This column originally appears as a Q&A in the Holiday issue of The Sheet. But because it covers the current market conditions, it is probably a better Broker’s Report.
Mammoth Lakes condominium values have assuredly risen in dramatic fashion in the past 12 months. The increases range from 10 to 30% or more depending on price range and other variables. The most profound increases have been in the low-end of the inventory. But that appears to be changing as the increases are now moving more rapidly into the other segments of the condo market. And as we close out 2017, the available inventory remains historically low.
Where this all goes is anybody’s guess. And as I have previously written it is probably more dependent on the macro economies of the country and the State than anything that is happening (or not happening) here in Mammoth Lakes.
But why did this significant rise occur? There was, and is, a confluence of factors. Arguably, the Mammoth condominium market has been undervalued the past few years. The financial crisis of the late 2000’s certainly impacted the market in a negative way. The foreclosure/REO/short sale phase took years to clear out. But while all of the distressed properties were being worked through, Mammoth suffered through a few drought years. And those dry years took their toll.
So the past two wet winters have rekindled Mammoth’s reputation as a snow magnet. There is no doubt that quality snow conditions help Mammoth real estate values. The perception of a better economy and increased stock market wealth also helps. Especially in this second home/vacation market. But other factors have played their parts.
One of the reasons Mammoth condos have been undervalued in the recent past is because they have never reached their true potential to generate revenues. Another convergence of factors has changed the rental industry. The VRBO/Airbnb phenomenon has allowed many condo owners to become “active” participants in generating significant rents out of their properties while also allowing them to enjoy some personal usage. This trend has allowed many to become true sole proprietors and income property owners. For some it has become a component of their lifestyle and retirement plans.
But there are other factors here in Mammoth that have propelled this even further. Mammoth condos have been selling well below replacement value. Because of that there have been very few (almost none) new condominiums built in the past 10 years. And no new condo hotel properties to help fill the increased rental demand. Did I say increased rental demand? The most recent group of planning consultants looking at Mammoth Lakes report that we are now close to 1,000 beds short during the peak tourism periods.
Another factor; the community has allocated a substantial sum to marketing in the past few years. The TOT (bed tax) numbers show that it has paid off. The marketing has created greater demand in the summer and off-season periods. It has also allowed for an increase in the winter rates especially during the high demand periods. So rental revenues are up. And the new models of vacation rental and management are allowing condo owners to keep more of their income (the vacation rental industry is going through real transformation).
So demand is up, rates are up, and there is diminishing competition. Diminishing competition?? For now a large chunk of the local condominium inventory is owned by what I refer to as “pure second homeowners.” They don’t rent and they don’t really occupy their properties that much. This is especially true in projects that have not seen large percentages of local resident ownership or long-term rental. In projects like Snowcreek, there really isn’t much nightly/vacation rental going on.
Some of that could change with the new tax laws. Some pure second homeowners may convert their properties to rental properties for tax purposes. But it may not be a significant volume because many pure second homeowners aren’t owning for tax purposes, and many have no or very little debt on these properties. And just as many new condo owners are planning on being pure second homeowners as are planning to run a rental business.
The low end of the condo market has come under the greatest amount of pressure because of these new rental models. The small units function like hotel/motel rooms in the Airbnb realm. But the demand is creeping up to larger and more luxurious properties. Owners are finding interesting niches in many segments of the market. The less expensive units have provided better returns on investment (ROI) in the past few years. But that appears to be changing too.
The modern rental programs are also utilizing dynamic pricing. Owners are pursuing higher rents during the strong demand periods, incentivizing extended weekend rentals through the winter, and requiring week-long minimum stays during the summer. And they are also capturing low-impact rentals that generate modest rents in the shoulder (slower) periods. An increasingly successful strategy during slack demand periods is renting larger units as smaller units by locking off bedrooms and baths. Renters like the larger living areas and kitchens of larger units but don’t need the extra sleeping space.
These evolving and increasingly effective vacation rental models have certainly pushed condo values up here in Mammoth. The underlying zoning and land use designations in Mammoth are now creating added value for most condo units. It is a twofold impact. The zoning (and other governing restrictions) for the majority of condo projects allows for nightly rental. It is not contentious. The Town and community see it as a golden goose. There is no movement to make a change.
Conversely, the restrictions on nightly rentals in the single-family neighborhoods curbs the competition from these properties. And while that activity has occurred in the past, the Town is stepping-up on enforcement. These “illegal” rentals will simply become more difficult to operate, if not impossible. That makes the revenue production capability in the condominiums even more valuable.
Another factor driving the condo values is the housing crisis here in Mammoth. Local residents have scrambled to “own anything” even if it is a cheap condo. It beats having your landlord decide to sell at these improved prices and ending up in the forest. And interestingly too, many local residents are downsizing including selling large homes and moving towards condos. Winters like 2011 and 2017 can certainly be motivators. The longer you live in Mammoth, the more trying the big winters become.
For many, part of the popularity and downsizing trend is the realization that the local HOA fees are not some ominous burden that many think they are. Owning, managing and maintaining improved real estate in this environment is expensive. Snow and ice removal (and the damage they can cause), the altitude, the sun, the dryness, etc., all take their toll. There are economic efficiencies in a condo projects that don’t exist in single-family homes and neighborhoods. I’ve owned both. The expenses of owning a home add up fast. And inevitably second home owners end up paying for some level of management that condo owners already have. The true cost of ownership, depending on variables, can be a push.
And all of these factors have also created a condo remodeling boom in Mammoth. Many of the older condo projects have excellent locations including the Meadow or slope side or downtown. Many have good utility (especially for nightly rental) or pleasant views or are in low density projects. Most are certainly worth remodeling. Potential buyers and owners contemplating a rental business are looking to remodel with renting in mind; attracting renters who are willing to pay more for a condo that feels modern and works efficiently. And they are remodeling with some built-in durability to withstand almost constant usage.
The rise in values in the low end is now affecting the higher end; potential buyers are looking at condos that have now risen into the $400 to 500,000 range that need $100,000+ in upgrades. So they might as well move into the $600 to 800,000 range and buy a property that is relatively new and already in great condition.
If these trends continue there will eventually be new units developed in the market. But their pricing will have to be high. Nothing to do with development and construction is cheap in Mammoth. And California’s wildfires aren’t going to make it any less expensive
So for now the Mammoth condo market pricing is on the upswing. This has primarily occurred in the past 12 months. But the condos are still undervalued. They are still selling for significantly less than the peak of the mid-2000’s. And many believe the rental rates remain undervalued too. Increased rents will support increased values.
How long will this last? Ultimately the larger national and State economies should determine where real estate values go from here in Mammoth. But if the Ski Area’s new ownership does something really profound, then all bets are off. So only time will tell.