts who were listing single rooms or single floors of their homes.
Corporate Travel Goes Luxury
In parallel market action, STRs have given rise to “Zoom Towns”; small cities that accommodate families in niche local experiences when a spouse travels for business. The development combines the traditional business trip with family vacation, offering all parties a safe, immersive stay.
In March 2020, Douglas City, located in the state’s northwest Trinity County, median home prices were $305,000. In June 2021, when the statewide lockdown was lifted, median home prices stood at $350,000. Today, investing in an Airbnb in a quaint mountain community offers a 7.16 ROI.
‘As a whole, California’s luxury home rental market is flourishing,’ says Dukic. ‘Companies are taking advantage of STR mansions, which might be the cheapest form of high-end travel on the market today.’ An upfront price tag for a $4,000-a-night luxury mansion may seem daunting on the surface, but when it accommodates 24 people, that equates to $160 a night. For mid-sized companies with limited travel budgets, luxury STRs are a cheaper and ostensibly better option than traditional hotels equipped with conference rooms and business facilities. Candidate interviews, employee travel, and family relocation services have all become reasons to engage local hosts and contribute to the local business ecosystem.
The early uptake of this strategy can be seen in the forward thinking world of tech. A tech company in San Francisco sponsors a summer intern program and enlists an STR management company to coordinate travel and living accommodations. Instead of making multiple reservations for one party, the approach requires only one booking and puts guests in the quality care of local hosts, many of whom have invested in their guest experience and property management in tailored and targeted ways. ‘Hotel perks’ have become STR staples; airport pickups, check-in greetings, and coordinating grocery shopping ahead of guest arrival are often extended as guest offerings, improving their stay.
‘Supported by many avenues of demand, California’s STR industry is positioned for substantial and sustained growth as a new normal continues to establish itself,’ says Dukic. ‘From smaller-city tourism to streamlined corporate travel, STRs will continue to be the popular choice.’ Regulations continue to favor STRs as a successful way to engage circular economies and support the state’s return to travel activity. For California homeowners and investors, it’s an exciting time to watch—and participate in—an asset class in the making.