A look at the conditions that fanned the flames of the STR boom, and what’s in store
By Tim Rowland
Airbnb, which originated in California, is an example of how far-off developments can have outsized impact on the Adirondack Park. But it’s only part of the equation.
In 2007 the subprime mortgage market began to collapse, followed closely by the Great Recession. To spur growth, the Federal Reserve slashed interest rates, which would come to have an unintended consequence in the Adirondack Mountains: housing became an almost foolproof investment.
Shelter, a basic human need, was being bought up as one might buy shares of stock — either for a steady income, or a quick capital return. That, said Jeremy Evans, executive director of the Franklin County Industrial Development Agency, is a model that needs to be discouraged if affordable housing is to be retained. “We have to stop treating housing like a commodity,” he said.
About this series
Adirondack Explorer is highlighting the region’s housing challenges, with a multi-part series running in our magazine, online and in a regular newsletter you can sign up for here. Award-winning Freelance Journalist Tim Rowland investigates causes of the housing shortage, housing’s effects on other aspects of Adirondack life, hacks that people use to get into a home and potential solutions being tried here and elsewhere. His reporting is based on review of real estate data, documents and extensive interviews.
Properties that were out of reach for average families were low hanging fruit not just for professional investors, but for vacationers who, as if the forests and lakes of the Adirondack Park weren’t reward enough, had stumbled upon a smart, seemingly foolproof investment.
With very low mortgage rates, the gap between the cost of doing business (which includes interest on the housing loan) and income (rent) was impossible to ignore.
“As an investment it was a slam dunk,” said Dan Kiefer-Bach, community development director for LivingADK. “You could double your money without any risk at all.”
“It was almost free to buy this secondary house,” said Jodi Gunther, a Lake Placid real estate agent. As with any investment, housing is at risk of losing value, but historically Adirondack property is slower than the nation as a whole to give up its gains.
In fact, as an investment, the deck was stacked in housing’s favor. The same low interest rates that made it cheap to buy a house at the height of the pandemic also made more traditional investments like money markets and bonds all but pointless.
More on short-term rentals
This is the second part of a pair of stories looking at short-term rentals’ impact on the Adirondack housing market.
Then, a global pandemic
So the table was set when, with the onset of Covid in February and March 2020, the stock market crashed, with the Dow losing 37% in a month. Covid also sent record crowds fleeing the cities to the Adirondacks where it became more cost effective to buy a short-term rental than to stay in one.
Florina Altshiler, a partner in a Buffalo law firm, said that for her, STR investments were an organic expansion of her long-standing affinity for Lake Placid and the Adirondacks. She purchased a vacation home prior to the pandemic, intending it to be a retreat for herself and her family — but then began to think about all the time that it was going unused.
She’d become familiar with Airbnb a decade ago while serving as a prosecutor in Alaska, and the model seemed applicable to the Adirondacks. Indeed, her listing on Airbnb was met with an overwhelming response, and led to her purchase of “a few” other properties as well.
“It was never intended to be a business, but it happened to do really well,” she said. “And if it’s doing well financially, you buy another.”
Locals shut out
Which is what many investors did. Buyers from San Francisco to Puerto Rico successfully bid on Adirondack properties, according to real estate sales reports, often at above list price and often, Realtors say, without seeing the property in person. In a spring of unknowns in 2020, when no investment seemed safe, short term rental property was suddenly a rare ray of sunshine in an otherwise uncertain investing landscape.
Even better, any improvements to these properties were tax deductible, as were taxes, cleaning, maintenance and management. Even the mileage of driving to the Adirondacks could be written off because “checking on the property” was a business expense. The lines between vacation and tax deduction began to blur.
Technology eliminated the typical entrepreneurial headaches of finding a dependable stream of clients, along with wrestling over advertising and to some extent, even handling the books.
More to explore
- Locals and landlords square off over short-term rentals
- Moderating short-term rentals: How other regions can serve as models for Adirondack communities
- Town of Webb’s short-term rentals law: What you need to know
- In Lake Placid, short-term rental owners feel ‘vilified’
- Opinion: Communities need to take steps in regulating short-term rentals
- Opinion: Short-term rental laws discriminate against property owners
- Communities develop solutions to keep people sheltering in place
These new investors were now in direct competition with residents for housing, and they had something the locals didn’t: money in the bank. “Properties just started selling for cash and locals could not compete,” said Jamie Konkoski, community development director for Saranac Lake.
