Life’s Better on the Water
How COVID-19 has Affected 3 Different Waterfront Markets
by Carole VanSickle Ellis
The global pandemic might have lit the fire underneath U.S. vacation real estate, but fundamentals are keeping things frenzied in many waterfront locations around the country from East Coast beaches to West Coast shorelines to the often-overlooked Great Lakes of the Midwest. For real estate investors, knowing where to look for potential opportunities in one of the hottest market sectors in the country could mean the difference between overpaying for a vacation property in a cooling market and getting ahead of the competition in a solid market with plenty of growth potential this year and beyond.
Why Waterfront Property is Booming
In 2020, COVID-19 changed the vacation rental industry as city-dwellers scrambled to leave crowded multifamily dwellings, packed sidewalks, and suspected hotbeds of contagion otherwise known as office buildings in favor of less-densely-populated suburban and rural areas. Of particular interest to these participants in the sudden urban exodus were vacation markets with access to outdoor recreation options, decent internet connectivity for daily zoom meetings, and the option to rent for a few weeks (or months) while they waited out experimental health policies like economic shutdowns, stay-at-home orders, and lockdown mandates.
While competition remains fierce in the single-family residential sector mainly for properties accessible to middle-class earners, vacation markets offer the opportunity to cater to buyers and renters with large amounts of disposable income even as the luxury sector cools in other areas of the country. “It’s about being able to enjoy life [in]…these luxury markets,” explained Danielle Hale, chief economist for Realtor.com, in an April 2021 interview with Mansion Global. Hale went on to observe that many emerging housing markets in this sector may be identified using conventional indicators like housing supply and demand, median listing prices, unemployment, and wage growth. However, the markets with the most growth potential also tend to display additional indicators like a healthy small-business population and what Hale described as “a share of foreign-born residents who contribute to the vitality…of the area.” She also noted in her observations on the results of the June 2021 Wall Street Journal/Realtor.com “Emerging Housing Markets Index,” which is released quarterly, many households will “continue to have more flexibility around where they will work, making moves from one part of the country to another a possibility for more and more home searchers.”
Of note for any potential vacation-market investor should be the pandemic-driven indicator for market desirability: drivability. As many Americans continue to feel skeptical about flying or, more recently, simply feel the odds of a canceled flight are too high to stomach, waterfront markets within about four hours’ drive of major metropolitan centers have boomed. These markets are literally “just what the doctor ordered,” as Jonathan Hughes, a contributor to MDLinx.com, observed in an August article on how to get the most out of a pandemic vacation. “The effects of a scenery change appear to be especially potent when we put ourselves in a natural setting,” Hughes wrote.
Naturally, waterfront areas are a perfect fit, which is why we will use this market study to evaluate and compare three very different waterfront markets and determine what makes them attractive to investors, vacations, and permanent residents alike.
Market 1:
Hilton Head Island, South Carolina
“Temperatures Rising in the Southeast”
Hilton Head, South Carolina, is known for its beaches, golf courses, and high-end real estate. Thanks to a temperate climate and the relative affordability of the southeastern United States compared to other regions of the country, Hilton Head has long been an attractive destination for homebuyers and vacation-rental investors. COVID-19 has “accelerated” this trend in Hilton Head just as it has accelerated many other trends across the country. In fact, in March 2021, homes were spending half the time on market they spent in 2019 (62 days vs. 117) and home prices had risen 8.9 percent year-over-year across all price sectors including Hilton Head Island’s thriving luxury market.
Local real estate professionals credit a combination of attractive property types, retiring baby boomers, and millennials finally starting families amid the remote-work environment of the pandemic for the wild escalation of property values in Hilton Head and the surrounding areas of South Carolina and Georgia. On top of residential demand, there is strong demand for short-term vacation rental investments. According to rental analytics service Mashvisor.com, Airbnb income alone in Hilton Head is currently averaging about $2,501 a month for full-time operators with average occupancy.
Hilton Head also had an additional boost thanks to the “Revenge Summer” mindset of 2021. Although the Delta variant of COVID-19 did slow some Americans’ travel plans (particularly abroad), the southeastern beachside destination is highly drivable and effectively lured in travelers seeking something memorable to help them “make up” for the whole of 2020.
In many cases, families that experienced that “memorable” trip this past summer are now seeking to acquire properties in their favorite vacation markets as it becomes evident fewer employers than expected will require a return to full-time, on-site office work this fall. This ongoing attraction pushed Hilton Head from seventh place on the WSJ/Realtor.com emerging luxury market index in Q1 2021 to third at the end of Q2 2021.
Investors seeking opportunities in the Hilton Head area must realize the drivability factor makes a much broader area than just Hilton Head Island attractive to buyers seeking second homes or pandemic-related relocation. In fact, the more recently released index included the entire Hilton Head-Bluffton-Beaufort area of South Carolina on its emerging markets list at number three.
Market 2:
Newport Beach, California
“Cooling, but Still Hot Enough to Burn Overenthusiastic Investors”
On August 20, 2021, residents experienced something they had not felt firsthand in quite some time; a decline in the relative “temperature” of the local housing market. August numbers indicated that starting in July and continuing into Fall of this year, #4 on 24/7 Wall Street’s “America’s Best Cities to Live” might experience a little bit of real estate-related cooling. As the entire state of California begins to work through what most investors have long agreed was an inevitable – albeit long-delayed – slowdown in the housing market, Newport Beach, California, just may see a slight decline in local home prices of its own.
