Apartment Rents Surge As Vacation Rentals Reduce Supply for Tenants

Article originally posted on CoStar on March 15, 2023

With a Housing Shortage, Increase in Vacation Rentals Seen Harming Affordability

Record growth in apartment rents in some of the biggest U.S. metropolitan areas coincided with more short-term rental listings, renewing concerns about housing affordability as more property owners cater to travelers rather than long-term tenants.

Before the pandemic, cities around the country had put tougher regulations in place to control where short-term rentals could exist to limit disruptions from vacationing tenants. Those regulatory efforts have been gaining new life in the past two years to address not only noisy vacationers, but the prospect that owners may be driving up home and rent prices for permanent residents.

Cities as big as Atlanta and as small as Steamboat Springs, Colorado, have passed regulations in the past two years to gain some control over where short-term rentals can be operated while wrestling with housing affordability concerns. Cities view the growing supply of short-term rentals as cutting into needed supply of long-term rentals, pushing up rent prices of what’s left for traditional leases.

Before the pandemic, listings on AirBnB and VRBO, the two largest short-term rental platforms, had grown to more than 663,000 across the 50 largest markets in terms of demand, according to short-term rental tracking firm AirDNA.

The pandemic pushed the number to a low of 418,057 listings by February 2021. Such a drop means that landlords either changed the property to long-term rental, sold their properties or didn’t list them.

During the pandemic’s first year, some owners shifted to medium-term rentals, defined as 30 days or more, to target traveling nurses, said Grant Hammond, a real estate broker in Nashville, Tennessee, who specializes in selling newly built short-term rentals to investors.

Those nurses, who filled staff positions at overwhelmed hospitals early in the pandemic, “filled up our stock at the time,” Hammond said.

Rental listings began to grow nationally as the country opened up, and there are a little more than 600,000 listings now, according to AirDNA.

Rising Rents

Apartment rents also began to rise, hitting a record annual growth rate of 11% by the end of last March. Rent growth in Sun Belt markets soared well above that national average.

Of course there are other factors that contribute to surging rents, such as a shortage of building, particularly construction of affordable housing.

Even so, Ken H. Johnson, a real estate economist with Florida Atlantic University, told CoStar News that the rise in short-term rental properties is a clear contributor to soaring rent growth. “From a statistical standpoint, I feel certain that an increase in the number of short-term rentals is causal to a rise in rents,” Johnson said.

Short-term rentals take supply out of the market that might otherwise be used for traditional long-term renters, Johnson said, adding that it exacerbates other factors such as a rental shortage 15 years in the making and migration to Sun Belt cities during the pandemic.

Rent growth has eased considerably across the country, largely because of a historic construction pipeline. But in some places, such as Florida, new construction still isn’t adding units fast enough to slow rent growth.

Orlando, Florida, is a prime example. The city in central Florida that is home to Disney World and other major attractions is the largest short-term rental market with just over 40,000 listings, which is far from its peak of 66,734 listings in August 2019, according to AirDNA.

Listings had dropped to a low of 33,724 in February 2021. Disney’s parks hadn’t fully reopened at that point.

Former Florida governor and now U.S. Sen. Rick Scott signed a law in 2011 that forbids local communities from banning short-term rentals. But beach towns have continued to wrestle with how to deal with short-term rentals interspersed throughout residential neighborhoods.

People moving to the Orlando area helped give Florida the highest number of domestic in-migrations in the country last year. Rent growth hit a record at the end of last March at 23% and had been at the highest in the country, along with Miami.

Rent Control Sought

Rents grew so much that Orange County, where Orlando is the largest city, sought to implement rent control. Voters approved it in November despite court rulings against it. The case is now headed to the Florida Supreme Court.

For perspective, the number of short-term rentals is equal to 20% of the 200,000 apartments units CoStar data shows for the Orlando market.

Rent growth has slowed to 4.2% in the Orlando market. New construction added 8,229 apartment units last year, helping to tame rent growth. Current construction levels would increase the existing apartment stock by 11.6%.

But it’s still an overpriced rental market, according to the Waller, Weeks and Johnson Index created by FAU, Florida Gulf Coast University and the University of Alabama. In December, the index showed Orlando renters were paying an 8% premium on rents, defined by prices above where they should be based on historical average rent growth.

In contrast to Orlando, Nashville was the fifth most popular destination for domestic in-migrations last year, with 81,646 new residents putting down roots in the region. However, Nashville’s apartment market demonstrates how a bigger supply of new apartment units can offset increases in short-term rentals.

AirDNA data shows that Nashville’s short-term rental listings reached 9,630 in January from less than 7,000 during several months in 2020. Listings peaked at 10,000 in June 2019.

Apartment rent growth in Nashville hit a record of 16.6% at the end of last March. But developers added 8,359 units last year, helping lower rent growth to about 3.1%, according to CoStar data. The construction pipeline represents a 14.9% increase over the total supply of existing apartment units in the Tennessee capital.

Nashville, a convention and tourist destination in its own right, doesn’t have the same concentration of attractions as the Orlando area. Demand, though, is strong for short-term rentals in Nashville, Hammond said.

“You can’t find places to build anymore” because of new regulations, Hammond said about Nashville.

Nashville passed its main legislation in 2016 to keep short-term rentals out of residential neighborhoods, as well as areas zoned to allow multifamily development.

“That has kept short-term rental housing prices high and short-term rental rates high,” Hammond said.