⛵️ Florida is a Mess, Airbnb's are Great, Quick Trip to Newport, and Oyster

Soaring HOA Costs Create Glut in Florida Condo Market

When Florida Gov. Ron DeSantis signed a law last June that requires structural inspection of all condominium buildings three stories or higher by the end of this year, he set in motion a process that is altering the economics of the state’s real estate market.

Some condo owners are facing fees in excess of $100,000, in some cases almost as much as they paid for their units, and the stampede to sell is sending prices to the basement.

Ivan Rodriguez told the Wall Street Journal that he tapped his retirement account to pay $190,000 for a 1,500-square-foot unit with water views at the Cricket Club, a bay-front complex in North Miami.

Rodriguez, 76, was forced to dump the condo in April for $110,000.

Cricket Club’s board recently proposed a nearly $30 million special assessment for repairs, including roof replacement and facade waterproofing, which was more than $134,000 per unit owner, more than Rodriguez could afford. 

After listing his unit for $350,000, he kept lowering the price. When potential buyers heard about the assessment, he told the WSJ, “they’d run in the opposite direction.”

Bryan Shaw, a senior analyst and real estate consultant based in the Tampa Bay area, sees a market turning ugly.

“If condo values continue to drop as fast as they are,” Shaw said. “It’s going to be a race to the bottom.” 

The Florida legislation, which calls for condo inspections before Dec. 31 and then again every ten years, is in response to the partial collapse of the 12-story Champlain Towers South condominium building in Surfside that killed 98 people in 2021.

Those inspections are uncovering problems at many properties and a glut of condos on the market from owners like Ivan Rodriguez who can’t pay six-figure assessments. Condo inventory for sale in South Florida has more than doubled since the first quarter of last year, to more than 18,000 units, the WSJ reported in May.

A lot of buyers caught up in the cratering of the condo market are first-time home buyers and retirees who cashed in their next eggs to buy, according to Shaw. Some of these folks are now trying to “ditch their condos at cost if they can,” he said.

Condo prices across Florida have been falling this year, with June 2024 seeing a double-digit drop in condo deals in Miami-Dade and Broward counties. In Miami-Dade, the number of annual condo sales fell by 26.8% in June 2024, compared to June 2023. Broward County, which saw 412 sales, is down 31.7 percent from June 2023, when it saw 603 sales. 

Shaw said there are also plenty of older condos on the state’s West Coast that are seeing significant price drops.

Insurance costs have also hammered the Florida housing market, as reported in issue #3 of proptext.co, but the new law requires condo associations to obtain a Structural Integrity Reserve Study that spells out the reserves must be collected to finance the building repairs and maintenance over the next 10 years.

The result has been whopping assessments and distressed sales, mostly for middle income units.

“You can’t put off these repairs any longer and there are a lot of people holding on for dear life,” said Shaw. “It’s only going to get worse.”

The luxury condo market hasn’t been hit as hard since owners in these projects can afford increased fees and special assessments. Most luxury condo projects are newer, but even the older buildings have generally been better maintained than middle- and lower-end condos.

The distress of older condo buildings, which in some cases preceded the new law as older buildings deteriorated and repair costs escalated, is creating opportunities for developers of luxury projects on the lookout for building sites. 

In older condos where owners are staring down exorbitant renovation costs, the land under the building can be worth more than the units. Increasingly, condo owners have come together to sell units in bulk to a developer, who can demolish the structure and put up a new building. In 2023, South Florida saw the highest number of bulk condo buyouts since 2019, according to Kiplinger.

But there are limits to the market for luxury condos, and not all middle-market owners are holding property in Florida’s most desirable areas.

Shaw agreed that there are opportunities for developers in the luxury market, but investors who think they can get a deal on a condo need to be cautious. Be sure to check that the HOA is well-funded and the building’s construction is solid. A lot of condos were built quickly in Florida with what he called “sketchy construction.”

It’s unclear if Gov. DeSantis or the state legislature is inclined to come to the assistance of these distressed properties.

“Stay away from these condos until we figure this out,” Shaw said. “It’s too early to tell.”

AirBnb Created a New Asset Class. Next Came New Rules.

Few could imagine that the hospitality industry would be forever changed when Brian Chesky and Joe Gebbia rented air mattresses to conference attendees who could not find a hotel in 2007 to help pay the rent in their San Francisco apartment. 

This inspiration created a new asset class, bedeviled local governments that have tried to regulate and tax the industry, drove Barcelona residents to squirt water pistols in early July at Airbnb tourists who they say have made the housing market unaffordable for locals, and changed the way people search for lodging and travel.

