Prepared for STRO Regulation?

Question

Many likely have concerns about the impact of upcoming STRO (Short Term Residential Occupancy) Ordinance in San Diego and how it will affect rents/values.
I work on a team with the Managing Brokers at Class Realty Group. Our Real Estate Brokerage specializes in residential real estate, property management, short term rentals, and investment real estate. Personally, my Managing Brokers own 4 units in Mission Beach as well as we manage 20+ rental properties for clients in San Diego.

Recently we were provided the STRO Implementation Timeline!The updates include:

• Published STRO Implementation timeline:

• October 3rd, 2022 – Application Period Opens for all STRO license Tiers
• November 30th, 2022 – Tier 3 & Tier 4 License Period Closes
• December 16th, 2022 – Lottery conducted & hosts notified of the results
• January 6th, 2023 – Tier 3 & Tier 4 License Fees Due
• May 1st, 2023 – STRO Ordinance Implementation Date

A few things we have been concerned about and are preparing accordingly for are:

What are our chances of getting a Tier 3 (Pacific Beach) or Tier 4 (Mission Beach) License for short term rentals?

Will the reduction of short-term rentals increase rental inventory so much that long term rents go down and vacancy increases significantly?

Will those that do not get a license choose to sell all at one time in an already cooling/uncertain real estate market?

Although we don't have all the answers, we have spent quite a bit of time analyzing the data provided by the City of San Diego.

Curious of others thoughts, concerns, and strategies for STRO Implementation?

Michael Baum · Answer

That is a real bummer @Dan Heuschele. That kind of crap is just unacceptable really. So sorry that has happened. Good luck with the lawsuit!

Dan H. · Answer

Not quite right.  Mission beach hit Quora and people did not receive permit (including one of our STRs that have been an STR 23 years and family owned the entire 23 years and had maximum lottery entries - real unlucky?). The rest of San Diego did not hit the quota limit.

Even before we had one of our units not chosen, we had donated to a legal fund to fight the STR quota.  It seems very wrong for an STR that has operated legally for 23 years paying the taxes (and provided city 5 years proof of paying the taxes to get max lottery entries) is no longer allowed to continue as an STR.  I personally would have liked all STRs in existence before the STR quota was passed to be grandfathered in but especially an STR owned by one family for 23 years.  We are evaluating our options as it is furnished and we like to have friends and family use it.  Hopefully the law suit can help.  Not sure how it will do as MTR as mission beach is much more a STR area than MTR area.

Jennifer Creager · Answer

Now that its December, and San Diego did not receive enough applications for the lottery, Tier 3 and Tier 4 permits are still open, until all have been allocated. I found a deal and will 1031 exchange into a STR in Pacific Beach, so I am hopeful  I will be able to get a permit in the coming weeks.

Wyatt Darien · Answer

@madison Thank you for sharing this and starting the conversation.

With rents leveling off after the summer and the surge we have seen from COVID, I do think that there will be a small price adjustment on rents depending on how fast/how many STRs Transition to LTRs immediately after losing their licenses. More importantly, will these owners go to market with their properties after not being able to win the lucky ticket?  After reviewing the new Tiers for SD it seems to be that there is an opportunity unlocked for owners/investors targeting Tier 2 licenses.

1. Will owners of 2-4 unit properties start looking for license holders that are tenants of the property?

2. Will there be a correction in the pricing of existing STR's 2-4 units that won't be able to get Tier 3 & 4?

3. Does this create an opportunity to House Hack at a near 0 cashflow basis or + ?

My investment thesis is that by the spring/early summer of next year, we will see more inventory that will allow Tier 2 operators to purchase properties and operate as STR's. Additionally, there might be a market for license holders to become LTRs at STR properties. Would love any thoughts or feedback.

Michael Baum · Answer

Yet another reason to stay away from CA as a place to invest in. Too bad as there are some cool places.

Robin Simon · Answer

@Madison Carlson great info

Carolyn Fuller · Answer

I can't say what will happen in San Diego but in Boston when over 3000 STR units were taken off the STR market in 2019, the LTR vacancy rate was 2.88%. Today the LTR vacancy rate is .47%.

https://www.boston.com/real-es...

Our LTR market is totally off the rails. The STR units that were returned to the LTR market at the end of 2019 have been a drop in the bucket.

Prepared for STRO Regulation?

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