Of course, California “cooling” means that statewide, home values are still up 11 percent over pre-pandemic highs and most of the losses in home-sales volume are due to a lack of inventory rather than a lack of buyer interest. However, in Newport Beach, another contributing factor to market leveling is the astronomically unaffordable housing available. According to U.S. Census Bureau data, median household income in the area is just over $127,000 while the typical home in Newport Beach is worth almost $2 million, putting homebuying out of range for most people in the area. Fortunately for sellers in Newport Beach, as of August, this discrepancy meant that in August they fielded between three and five offers on properties rather than the roughly 20 they were getting at the start of the summer, and homes sat on market only about eight days (down 58 percent year-over-year).
For investors looking to acquire properties in the Newport Beach area, the market, allegedly leveling or even declining, could be tricky. Although the coastal community boasts some of the most beautiful beaches in the country, the largest recreational harbor on the West Coast, and top Condé Nast-ranked golf course Pelican Hill, many visitors complain that they cannot enjoy local beaches, in particular, due to a lack of public access. However, starting in the 1990s, the local government has endeavored to expand access via shoreline easements and dedications whenever new development permits. Investors should carefully investigate any property for proximity and access to the shoreline before buying.
Short-term vacation rental investments may also represent potential pitfalls for investors who do not live in the Newport Beach area. Outside of the difficulty in acquiring these properties in the first place, local residents and the Newport Beach City Council are currently engaged in cracking down on short-term rental operations and property owners in response to the COVID-related onslaught of vacationers in the area. Current Airbnb owners in Newport Beach say new requirements including the official submission to the city of “a plan…on how they will deal with troublemaking and rowdy guests,” a three-night minimum stay for renters, age limits on renters (only 25 years old and up), and a hard cap of 1,550 on the number of rentals permitted in the city, will make continuing operations difficult or even impossible. Newport Beach also has a 24-hour hotline where residents are encouraged to report issues with local short-term rentals.
However, investors should note that Newport Beach is far “friendlier” to investors than other local beachside destinations; Huntington Beach permits only about 260 rentals, while Anaheim permits only about 270.
Market 3:
The Midwestern Great Lakes
“A Red-Hot Cottage Market Up North”
During the Great Recession, which officially lasted from December 2007 to June 2009, the “Up North” real estate markets reeled as much of the real estate on or near the shores of Lake Huron and Lake Michigan throughout the Midwest lost roughly 30 percent of its value and then sold at deep discounts for years after the rest of the national market was considered officially “recovered.” When COVID-19 emerged in the United States in early 2020 and the state of Michigan’s governor responded with a series of stringent shut-down policies and began a verbal sparring match with then-President Donald Trump, these markets, collectively referred to as Up North by the Michigan tourism industry, braced for another downturn. Instead, however, COVID-19 brought a red-hot market to small communities where few things have felt red-hot in years.
“I’ve been doing this for over 40 years, and I’m just dumbfounded over the real estate market [between Grayling and Lake Huron]. It’s a feeding frenzy,” Grayling Re/MAX broker Craig Hinkle said last September. The frenzy has not eased since then. Hinkle and other real estate professionals credit the combination of many professionals realizing remote work may be a permanent option and skyrocketing prices in coastal areas for the renewed level of interest in Up North markets. Although the climate is certainly harsher around the Great Lakes than it is in the Southeast or on the West Coast, access to (unsalted) water, miles and miles of trails that do double duty for bicycles and hikers in the summer and snowmobilers and skiers in the winter, and relatively affordable waterfront and water-proximal properties tip the balance for many buyers. When other waterfront markets spiraled out of the realm of possibility, “the ability to obtain a property Up North was within reach,” explained Tawas Sunshine Realty associate broker Karen Haglund, whose brokerage operates out of Tawas City, Michigan, along Lake Huron.
Rising buyer interest in lake waterfront communities may have been accelerated by COVID-19, but it was not started by the global pandemic. “Even before the COVID-19 crisis, Americans’ love affair with the ocean was starting to diminish…due to concerns about climate change [hurricanes and insurance costs],” observed MarketWatch analyst Constance Ford. She added, “There is also a growing perception, based on the new era of social distancing, that beaches have become too congested.” Because lake markets tend to have more recreational options outside of water-dependent activities and more room to build (which means more square footage for outdoor living and guest housing), buyers who have only recently decided to take the leap and invest in a vacation home or a permanent home in a “vacation county” like Michigan’s Presque Isle, Cheboygan, Ottawa, or Charlevoix Counties, to name a few, are far more likely to find options for real estate investments or their own personal residences, although prices are still climbing and availability is declining. However, compared to markets like Newport and Hilton Head, Up North properties’ 5-10 percent appreciation between Summer 2020 and Summer 2021 is pretty palatable.
Local investors say sellers and investors hoping to rent out their new properties should invest in modernizing older cottages and updating amenities if they want to force appreciation or attract high-paying renters in the short- or long-term.
Some investors are even capitalizing on some buyers’ newfound desire for near-total isolation and buying homes on small islands accessible only by ferry or airplane. Historically, cottages on islands like this in Lake Michigan have sold for less than $150,000. Now, one local broker has an office on one of these islands and is fielding calls about real estate there daily.
As one cyber-security expert who recently purchased a home just outside Traverse City put it, “With COVID and being locked down, we just…had some reflection time and decided that if we’re going to get locked down, why not be in one of the most beautiful places in the world?”
