I think we can all agree that 2016 has been a really weird year for the US and some other key countries as well. Most of the media focus has been on the bizarre presidential election here and pretty much everything else took a backseat. We had Brexit happen over in the UK which had a huge effect on the exchange rate of the pound against the dollar. There was also the impeachment of Brazil’s president earlier this year and don’t forget that the Canadian dollar is still down quite a bit and has been since 2015. Once everything finally settled down a bit from all of the above we were thrust right into the holidays, which is typically a slower time of the year for investing but definitely not for rentals. “What does all this mean for our market?”, is what you might be thinking. Well, I’m going to break it all down for you along with my predictions of what we can expect to see in 2017 for the Orlando vacation rental market. . . which, by the way, functions almost the exact opposite of our residential real estate market here. So if you’ve been following the general news about what the Orlando real estate market is doing, it’s possible you don’t have all the information.
Brexit and the UK Investors
British investors and owners make up a huge portion of our small but coveted vacation rental market here. When Brexit happened it caused the pound to fall to the lowest it’s been in a very long time, making it a really bad time for UK investors to buy. It also, however, made it a really great time for them to sell. So you’ll notice there’s a lot of inventory on the market right now in popular locations like the Windsor Hills resort, where many people are recognizing the opportunity to sell. Which, normally would be a great idea except that, 2016 has been such a jerk to everyone, that many investors (especially ones brand new to this market), are sitting on the sidelines waiting to see what’s going to happen in the first quarter of 2017. Our Canadian investors, they’re still waiting for the exchange rate to get better, the Brazilian investors prefer to buy brand new homes and most bought in 2015 and early 2016 before their local economy also got weird, the American investors, as great as their economy is right now, are busy with the holidays and have been distracted with the election cycle and that leaves us with very few investor groups left. China has always made up a large portion of the investors here, but even they seem to be on the sidelines waiting out this storm. 2016 has NOT been a good year for sellers as homes are sitting much longer on the market and prices keep dropping lower than some sellers would comfortably like. However, many are willing and able to hold off and they are. Hence the reason the homes are sitting longer on the market. Sellers may want to sell but they aren’t desperate to sell and won’t give their homes away for nothing. Most do not have a mortgage on their home and they are collecting a good rental income so there isn’t any urgency, just desire. Without urgency you still won’t see prices come down too much. You may find an occasional deal here or there but this still will not be a low ball 2012 market type of market.
The New Build Effect
Builders have nothing short of dominated this small vacation rental market over the last 3-4 years. By dominated I mean they have driven prices up and set the standard for today’s vacation rental home. This has been both good and bad. While most people will agree that the new build vacation homes being built right now have a more functional and desirable floorplan for renters as well as the communities offer incredible amenities that keeps renters returning, they have not come without a price. While the cost of homes have continued to rise over the past 5 years, the nightly rental rates have not been going up along with them, so at some point the price becomes too high to support the market rent. I have seen that happen in Champions Gate, Encore, Festival, Storey Lake, Paradise Palms, Windsor at Westside and Providence . . . pretty much all of the new build communities. Sellers are literally putting their home on the market at a loss right now with furnishings in the communities I mentioned above because after the mortgage and expenses they aren’t making any money. In some communities, it’s been said that builders are actually bullying these sellers to take their homes off the MLS because it makes it harder for the builder to sell at their inflated prices if people can go and get a resale that is barely used, furnished and exactly the same floorplan in the same community for much less.
Some people bought a new build home because they were pressured into it by their agent, because these agents were getting paid a HUGE commission to sell these homes as opposed to their standard fee on resales. Now you are seeing the effects of all the inflated new build purchases and those agents are no where to be found. I am not saying buying new is bad, please don’t run with that. If you can get into a nice new build home in one of the resort communities for under $125 per sq. ft. that’s legitimately not a bad price. But most of what’s been being sold is in the $140+ per sq. ft. range BEFORE furnishings. That is too high for this rental market to support.
What’s In Store For 2017?
I am predicting everything to pick back up again in spring of 2017 and here’s why. There are SO MANY investors sitting on the sidelines ready, willing and able to buy. There is absolutely no shortage of buyers but they’re not the kind of buyers that will invest on impulse, speculation and hype. They want a good price. They don’t want to pay $145 per sq. ft. from a builder or from a seller who paid too much and is trying to get out of it. These are the kind of investors who will spend months analyzing community by community, studying the rental incomes, running numbers and they are waiting for the right property. Most of these investors are new to the vacation rental market and are just catching on to the Airbnb craze and want in on it. They have a lot to learn about how it works but they are learning fast and studying. Some are owners that already own a vacation rental here or somewhere else but recognize the opportunity to get a resale for a good price right now.
For the US investors, most of the obstacles will have been removed by spring of 2017. The new president is sworn in, the holidays are over and interest rates will have either gone up or not but everything will be pretty much out of the way by then. There’s no telling what will happen with the exchange rates for both the Canadian dollar and the Pound but if not much changes, then 2017 buyers will be pretty much dominated by domestic US investors. . . and they want deals right now. I predict they will get them in the first half of the year. I think for the first half of 2017, because of how much inventory is on the market and how long it’s sitting, I think investors will be able to get better buys while this is the case. If international economies pick back up and those investors start heavily investing here again I think the demand will again start to exceed the supply and while I don’t think it will drive prices back up, I think it will support the prices homes are currently listed at and we won’t see prices come down much more. Only time will tell on that aspect of it.
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My Final Statement On The 2017 Market
I can’t imagine 2017 being as weird of a year for everyone as 2016. Investors are getting ready to jump back into the market soon and the rental market remains steady despite what’s going on with the real estate market. Orlando is still one of the best performing vacation rental markets in the country. I’m going to call this year as a buyers market, nothing like 2011 and 2012, we will probably not see anything like that again for over a decade, but it’s going to be a buyers market. If you don’t NEED to sell I recommend waiting it out for a year or two. If you need to sell and you bought new with a builder and furnished it, you will probably lose money because buyers are not going to pay you what you paid the builder right now when there are so many other options for them. Of course there are always creative ways to get a home sold, but you’re going to most likely have to give more than you’d like. No matter how beautiful the home is. It’s the market.
If you want to buy, the first half of 2017 will be the best time to do it, for two reasons.
1. The market is still warming back up. You will have more inventory to choose from and more opportunities to find a better deal.
2. You’ll be able to take advantage of the busy summer season and profit from those valuable weeks of bookings between June and August.
No matter what happens, I hope 2017 is your best year ever! I hope that if you do have the need to invest in or sell your vacation rental that you think of me and I hope that Orlando continues to remain one of the strongest vacation rental markets in the country, which it currently is. Here’s to a prosperous and healthy New Year to you, your family and your vacation rental business!