The State of (Our) Vacation Rental Market – 2018

I was urged recently to write on the state of the local vacation rental market. So here we go, 2018 edition. I start with a brief summary, elaborate with some detail, then finish with my thoughts on the implications for the market in our area.

beach houses rehobothSummary

My Fellow Americans, the State of Our Vacation Rental Market is good! Guest demand continues to be very strong. Inventory is at an all time high. We’ve experienced some pull away from downtown locations as guests favor additional amenities offered by new communities that have popped up around the entrances to our downtown areas. Increasingly demanding guests and a flood of new construction/gut renovations are putting stresses on rates and squeezing owner profit margins, but the vacation rental market is still very healthy, and a good property market/business to be in whether in downtown areas, or the feeder communities at the entrances to our downtowns. Details below.

Beach house rentals in RehobothGuest Demand (Occupancy and Revenue by any other Name)

Seachange Vacation Rentals finished our summer season this past Saturday, September 15 with an average occupancy of 93% across our current portfolio of 40 managed properties. Hotels envy such numbers! Year on Year with 2017, we’re down slightly – 94% for 2017 versus 93% for 2018. However, we added an additional 13 properties since 2017 and many of those properties listed late in the reservation season. 93% is still thrilling! In the 4 seasons that we’ve been in business we’ve had a high of 95% occupancy and a low of 92% with a running average of 93%. All good.

I counsel our property owners to focus less on occupancy and number of nights stay and more on revenue. Revenue numbers are dramatically up year on year thanks to our unique system of Dynamic Rate Pricing. Here is a word of caution on revenue, however. It is no longer possible to simply increase rates year on year. There are changes in the market driven by guest demand that increasingly require material improvements in a property’s amenities in order to keep rates the same as the prior year. More on that below.

Guest Demographics

Seachange Vacation Rentals honors and complies with all Federal and State Fair Housing law. As it should be! We have no bias or targeting in any of our business practices. All are welcome.

Rehoboth Beach vacation houseGeographic origin of guests. Continuing a trend observed since Hurricane Sandy unfortunately devastated the New Jersey and New York coastlines several years back, we pull significant numbers of guests from New Jersey and New York states – centered around the major metropolitan suburban areas of each state. The entire state of Pennsylvania with no real urban concentration delivers the greatest numbers of guests to our doors, followed closely by the metropolitan suburban areas of Baltimore, Wilmington (DE), and Washington DC. Ohio and West Virginia are strongly represented. California and Colorado have entered the building this year due to multi-generational family groups spread across our great nation.

GueRehoboth Beach vacation rentalsst group makeup. With no targeting whatsoever, the majority of guest stays are as follows. Medium to large occupancy property guest stays (8 plus occupants) are made up of multi-generational family groups with children ranging from babies through mid teens and/or multiple couples with attended small children. Properties with occupancy up to 6 see similar groups – families with small children. The difference being one family group instead of multiple couples sharing the cost. Surprisingly, we rarely see the groups of single professionals or couples traveling without children during the summer months that we expected at the outset of business. Guests are careful to select properties that suit the needs of their traveling groups. With multi-generational groups, the Primary (“Registered Guest”) typically is one of the grandparents since presumably being retired they have the time to coordinate the trip. With groups of couples of similar ages, children are many and trend younger.

Guest needs. Guests are increasingly demanding – both during the booking process and the stay. Guests are increasingly discerning on property amenities looking for hotel-type amenities (furnishings, fixtures, and services). Guests are increasingly looking to negotiate on all pricing while at the same time being non-negotiable on amenities.

Property Inventory

The last 5 years (and the prior 2 of those in particular) have seen an increase in available vacation rental inventory. In downtown areas, practically every tear down/new construction and gut renovation is being put into vacation rental. Outside of downtown areas, new construction condos, town homes, and single family homes are increasingly popular with guests looking for pools, tennis courts, club houses/fitness centers, jogging/walking/bicycling trails. This has resulted in many properties formerly not vacation rentals entering the market place. This rise in new and renovated inventory is feeding off of guest demand for higher end, contemporary properties. While increased guest demand and increased inventory is good, the flip side for many established property owners with longevity in the vacation rental market, and those entering for then first time with older property purchases is that there is an increased focus on the need to stand out in a crowded marketplace.

Conclusion and Implications For Our Vacation Rental Market

Rehoboth Beach housesBudget – it is important, now more than ever for property owners to manage their vacation rental properties like the businesses they are. This applies equally to second homes as it does to investment properties. When purchasing a property for vacation rental – it is critical to set a budget that includes the startup costs associated with staging a property for guest appeal and use. Even in the mid-tier range of furnishings, an average 2000 square foot home can cost $25,000 – $30,000 to furnish. A kitchen can cost $1000 to outfit from scratch (guests do a lot of cooking!).  If a property owner is allocating all available financial resources to a property purchase leaving little to furnish and amenitize the property, or if a property owner is buying a property already furnished (don’t for the most part, just don’t), it is imperative to budget for start up costs. Then each year after, re-invest a minimum of 10% of recurring rental income back into the property updating amenities and soft furnishings as needed and before they break or hit a bad review.

