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As California rolls out short-term rental regulations, investors look elsewhere

11/12/2019

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Los Angeles, which thanks to its beaches and good weather is one of the world’s most popular destinations, recently embarked on an experiment that could radically change its tourist industry: It started enforcing new short-term rental regulations.

The move is a major development in the long-running vacation rental saga, but it also highlights the growing complication for the real estate industry in California. Much as it attracts tourists, the Golden State has also attracted investors hoping to cash in on short-term rentals.

And at least in some cases, the regulations now appear to be driving those investors away.

David Lukan

“I’ve seen some investors change their plans because of these new regulations,” David Lukan, a Compass agent in Los Angeles, told Inman.

Lukan said it’s common in Los Angeles for buyers to be interested in some sort of Airbnb-type component for their properties. That can range from wanting to run an actual business with one or more dedicated rentals, or it can be as simple as adding a rental apartment in the backyard of a primary residence.

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Lukan said that he has seen a “downturn” among people looking to spend money on those kinds of properties, with investors now forced to make different plans because their return rates will now likely be lower.

Recent years have also seen listings in Los Angeles specifically marketed as short-term rentals, especially in heavily touristed neighborhoods like Hollywood. But Lukan said he has now seen that type of publicity waning as well.

“That was something that was going on,” he said, “but we’re seeing that decrease because of the regulations.”

Los Angeles first approved its short-term rental regulations late last year. Among other things, the rules limit the number of days a unit can be used as a rental, require owners to pay a registration fee and prohibit the operation of multiple short-term rentals.

The regulations shouldn’t significantly impact the most casual mom-and-pop property owners, but will severely restrict more serious investors’ ability to run vacation rental businesses — a practice that was quite common in Los Angeles.

Los Angeles began enforcing its regulations on Nov. 1.

As the biggest city in the state, Los Angeles’ regulations have arguably the greatest potential to impact the real estate market. But other communities also have regulations, and impacts, as well.

For example, Pacific Grove, a picturesque Monterey County city overlooking the ocean, uses a lottery system that led to 51 short-term rental licenses expiring in April. The system is just part of the regulatory patchwork in the county, which property manager Jan Leasure said is directly impacting real estate.

“I have seen a number of people who just simply elect not to invest in the area,” she said. “They’ll go someplace elsewhere it’s not so complicated.”

Leasure runs several management companies, one of which focuses specifically on short-term units, and is also the president of a vacation rental advocacy group. In both roles, she said she frequently talks to would-be investors and thanks to new regulations now has “to be very upfront with them and tell them, ‘here’s what you’re facing.’”

In one instance, Leasure said that a property owner who had a short-term rental license also opted to give up on the area.

“He elected to sell his property and go elsewhere because he was so fed up with the craziness of the city,” she recalled of the man, who had a waterfront home in Pacific Grove.

View of the coast in Pacific Grove. Credit: pikappa and Getty Images

For the time being, California remains a mishmash of regulations resulting in varying impacts. Places like Santa Monica, San Diego and Malibu have or are considering various forms of regulation. And a recent shooting at an Airbnb listing in Orinda has prompted the city council in that Northern California community to move forward with an emergency ban on some short-term rentals.

In some cases, laws have also been floated at the state level — such as one that would limit short-term rentals in San Diego County — but are yet to become law.

All of these regulations are part of a broader trend sweeping the U.S. For example, just last week voters in Jersey City, New Jersey, approved regulations that among other things will cap the number of days off-site property owners can rent out units on platforms like Airbnb. In Florida, lawmakers began considering state-wide regulations earlier this year, prompting some pushback from cities that already had their own rules in place. And in January, Massachusetts became the first state to require registration on all short-term rentals.

Numerous additional jurisdictions including Corpus ChristiDetroit and others have also recently contemplated or enacted various forms of regulation for rentals listed on sites such as Airbnb and Vacasa.

Thanks to its tourism business and the size of its real estate market, however, California is a key battleground in the fight over short-term rental regulations. And whatever happens, the stakes are high.

In a statement to Inman, Expedia-owned vacation rental company Vrbo noted that there is “a billion dollars in economic activity and thousands of local jobs on the line” in Los Angeles. The company expressed hope that L.A. “will follow through on its commitment to draft and pass a policy that legalizes and prudently regulates traditional non-owner occupied rentals in the city.”

Vacasa, the largest vacation rental management company in North America, told Inman that it complies with regulations and has moved out of the Los Angeles market after previously managing a “small number” of units in the city.

“Our local team members have seen a demand for vacation rental management services throughout Southern California, including areas where we don’t have a presence at this time,” a company spokesperson said in an email.

Waterfront homes in Newport Beach, California. Credit: Ron and Patty Thomas

Both Leasure and Lukan said these regulations also impact individual real estate professionals. Though they themselves expect to survive the current wave of regulatory change, Lukan noted that even a small number of missed sales from investors “does impact our business.”

Leasure added that the regulations additionally trickle down to other parts of the economy as there is less demand for housekeepers, carpenters, landscapers and all the other jobs that go along with short-term rentals.

“They’re the ones that are going to feel it the most,” she said. “And it has to do with the vibrancy and the diversity of our community.”

Email Jim Dalrymple II

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