I was trying to come up with a title for this article and the curse of opportunity was the only thing I could come up with other than too much of a good thing. Unfortunately, they’re not the same thing. Maybe you can come up with a better description of the scenario. One of the top news stories right now is about Barcelona both restricting short-term rentals to foreigners in the future and tourists being assaulted with water pistols um on the streets to drive them out. Unfortunately, the tourists aren’t the problem. The tourists are a result of the problem and in this case, the problem is opportunity.
Have I Got A Deal For You
So imagine you have a small apartment that has predictable rent and one day someone comes to you and says if I show you how to change how you’re marketing your property you can make three times what you’re making now and not have to do any additional work would you do it? Almost everyone would say yes in a heartbeat. What could go wrong? Well, it turns out quite a bit actually, but you don’t notice it until it gets to a certain scale. So while this sounds like an infomercial pitch the reality was much more subtle. COVID created opportunities for more people to work from wherever they wanted. And when geography relative to your work is no longer a factor you start looking at things like quality-of-life, cost of living and many people choose to move to those locations. The problem was volume. Communities in Portugal, Spain, Thailand, and South Florida all got flooded by people looking to relocate. And they were willing to pay what they thought was a reasonable amount to live there, even if it was considerably more than what the locals were used to paying. This is where the wheels start to come off the cart.
The Honeymoon Phase
At first, it’s great for the people who are renting or selling they make a lot of money they tell their friends their friends start doing the same thing they make some money and you’re starting to see money coming into the local economy. The problem is that for every person willing to spend $1000 a month to rent an apartment they are displacing someone local who could probably only spend $300.00 a month. And those are the people that make up the fabric of the community. They are nurses first responders waiters and waitresses cooks construction workers you name it Suddenly you have a situation where the people who are needed for the community to function can no longer afford to live there. So for them to keep their jobs, they typically have to move away which increases their expenses and either forces them to demand higher wages or seek other employment. The result is local economies that are broken. Restaurants are closed when they should be open because they don’t have enough staff to work. You can’t find anybody to work on your car because the mechanics have all moved away. Basic services in general become less affordable and less available because the people who need to perform those jobs can’t afford to live there.
The Tipping Point
Eventually, you reach a tipping point where everything starts to break at once. Florida is still a mixed bag with some areas on the way up, and others already headed down. From 2019 to the present, the average home price in Florida has increased by 65%. It has been displaced by Lancaster County Pennsylvania as the retiree destination of choice, and they are already starting to see the retreat of people needed for the economy to function properly. In Jackson Hole Wyoming, the median income is $108,279 but the average house price is $7.4 million. The people who used to live there, are now “the help”, and they are lucky if they can afford to live within an hour’s drive. It’s just a matter of time before the system breaks.
This is what is happening in Spain and Portugal now. While it’s easy to single out “the foreigners” in many countries, it’s harder to do people with money are simply crossing state lines. As local leaders see the negative impact, they tend to respond with taxes, ordinances, or other tools to get rid of the problem. The tourists looked pretty good when they were first bringing money into the community, so no one questioned the long-term sustainability of letting people charge what the market would bear.
It sounds counterintuitive that you should restrict the amount people can charge to rent or sell real estate. Especially, when the market can collapse and the value of houses can plummet. Why should you restrict the upside of increasing demand? Because you have to look at the community ecosystem.
Outsiders Aren’t the Problem
In the immortal words of The Talking Heads, “And you may ask yourself – Well, how did I get here?”. It’s a combination of change + opportunity + lack of foresight. It’s sort of the flip side of what’s happening with commercial real estate and people working from home. It created a real estate problem, and CEOs are essentially blaming the workers and taking action against them in the form of RTO mandates, to fix the problem. People have been working remotely at some level for about 30 years. It just took a pandemic to get us to an inflection point. For whatever reason, any alarm bells about the declining future need for office space were never addressed. So instead of a gradual shift away from the current model, we continued with business as usual until occupancy and utilization dropped off the cliff. Then the blame game started.
Back on the residential side, AirBnB has been with us for almost 20 years. With over 5 million locations and almost 2 billion guest arrivals under their belt, you would have thought communities would have started asking “What is this going to do to our community?”. Now the focus isn’t just on short term rentals, real estate sales in popular areas are also driving prices up. Again – thanks to outsiders. It’s always helpful to have labels when you are blaming people for problems.
Money Money Money
That blinding light that prevents us from planning properly for the future is often green. Short-term profits are so tempting. And long-term planning can be intimidating. Wall Street is littered with the stock symbols of companies where a select few made a spectacular amount of money and then pulled out when the market changed. I once worked for a company that was growing so fast we went to have a meeting and all the conference room chairs were gone. We had people sitting in the hallway with card tables because we couldn’t add space fast enough. Then there was a blip, and we went from $3B in assets managed to bankruptcy in about 3 weeks. Real estate is a bit more complicated.
Did you know there are almost 4000 ghost towns in the United States? We don’t know if the people who ran those towns saw the change coming that killed their communities. You can’t plan for everything, but you can think about sustainability in planning growth. That means you can’t just look at individual buildings for their highest and best use. You have to think of the community as an ecosystem and put up guard rails. Some may not be popular because they restrict people’s ability to make money.
Focusing on Sustainability
Community leaders need to keep a watchful eye on opportunities and trends that can benefit their community as well as destroy it. Waiting until there is a problem and then implementing punitive policies is not an effective solution. There are more than a few stories about towns that died because the railroad took a different direction and their model for the town wasn’t sustainable without it. I live in what was a booming mill town 100 years ago. The mill is largely empty at this point and has been for decades. Some communities have found sustainable solutions to breathe life back into their empty mills. Others are still trying to figure things out.
The goal is to have some safeguards in place so you don’t have to figure things out after a major change happens. It’s often too late at that point. Grabbing the quick buck that presents itself is rarely a long-term strategy. They need a process for adapting to change. Communities are still figuring out the impact of remote workers, and AI is likely to leave its mark on many communities in the coming years.
Any time you have a change that either creates or takes away opportunities for people, community leaders need to have a strategy for what comes next. Waiting and seeing how it pans out is not a strategy that has worked well for communities like Barcelona and Jackson Hole. These are extreme examples, but we can learn from them. If your town has a master plan older than 3 years old, it’s time to relook at the changes in your community and the opportunities they may take away or create.