Rates – it used to be that rates could be automatically increased year on year at least 10% on the prior year with no upgrade in the property. This gravy train has long left the station. With so much newer inventory online, and with such demanding, discerning guests, the pressure is on property owners to upgrade just to stay at prior season rates. There needs to be a major precipitating upgrade(s) at a property in order to raise rates over the prior season. Simply swapping out a few stained cushions, or replacing a worn out dishwasher is no longer reason alone to increase rates. Guests are expecting these amenities to be present, to be functional, and to be in good order. Depending on your price-point, you don’t necessarily need sub-zero oversized stainless refrigerators. However, rusted, humidity dripping refrigerators from beach homes decades back are not cutting it. I’m a broken record when it comes to rate setting. It is predetermined by purposeful interior design focused on the needs of the customer – your guest, regardless of price point.

Beach house rental rehobothAmenities – Property amenities cover furnishings, appliances, equipment, lighting, landscaping and more. Broken record again! The presence of mis-matched, broken, shabby, rundown amenities, or conversely the absence of amenities important to guests stems from the lack of a basic design plan for a vacation rental property. Spend some time in focused planning mode. Consider everything that a guest could need living in an unfamiliar home away from home for a week. Remember that they’re on vacation – don’t make them think, or work too hard! Allocate a budget based on the priority of beds, dining tables, sofas, kitchen equipment and bathrooms before decor. Paint the entire property with a fresh coat of paint in a counter-intuitive white or light gray. Both tones photograph the best. Don’t cram too much furniture into the space. Less is more. Just make sure to have the basic comforts covered and leave a good line of sight through the room. We have an Interior Design expert on staff to provide complementary advice to our owners on how best to outfit and furnish a property to maximize guest appeal and rates. No need to elaborate here except to say Interior Design goes way beyond decorating! You are not decorating a house to your personal tastes. You’re amentizing your property to appeal to as many guests as possible with remarkably consistent needs among them. That being said, of course, if your beach rental is a second home for you, then absolutely make it your own in terms of style. Just keep the guest needs in mind. You absolutely can no longer get by with the old-time approach to beach house setup. It’s not charming. It’s not likely to rent. Don’t believe me? Grab a coffee and peruse online reviews of vacation rental properties. Look for consistency in guest comments – it’s all feedback. The messages are there between the lines. Consider your guest needs when styling and amenitizing the property.

Rehoboth Beach rentalsTechnology – Guests want to book online whenever and wherever that makes sense for them. We have to adapt to this with true 24/7 booking platforms while continuing with the safety checks and balances of the human touch with reservation confirmations and guest screening. I believe the old-school rental agent job has morphed into a hybrid of travel agent and reservationist. We call our positions, “Vacation Planners” since that’s really the job. Helping the guest find the right property for their needs while comfortable that all available inventory meets similar standards of quality, cleanliness, maintenance, and hospitality, regardless of price point.

Beach houses in RehobothManagement Fees – I’ve saved probably the most controversial, sensitive topic for last! Management Fees are the percentage of gross rent that an agency charges the property owner for the agency’s work. The vacation rental hotbed of North Carolina Outer Banks sets the average management fee  for the USA at 35% (of gross rent). Vacation Rentals in ski communities command the highest management fees in the USA – coming in around 50% (of gross rent). Management fees at the Delaware Beaches are historically low, and at 15% – some of the lowest in the USA. This sounds good if you’re an owner in Delaware, no? No! Absolutely not! This is not good news for anyone! At 20% (of gross rent), our management fee is admittedly the highest in our area. To be defensive, I’ll tell you we also provide a lot for the money and we pull in more income for our owners to offset the higher fee. However, from our perspective, it’s only the daily discipline of prudent financial planning and good business systems management that we can make 20% work. If you have a vacation rental agency willing to discount an already low management fee, run. What else are they discounting to meet their labor costs (i.e. pay their staff and suppliers)? If I chat with an Owner who’s shopping simply on management fee, I’m happy to agree with that Owner that perhaps we’re not the best fit for each other. What else is the Owner willing to discount on? Home maintenance, upgrades to meet guest needs/demand? Property Owners – seek to understand each Agency’s value proposition. What makes their approach similar to, and more importantly, different from their competition? What does the management fee cover? Have a respectful conversation together on the costs of business associated with the vacation rental industry. Respect your agency if they say, courteously that a particular cost is the property owner’s. Challenge the agency on the service level expected for their fee.

Closing Comments

Each and every year, all of us in the vacation rental business should ask ourselves as current and future property owners:

  • “Should I stay, or should I go?”
  • “Should I enter, or should I pick another (business) door?

Should you stay in the business? Meaning, should you sell your property? Yes and No. Unless there is a pressing emotional connection to the property that is more important than the bottom line, one should always have an open mind and be looking around at available properties in the area. If your rates are maxing out for the size and location of your property, and your income is getting close to your operating cost, then many times it is prudent to sell the property and re-invest in one or more replacement properties if they generate more income. If you remain happy with your property income, and the property continues to attract and delight guests, why sell?

Should you enter the vacation rental market and buy a property for the first time? A resounding yes! The resort rental market is very strong. The vacation rental industry is a thriving industry experiencing phenomenal growth and blisteringly fast transformation from days of yore. Guests are very firmly in control. We’re very fortunate to have strong guest demand and, fortunately for us as property owners, insufficient hotel inventory in our area to meet vacationing demand. Come on in, the water is warm. Just recognize, and budget for the costs of doing business. Good enough for the rental is no longer good enough for your guests. You have to see properties and your guests as the investments they are.

Beach house rehobothThank you for listening. The information shared is my personal opinion on our local vacation rental market. A sincere thank you to all of our property owners partnering in business along side us. Thank you to all our vendor partners who make us look good! Thank you to all of our vacationing guests. Thank you as always to our staff – you unsung heros and heroines.