“It’s really transformed the market quite radically,” said Mark Anderson, a professor of German at Columbia University in New York. He has had his property in Harlem on Airbnb for a number of years, and ran afoul a couple years ago of New York City’s limits on short term rentals a couple years ago.

Airbnb claims that benefits largely fall to small investors, who use these short-term rentals (STR) to stay in their homes, pay bills, and save for retirement. 

The service originally called “Air Bed and Breakfast” has a market cap of $95.34 billion as of July 2024. The company reported that hosts across the US earned some $24 billion last year, up from $22 billion in 2022. Its net income was $4.79 billion, up 153% from 2022, and its profit margin was 48%, up from 23% in 2022 when the effects of the Covid 19 pandemic were still lingering.

Airbnb says hosts and guest generated an estimated $85 billion in economic activity across the US last year, which included:

• Additional income for hosts

• Visitor spending in communities, such as restaurant meals, cultural sites and sporting events

• Tax revenue for local governments.

• Wages from the more than 1.1 million jobs across various industries

If you are an investor who has yet to dip a toe into the Airbnb market, there is a tool that will help calculate the earning potential of any particular address.

The STR market is full of pitfalls and investors need to do their due diligence and pick an area where the regulations on short-term rentals are not so onerous that cash flow will be difficult to come by.

Airbnb Regulations and Unintended Consequences

Despite its history-making success, many cities and towns across the US have enacted regulations to limit the proliferation of Airbnb. New York City requires hosts on Airbnb, Vrbo, and other short-term rental sites to register with the city and stays must be 30 days or more. Hosts must stay with guests in their apartment and limit guests to two people. 

New York officials, like those in Santa Monica, San Francisco and other places that have stricter regulations on short-term rentals, argue that Airbnb and other platforms reduce the number of available rentals and push up prices. 

“Have apartment rental prices gone down since they outlawed Airbnb?” Anderson asked. “No.” (As of July 2024, the average rent in New York City is $3,794 per month, a 3% increase from the previous year.)

Anderson, who spoke by phone with proptext.co while he was traveling in the Italian Alps, said the 30-day rule has cost him revenue. He currently has openings at his property in August, but since many travelers are looking for shorter terms and he would need to be home with them, it’s going to sit empty.

“Who loses out? The people who lose out are small independent homeowners who can’t rent on Airbnb,” said Anderson. “The others who are losing out are the tourists who have to eat out every meal, who are looking for something more than a hotel room.”

The Guardian reported in April that the ban has pushed travelers toward hotels, where it is difficult to find a room for under $300 a night, or to unregulated short-term rentals.

Or to New Jersey.

Cities across the Hudson River from New York, such as Hoboken, Jersey City, Bayonne and Edgewater, have the fastest-growing Airbnb demand in the nation, according to AirDNA.

Tourists are seeking out black rental markets in the five boroughs of New York, which can be found through Facebook groups, Craigslist posts, Instagram listings and word of mouth.

To quote The Guardian article: If you have friends in New York, you’ve probably seen the Instagram stories. “Hi guys! Subletting my room in a 5 bed apartment for four days over Easter! Must be good with dogs and rude roommates! DM if interested!”

The Net Result for Tourists, Housing and the City’s Bottom Line

The law has been on the city’s books since 2022, and the affordable housing crisis in New York has never been more dire. The New York Times reported that the city had a 1.4 percent vacancy rate in 2023, the lowest portion since 1968. The market was even tighter for lower-cost apartments. (A “healthy” vacancy rate is between 5 to 8 percent, according to housing experts.)

Airbnb regulations are not likely to have much of an impact on a decades-long shortage of affordable housing in New York, but are surely going to be a boon for the hotel industry. The Commercial Observer reported that the hotel industry was in line to gain an extra $380 million in revenue once enforcement of the law went into effect in September of 2023.

Ultimately, fewer tourists will be staying in New York, and Anderson said the city is missing out on tax revenues. Like many, he said the influence of the hotel lobby played a role in putting limits on short-term rentals, while many tourists have become accustomed to the amenities that come with renting an apartment and don’t want to stay in a hotel.

“Airbnb is offering a real product that hotels don’t offer,” Anderson said, such as a place to cook a meal and a room where they can entertain guests. 

“They could tax Airbnb rentals like hotels and take a cut of all that money,” he added. “These tourists represent a substantial income for the city.”

One of Anderson’s pet peeves is that regulations for short-term rentals, such as fire codes and alarm setups, do not apply to longer-term rentals. (He has also leased his property for up to a year at a time.)

“The hypocrisy in the whole system of code violations,” Anderson said, “is maddening.”

He received five citations when city housing officers descended on his property a couple years ago and he told them that yes, he was renting on Airbnb for weeklong stays, which is legal in Long Island beach towns not more than 40 miles east of the city, and he believed, legal in the city.

