Tuesday, January 8, 2013

Smoky Mountain Cabins - Current Market Conditions in Gatlinburg & Pigeon Forge

I have received several questions from clients regarding the current state of the real estate and rental market here in the Smokies. I thought I would post my analysis for all to see regarding the Sevier County area real estate market, foreclosures, and the impact of the "real estate/mortgage bubble" on the local rental management companies. Below is my sometimes critical and as straight forward as possible analysis of the market.

The overnight cabin rental business realized a decrease in business during the early summer months (compared to the same time frame in previous years) when gas prices spiked to around the $4 mark. I think it discouraged some visitors from traveling here and some from making plans to travel during the later months or at least waiting to book their vacations. The good cabin management companies adapted quickly once they came to the realization their occupancy was not as high as it was in the past by offering incentives. The rental management companies typically offer some sort of "incentive" such as stay 5 nights get the 6th night free or something along those lines. But a few management companies were smart and tied their discounts directly in to what the consumer was seeing as the reason for them not making the trip - gas prices. So, they advertised on their websites things such as Summer Gas Incentives - 10% off cabin rentals and things of that nature. For instance, a cabin that would typically rent for $200 per night would be a savings of $20 per night and the typical summer stay is at least 3 or 4 days, so it was enough of an incentive to entice the visitors to book the cabins. The average visitor to the Smokies is not extremely affluent, they are your normal average Joe for the most part. This ultimately resulted in slightly less rental income for cabin owners, but far outweighed the alternative of having no rentals at all!

Some management companies did not adapt as quickly and I believe they are suffering because of it. The vast majority of people who rent cabins do two things: drive to the destination and find the cabin they end up staying in on the Internet. The management companies who capitalized on both of these by placing in the top in Google Searches, use pay-per-click advertising and adapted quickly to the gas increases seem to be doing fine and actually are on par with past years.

In talking with several different rental management companies, they are seeing a few differences from the past. First, people are not booking rooms as far in advance. I have seen the rentals for several cabins seem empty for August when I looked at them in May & June and then all of a sudden it was booked for virtually the entire month. I am not sure the reasoning behind this, but I would think with the economy facing its struggles and gas prices fluctuating people are waiting to know their financial condition closer to the date of their vacation. They also have told me the cabins renting the most (at least with these specific companies) are the smaller cabins or the very large cabins where groups/families come to meet. So the 1 BR cabins along with the 4+ bedroom cabins tend to be the ones with the best rental histories as of now. The mid-range sized cabins such as 3-4 BR cabins are not performing as well as they had in the past. For instance, a small family coming on vacation with a couple kids can stay in a 1 BR cabin and it still works for them because the cabin may sleep 4. So, the need for the cabins in the 2-4 BR range is less than that of a 1 BR cabin. Although, I must also say there have been quite a few one bedroom cabins built!

Cabin rentals seemed to peak in the period prior to 2005 when there was a great demand for cabins and the supply was still not up to the demand. In and around the time of 2005 there were many large developments and PUD's with cabin upon cabin built in a short amount of time. The demand did not increase, but the supply of cabins increased dramatically, causing the overall gross rental income for many cabins to go down. The cabins that were built in the 1990's and dated as far as the amenities a visitor is looking for saw the largest decline. These cabins now are sort of phasing themselves out as rental properties as they become older and not performing as well as they had in the past. The one exception is a cabin with a tremendous view or on a river - these cabins continue to do well even if they are older and dated. Thankfully, with the downward trend of the real estate market, new cabin builds have slowed dramatically, allowing the supply vs. demand find a better position than the quick growth period of 2005-early/mid 2007.

As far as the real estate market is concerned, in my opinion, I have no indications of prices recovering right now. I don't think they have a lot of room to go lower, but also do not think we have hit bottom yet. In March, I believe it was, I showed a 6 bedroom, 6.5 bath in Black Bear Ridge with a fairly good view. It was on the market for $399,000 and I thought this was a decent deal due to the rental income potential I was aware of and had looked at for comparable cabins in the development. When it dropped to $375,000 I thought it was a good deal and my family and I considered purchasing it ourselves for investment. We ended up not buying it and it sold for $375,000 not too long afterward. Just recently the same model of cabin in Black Bear Ridge came on the market completely furnished as a foreclosure with a much better view and now it is in contract for $369,000. So prices have without question seen declines (particularly in certain developments facing a lot of foreclosures) from the beginning of the year to now. The reason I believe there is still room for the prices of cabins to go down is because even at current foreclosure prices, most cabins do not cash flow with 20% down after paying 40% to a rental management company and all the utility expenses, taxes, homeowners insurance,etc. There are a few cabins here and there that will cash flow, but the vast majority still do not. When a large portion of the cabins hit the point where they cash flow I believe that will be the turning point as investors see the cabins as a wise investment and while there is a lot of inventory of good deals they will begin buying again. As they begin buying at the point where quite a few cabins cash flow, the inventory will go back down and I think there will be a recovery. I cant predict when that point will be, but I do try to have as much data as possible and analyze the market very carefully.