To spruce up the properties, newly minted STR owners wrote checks for contractors and building materials, all of which were in short supply. Anyone wanting to build a home would likely have to wait. “Everyone was competing for the same scarce resources,” Konkoski said.
Will the boom last?
Prospects for the future are mixed, but industry experts such as AirDNA believe STRs will remain strong throughout 2023, even as some economists continue to predict a recession.
“Data shows us that the vacation rental industry has more cause to stay optimistic than despair, as travel tailwinds still have the power to overcome economic headwinds,” an AirDNA analyst wrote. “With employment remaining strong and consumer interest increasingly turning to travel, the diverse and often affordable experiences offered by short-term rentals will continue to draw crowds in 2023 — both on the supply and the demand side.”
But even if STRs remain popular, going forward they may not be the cash cow they once were. Higher interest rates, for example, might slow investors. “At 7%, that changes things quite a bit,” Gunther said.
Analysts agree. In the third quarter of 2022, AirDNA reported margins between rental income and mortgage payments hit record levels, leading to a 25% increase in STRs nationwide. That growth is consistent with what’s been happening in the Adirondacks, where according to AirDNA, STRs in the heart of the park grew by 43% between 2019 and 2022.
But the Fed’s rate hikes are “nearly erasing the premium and leaving the smallest gap between rental revenue and new mortgage payments since well before the pandemic.”
This is a two-edged sword, as higher interest rates affect residential homebuyers as well and cannot pay cash as some investors do.
Still, STRs are now more likely of late to be subjected to local regulations that include fees, and the proliferation of Airbnbs appears to be eating into the bottom line as well. All this added supply puts downward pressure on rent, which in its most recent reporting AirDNA says is off by 3% nationwide.
If STR owners fail to respond to greater competition with lower rates it could lead to excess vacancies, which local STR owners say could potentially threaten survivability.
“If you’re purely out for profit you’re taking a risk that may or may not work out,” Altshiler said. But that definition doesn’t fit all STR owners, many of whom just want to subsidize their vacation home.
It also benefits the community economy when a second home is rented out instead of sitting empty. “I recommend local guides, they go to local grocers and buy local firewood,” Altshiler said. “They go to Lake Placid stores and the Hungry Trout (restaurant). There is no downside so long as everyone is respectful.”
The paradox is that the people who staff the stores and restaurants cannot buy a house because, at least indirectly, of the people who make their jobs possible.
Help is on the way: Saranac Lake lofts
A mixed-use complex of 70 apartments and commercial space
Working toward solutions
To keep or return homes to the residential market will likely take some sort of incentive, said Kiefer-Bach. “You cannot tell people how to use their property, so we need a carrot to keep a home a home.
One model, popularized in Vail, Col., pays homeowners cash in exchange for a deed restriction preventing use as an STR. The program, known as InDEED, aims to protect 1,000 residential homes over the course of a decade. So far, Vail has paid about $12 million to protect 174 residential properties.
The sticking point, Kiefer-Bach said, is identifying a revenue stream, but the program is underway in the Central Adirondacks. And across the region, real estate agents are starting to report a sprinkling of sellers who are voluntarily placing restrictive covenants on their homes.
Short-term rental laws can also help keep housing in residential hands. A proposal under consideration in the town of Hague on Lake George, for example, would create a three-year waiting period prior to registering a home as an STR — discouraging the purchase of a residence purely for investment purposes.
And in Nantucket, to pick one vacation-destination example, taxes on people staying in an STR were 11.7% starting in 2019, with an option to go as high as nearly 15%.
The goals of these initiatives are not to eliminate STRs, but to level the playing field in hopes of giving residents a better chance at finding housing, while recognizing the economic benefits of vacationers and the housing that serves them. “This (issue) has left us with two teams, the secondary home owners and the long-time residents,” Gunther said. “There should be room for everyone.”
This series is funded in part by the Generous Acts Fund at Adirondack Foundation. And by the Annette Merle-Smith Community Reporting Fund at Adirondack Explorer. Click here to help fund community reporting such as this.