Dax’s Data: Is Airbnb Still a Worthy Investment in Santa Cruz County?

Dax Nollenberger
- Dax Nollenberger

Dax’s Data: Is Airbnb Still a Worthy Investment in Santa Cruz County?

You may have heard the phraseAirbnbust” circulating through social media. The exciting luster of an affordable hotel alternative took the world by storm and only accelerated as we began to escape the lockdowns of COVID-19. Since then, the drawbacks in fees and rules had many pushing back, creating a roar of discontent amongst outspoken social media participants. 

While I realize that short-term rentals (STRs) are a touchy subject for many concerned about housing affordability (trust me… I get it!). Those concerned will be happy to know that local ordinances in Santa Cruz County have made it quite difficult to become an STR homeowner/host. That said, I am not here to argue the morality or local impact of STR ownership. Instead, I’ll take the objective approach of analyzing recent performance and determining if Airbnb is still a viable option for current or potential Santa Cruz homeowners. 

If you’d like to learn about STR ordinances/restrictions in Santa Cruz County, read my blog on short-term rentals HERE. For Monterey County restrictions, click HERE.

General sentiment surrounding the long-term viability of Airbnb’s has many potential buyers spooked. Viral posts on X indicating a 40% year-over-year reduction in revenue created a firestorm of conversation and predictions of an Airbnb collapse. The rebuke by Jamie Lane, SVP of analytics at Airdna, shows that the data that created the firestorm is up for serious debate. 

All that said, certain markets that saw a massive explosion in Airbnb properties will inevitably see a significant decline. The market is correcting and some areas have become so over-saturated that ownership revenue will never be the same. The question is: Is Santa Cruz one of those markets? 

Revenue, like home prices, is determined by supply and demand. The notable thing about all of the metros listed in the chart above is that local ordinances for those locations are very Airbnb-friendly and therefore have seen a massive influx in supply.   

As so clearly stated in the chart above, supply has been exploding. As a result, many local governments are enacting heavily restrictive ordinances. While frustrating to navigate, this has created a barrier to entry that protects current Airbnb hosts from oversupply. In Santa Cruz County, restrictions will continue to keep supply low resulting in stabilized prices and occupancy rates. 

So back to the question, are Airbnb’s still a good investment in Santa Cruz? 

Let’s find out… 

The first thing to consider when shopping for an STR home is what your goals are. If you are looking exclusively for high cash flow, this may not be the market for you. If you are looking to secure a high-value asset that is going to make money and appreciate over time, Santa Cruz is the market for you. Airdna ranks the Santa Cruz market as a 15/100 on the investability scale. Unsurprising when this metric measures the cost of a mortgage weighed against projected revenue. Our prices are high and that impacts the Return on Investment (ROI). Much like other investment strategies (long-term and mid-term), CA is not the greatest performer from a cash flow perspective because of the cost of the homes. That said, it has the greatest potential for wealth building because of the appreciation. 

What Santa Cruz certainly has is demand. While the county has a healthy small-town vibe and just over 297k residents. According to Santacruz.org, Santa Cruz County gets over 3 million visitors a year. That is a 10x over the population itself! 

What Santa Cruz doesn’t have is excessive supply. Highly restrictive policies and a crackdown on unpermitted Airbnbs have led to a 5% reduction in STR listings year-over-year. With only 686 listings in the entire county, we will not experience an over-supply-related revenue drop. 

According to Airdna, Median annual revenue over the past 12 months in Santa Cruz County was $105.9k with a $427.40 average nightly rate and 68% occupancy rate. When compared to last year, annual revenue is down only 1%, the average daily rate is UP 3%, and the occupancy rate is down 7%. An expected but acceptable change when compared to the crazy travel times of 2021 and 2022.

As indicated in the chart above, short-term rental demise is overstated. A slight decrease in monthly revenue is noted, however, 2023 STR performance is comparable to 2022 with a notably higher peak in July. 

Another metric for determining the health of the short-term market is the nightly rate. What is clear from the charts above is that the nightly rate is on an upward path. A very positive sign for the long-term income potential of STRs. 

The final metric that I want to highlight is the occupancy rate. It is undeniable that the occupancy rate has diminished over this past year. That metric, along with revenue, is the panic button that every STR naysayer has been highlighting. This isn’t exclusive to Santa Cruz, it’s across the entire platform. Economic conditions have a huge impact on the hospitality sector. If the market is uncertain, consumers respond by reducing expenses and hunkering down. With that considered, I’d argue that a 1% decrease in Annual Revenue projects positively on the long-term outlook of short-term rentals.

In conclusion, STR performance in Santa Cruz County of late not only indicates that STRs are still very much a viable investment option but also projects positively when it comes to nightly rate and annual revenue. While local ordinances have made STR ownership painstakingly difficult, they also created long-term viability for owners by effectively capping supply. Intentionally suppressed supply bodes well for long-term occupancy, revenue, and rates. Couple that with a consistent demand from over 3M annual visitors, and you have a formula for a resilient investment. Not to mention, the longer-term wealth-building prospects due to property appreciation make it a worthy consideration.

Concern for changing regulations is a valid one. While we can never say with certainty how our local government will act in the future, precedent shows that there will be consideration for grandfathering in previously operated short-term rentals. I’ll advise you as the reader the same way I advise my buyer clients: always have a pivot strategy, never overleverage yourself, and understand that history tells us how strong a long-term investment in Santa Cruz real estate is. 

Ready to make a smart, resilient investment in Santa Cruz’s short-term rental market? Don’t navigate these waters alone. Reach out to me for personalized guidance, current market trends, and insider tips. Let’s turn your investment dream into a reality. Email me at [email protected] to connect today!

Thank you for reading. 831-227-5847.

 – Dax

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