He got a lawyer and four of the five citations were dismissed in court.

Newport, Rhode Island

Newport, Rhode Island, a city known for its grand mansions, its cliff walk, vibrant sailing culture and historic downtown, presents an array of opportunities for real estate investors, particularly in the short-term rental (STR) market. 

Newport attracts over 3.5 million visitors annually, with peak tourism during the summer months (June to September). Newport’s “summer cottages,” built by leaders of finance and industry from New York and elsewhere during the Gilded Age of the late 19th century, are among the city’s primary attractions. The 3.5-mile cliff walk offers scenic views of many of the 11 mansions and the ocean.

Newport hosts several high-profile events, such as the Newport Jazz Festival, the Newport Folk Festival, and the annual Tennis Hall of Fame tournament, boosting STR demand during these periods. Sailing regattas and other nautical events also draw a substantial number of visitors year-round.

For short-term rentals, those less than 30 days, owners in the city of Newport must register their property as a Transient Guest Facility. Once the property is approved, there is a $500 fee for owner-occupied property and a $1,000 fee per unit for a non-owner-occupied property. 

Property owners in Newport’s Residential Zones are not permitted to rent their properties for less than 30 days unless the home serves as a primary residence, so investors should do their due diligence before buying.

These fees are offset by robust prices when renting properties in Newport. 

Opportunities for STR

→ Median Home Price: Redfin reported that the median home price in June 2024 was $750,000, a 1.6% decrease from the previous year. Rocket Homes reported that the median home price in Newport was $850,000 in June 2024, up 9% from last year.

→ Appreciation Rates: Over the past five years, property values in Newport have appreciated by an average of 6% annually.

→ Short-term rentals on Airbnb and Vrbo average 60% occupancy, $427 daily rate and $31,824 in monthly revenue.

Future appreciation

75 Pelham St

This two-bedroom condo in Newport's Historic Hill neighborhood features a spacious loft with an attached deck overlooking Newport Harbor. Sold "As Is," this unit includes 2 off-street parking spaces and offers potential for customization. This residence combines character and potential, featuring a loft with a deck that overlooks Newport Harbor.

The Investment Thesis

→ Pelham is steps to the most popular stretch in all of Newport (Thames St) driving nightly rates 2-3x higher than more suburban locations on Aquidneck Island.
→ According to Pacaso, Newport was the #1 in the country for luxury second home purchases in 2023, with inventory remaining historically low.
→ Proximity to Salve Regina University makes this home a prime option for maximum STR summer rates, and mid-term student housing during the winter months.

 Property Details

 Financial Projections

Interested in Learning More?

*Appreciation based on 4.5% growth rate. 

Jack Drachman - When to Start a Firm

John Drachman, co-founder at Waterford Property Company, recently shared his view on the best time to launch a real estate investment or development firm.  As much as we talk about how there is no perfect time to invest in real estate, the same can’t be said for when you start a business or raise money for a fund in the asset class.

When you invest in real estate, there’s a persistent tailwind over time courtesy of inflation.  There’s a much higher likelihood your investment properties will be worth more in 15 years than they are today.  However, when launching a business or fund, the clock starts ticking day one and founders do not have the luxury of time.  Starting a venture at the wrong time — either in the first inning or in the ninth inning — can lead to failure. Understanding these cycles and positioning your business correctly within them is crucial.

So When is the Best Time to 🚀?

According to Drachman, it’s all about the 3rd to the 6th innings. Why? This period is when the downside risk in the asset cycle has passed and the upside is starting to take effect.  Waiting until the later innings (think 2022 SFR) will mean fighting macro trends that are often insurmountable. There are always deals, but they are much harder to find and incredibly difficult to do over and over again with other people’s money in the late innings.  

Real estate is a cyclical business that requires significant capital and a strong track record to raise funds. Drachman points out that raising capital at the beginning of a cycle is nearly impossible without substantial experience. Even seasoned professionals find it challenging.  Case in point: John runs a successful business with a stellar reputation in Southern California and has struggled to raise capital in the current market. 

Our Thoughts

John Drachman is a must-follow on LinkedIn.  He consistently shares practical information, from an operator who started in the trenches and built a successful firm.  While most of his expertise is in larger development projects, his wisdom applies to any aspect of real estate.  

One point of contention with John: If you really want to work and build something meaningful, the best time to start was twenty years ago.  The next best time is now.  Where we align is that the moment you start accepting outside capital or put your own livelihood at risk, you better have a clear line of sight into how you’re going to succeed.  

Early innings of a cycle make capital fundraising brutal and in some cases impossible.  Late innings of a cycle leave you zero room for errors, and there are variables out of your control (think interest rates).  

