What's happening in the Airbnb/Vrbo market? August 2023

The latest on Airbnbs/VRBOs in the metro Phoenix area… a big topic around town lately. In 2022 more than 40 million people visited Arizona who then collectively spent $28.1B. Investors’ ears understandably perked up to the realization that they could make quite the profit from these visitors needing accommodations for their larger groups. Between 2020 and 2022, approximately 35% of our Single Family House, (SFH), inventory was purchased by investors looking to create short-term rentals. That was a massive number compared to our normal SFH buyer ratio per year. 

These investors were able to swoop in with over-asking price cash offers, beating out many of the less savvy, financed buyers who did not have nearly as much leverage. Left and right, homes were being remodeled and decorated to, shortly after, be posted up on the infamous rental sites for out-of-town guests to enjoy. By the end of 2022, AZ reached the highest tourism rate ever recorded. The Super Bowl and Waste Management Open were largely to thank for this spike, bringing many thousands of winter visitors to Phoenix metro. 

A couple of years have passed since this home-buying craze, and we are noticing a new category of inventory on the market. We are seeing these same SFHs being used as short-term rentals come to market for sale, often fully furnished and identical to their rental listing photos. It seems as if these investor homeowners want to cash out now that once-remote workers have now gone back to office, the big sporting events have passed, and tourism has decreased. For some, this timing conveniently puts them just beyond the 2-year short-term capital gains tax obligation timeframe, so it’s the perfect time to move on from their investment. We will likely see many more of these expired short-term rental properties come on the market, opening nice opportunities for those patient buyers that couldn’t jump in to buy during the last few years.

The Scottsdale Airbnb/VRBO market appears to be the most saturated, (consisting of 6,000 of our 7,300 total short-term rentals in the Valley), and the most susceptible to rapid change.  This has provided the now smaller pool of potential guests hundreds of options to choose from. A large percentage of these homes are not getting booked if they aren’t spectacularly decorated - regardless of if they have poor reviews and/or high fees. Something else to note: the availability, as well as cost, for local cleaners that can regularly turn these homes is very different than it was in previous years. This shortage has caused short-term rental hosts to require stay minimums which eliminates the one- or two-day interest. The boosted cost for cleaning and upkeep has also caused many potential guests to reconsider their plans and book at hotels again, who don’t charge all the miscellaneous fees. 

The entire concept of short-term rentals as a home-run real estate investment has slowed down over the last year and a half. The reality is that too many investors seeking a quick profit inevitably led to over-saturation. Yet the beauty in real estate investing is that not only can investors profit on rental income, but they can also profit from appreciation, and that seems to be the best way out for some of these short-term rental homeowners. So, what is the next best move for real estate investors looking for a short-term rental? This is all up for conversation, of course, but it’s safe to assume that it may not be as profitable as it was in the past few years. Stay tuned to our market updates, we will make a point to touch on short-term rentals regularly as we assess the marketplace.

The Salt River Project (SRP) is a series of dams and reservoirs that capture water from major mountain watersheds to the north and east of Phoenix. The water mostly flows through the Verde and Salt Rivers. Along the Verde River you will find the Horseshoe and Bartlett Dams that create reservoirs with the same namesakes. The Verde River then flows out of Bartlett and eventually meets the Salt River.

Along the Salt River you will find Lake Roosevelt, the largest dam and lake in the SRP, Horse Mesa Dam/Apache Lake, Mormon Flat Dam/Canyon Lake & closest to Phoenix is Stewart Mountain Dam/Saguaro Lake. Incredibly, all of the lakes in the SRP system as of April 2023, sit between 90 and 100% full. This is the equivalent of 2.2-million-acre feet of water. The SRP watershed will continue to fill during the rest of the spring melt and the reservoirs are in the process of releasing water in anticipation of this. Suffice to say, for the rest of 2023 there should be plenty of water in the SRP system.

The water that goes into the SRP system, either from the Verde and Salt Rivers or from CAP, is then distributed to the Phoenix Metro area via a series of canals. The Arizona canal takes water to the central and northern portions of the valley while the Southern canal takes water to the southern and eastern portions of the valley. Often these end up in water treatment plants for distribution to the customer, but there are also irrigation canals for agriculture.

Beyond the robust above-ground water distribution system, Arizona has also made a point to replenish its aquifers. Along the CAP system, six different recharge stations have been constructed. These are essentially man-made lakes where water is allowed to percolate back into the soil and “recharge” the aquifers below. SRP has done something similar, where they have worked with various municipalities to bank water in their aquifers. All told, Arizona has stored around three trillion gallons of water underground for future use.

A poignant example of this forward thinking as it relates recharging and banking water in aquifers can be found in the City of Scottsdale. In the early 90s, the Reclaimed Water Distribution System (RWDS) was conceived. “The RWDS is a complex system of pipelines, booster pump stations and reclaimed and advanced water treatment facilities capable of delivering 20 million gallons a day of non-potable water for turf irrigation specifically to RWDS member clubs.” The idea was for the 13 golf courses in north Scottsdale who were pumping groundwater to water their golf courses to instead pivot to reclaimed water. To accomplish this, the City of Scottsdale in conjunction with these golf courses agreed to a joint spend on pipelines and pumping stations that would provide the golf courses water. In exchange, the city then had the infrastructure to treat & move water more efficiently in addition to the ability to take excess water, not used by the golf courses, and bank it in their aquafers. 

A final piece of the water puzzle in Arizona is agriculture. Arizona alone is responsible for 90% of United States’ lettuce supply during winter months. It is a $23 billion dollar industry that exports more than 120 different fruits and vegetables - the second largest exporter of produce in the country. We would be remiss to forget about agriculture as an industry which is critical not only for national produce but locally is a major part of the economy. There has been talk of cutting agriculture’s water rights first as a way of keeping water in Lake Mead. Lest we forget, cutting that water may have dramatic ripple effects nationwide.

Arizona’s water supply is diverse and sustainable. The state is fortunate to have had forward thinkers that planned for potential water shortages. Currently, 41% of the state’s water comes from groundwater, 36% from CAP water, 18% from in-state rivers (mostly SRP) and 5% from reclaimed water. This diversity in source shall help the state navigate the foreseeable future and consistently provide residents with water on demand. Incredibly, Arizona uses about the same amount of water now as we did in 1957, despite rapid population growth since then.  A clear sign of effective water management and conservation at the city levels. This is not to say that we should disregard water – it is precious and finite. However, concerns about water availability in Arizona are somewhat overblown. Thanks to the efforts of many visionaries of the past, the water for our future appears to be assured.