Property Values In Palm Springs Are Suffering Since Short-Term Rental Restrictions Were Put In Place

Both short-term rental investors and traditional property owners in Palm Springs, California, are seeing a decline in property values since the city instituted restrictions on the ability of property owners to offer their properties as short-term rentals. Like many vacation destination cities, Palm Springs experienced a boom in Airbnbs (and property values) because of the tremendous earning potential they offer.

Seasonal rentals are not new in Palm Springs, which has a long tradition as a seasonal rental market popular with snowbirds coming from Canada and the upper Northwest to escape the cold winters. Aside from ideal winter weather, Palm Springs is also home to dozens of world-class golf courses and gorgeous natural scenery. All this created a perfect storm when the short-term rental boom kicked in.

After The Airbnb Boom Came The Pushback

It wasn't long before residents of Palm Springs came face to face with why cities regulate short-term rentals. There was the noise and the partying, much of it going on until the early hours of the morning. Palm Springs has many tight-knit neighborhoods, where people have owned property on the same block for decades and know each other well. It's also a quiet place, despite being a tourist destination.

Suddenly, it seemed to residents that half the houses on a given street were occupied by strangers who felt entitled to cut loose. Residents began to notice many homes on their block were owned by investors who didn't even live in Palm Springs. They intended to turn their properties into full-time businesses. This vexed Palm Springs residents and they complained to the city government, which responded by instituting a license requirement.

Then, in 2022, the city passed an ordinance capping the number of short-term rental licenses at a maximum of 20% in any of Palm Springs’s 66 neighborhoods. However, any preexisting licensed short-term rentals in those areas would count toward the 20% cap. That cap meant many of the city's most popular neighborhoods were already over the limit. The sticky part of the deal is that the grandfathered licenses are not transferable.

Selling Licensed Homes In Capped Neighborhoods Is A Huge Task

If you're a licensed short-term rental owner in a neighborhood over the 20% cap and sell your house, the buyer won't inherit your rights to operate it as a short-term rental. That becomes problematic when a significant portion of the property's value may lay in its potential to generate revenue as a short-term rental. It's created a difficult situation for owners selling properties in capped neighborhoods.

In an interview with the Los Angeles Times, real estate agent Michael Copeland detailed his predicament. He purchased a house for $1.8 million in Palm Springs' popular Gene Autry neighborhood, which is over the cap. He dutifully applied for his license, but now that he wants to sell his home and can't transfer it, he is having great difficulty finding buyers.

He originally listed the property for $1.725 million before reducing it to $1.595 million. The property has been on the market for over a year, and like many other frustrated sellers in capped neighborhoods, Copeland has no idea where the bottom is. Another agent, Tim Sarlund, listed a property at $1.4 million 10 months ago that he's reduced to $875,000 and still can't sell. 

Winners And Losers Emerge

Making matters worse, Sarlund, who also helps manage short-term rentals, says demand for short-term rentals is down in comparison to past years. That's only going to further depress local property values. The situation is unfortunate for some investors, but it is also an inevitable part of the real estate cycle. It can't be avoided, and many long-term Palm Springs property owners are still in the black in terms of appreciation.

Winners and losers emerge whenever property values fluctuate in a real estate market, and Palm Springs is no different. During the boom, everyone was winning, but that phase never lasts forever. While many owners who bought houses as income opportunities suffer, the downward price movement has made it easier for people who want to buy in Palm Springs and live there full time. In real estate and life, timing, as they say, is everything.

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