Oyster

Oyster is transforming asset management with a data platform that integrates predictive and preventative maintenance recommendations to drive ROI and minimize costly downtime for real estate operators and managers. By leveraging practical AI applications within a record system, Oyster can forecast expenses and address maintenance needs, while streamlining other administrative functions. This innovative approach ensures optimal asset performance and reduces unexpected costs, setting a new industry standard.

Real Proptech Starts with Seasoned Operators

The Oyster team, led by Joe, Albert, Ryan, and Leah, brings together an exceptional blend of leadership talent. Their combined experience includes innovative, tech-enabled pursuits at proptech giants like Zillow, with extensive expertise from institutional players in the SFR space, such as Colony, Waypoint, Starwood, and Invitation Homes.

While some argue that too much traditional experience can stifle innovation, we at prop.text believe the opposite is true for the real estate industry. Proptech is filled with solutions in search of a problem. Fortunately, the team at Oyster identified a pain point that they have experienced first hand and developed a solution — by operators, for operators.

So What’s the Problem?

Real estate has a track record of being notoriously late to the party when it comes to adopting technology. To this day, expense management is often handled by disparate systems and spreadsheets by operators big and small. When the industry consisted mostly of small shops with modest multifamily portfolios or large institutions allocating substantial funds to buying office/industrial properties, disjointed data management could be reconciled without too much pain. 

However, with the newfound interest in SFR among small and large investors, tight expense management is no longer trivial. In most cases, this is where a portfolio meets, beats, or lags behind pro forma.  Funds, in particular, also had the tailwinds of rent renewal increases for over a decade straight and access to historically cheap capital.  Today, rents face downward pressure across the country and capital is 6x more expensive.  

Unit economics also play a major role with CapEx (capital expenditures) items like roofs and HVAC systems. These are significant expenses that require long-term planning to avoid asset underperformance. Now, imagine expanding this across 10,000 units.

CapEx aside, here are some other real world examples Oyster can help solve: 

• What is the manufacturer contact info to file a warranty claim for an issue with your new refrigerator?

• What’s the expected remaining life of the dishwasher? 

• How much have we spent maintaining it over the past two years?

• How can we cut down excess property site visits by combining tasks?

• Did we pay for this work twice?!

• Does the typical X% of gross rent for maintenance align with our original projections over time?

These issues may seem trivial, but real estate operators and managers know how massive these problems become and the revenue leakage that occurs from making less-than-fully-informed decisions for your portfolio.

Oyster Enters the Chat

Oyster offers a single source of truth. A data repository that stores all pertinent property-level information, supported by AI, to help an investor make more informed decisions ahead of schedule. “The Oyster” features a simple, clean UI that helps users manage each home and their entire portfolio from a straightforward dashboard. AI forecasts potential capital expenditures, preventative maintenance, and repairs, optimizing performance from execution to ledger.

What is most useful about Oyster is that the team prioritized user utility, making the platform very simple to use. Onboarding can be as easy as uploading an inspection report. Oyster takes the content from that report, then supplements it through its network of other third-party data providers to analyze the property condition, make suggestions, highlight immediate health and safety items, and create a digital punch list. This acts as a digital sidekick for the asset manager/operator to be more productive when overseeing individual units and assessing data in the aggregate across their entire portfolio. The platform will be integrated into major ecosystems this year, making it easier for teams to adopt Oyster without a heavy implementation process.

Why We Like It

Some proptech companies nail the sizzle. Think affordability in 2024. There are very practical problems that impact entire industries — like knowing what kind of refrigerator is in a unit, its lifespan, when the warranty expires, what type/size to order when it needs replacing, and how much CapEx to budget for each year.  Oyster solves a very real, very painful, recurring problem — managing data and eliminating decision fatigue.

Three years from now, Oyster’s property-level insights will be able to make intelligent, data-driven recommendations based on historical performance outcomes across hundreds of thousands of units. Want the best performing HVAC that can handle Phoenix summers? Oyster will objectively identify it and likely leverage its scale to deliver platform discounts based on vendor relationships.

Today, the platform helps with property-level expenses. This can drive institutional asset management best practices and assist small-shop property managers/operators. Furthermore, the customer experience will improve from detractor to promoter by reducing surprise cash calls that strain relationships between owners and managers. Maintenance becomes consultative.

Who’s It For and How Do I Start?

Oyster can add value for small operators managing a modest portfolio to scaled institutions looking for the best way to hedge unexpected costs. The product is in its infancy (<7 months), so now is the best time to see if the platform can add value to your organization today. The team is receptive to feedback and applies what they collect to future iterations of the platform, such as enhanced portfolio dashboards and reporting features that are coming soon.

To learn more, visit Oyster to schedule a demo!

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