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Hospitality & Entertainment Insider Only News Sussex County

Hospitality execs. consider changing tide of housing market

Katie Tabeling
Beach home, vacation home, beach condo, Bethany Beach. April 2024 | DBT PHOTO BY KATIE TABELING

With housing prices skyrocketing and many other units turned into lucrative rental units for vacationers, it can become tricky to find housing for summer workers.  | DBT PHOTO BY KATIE TABELING

In 2001, Mike Dickinson spent his summer as the manager of Grotto Pizza during his vacation at Rehoboth Beach, hoping to earn some money before he went to the Medical College of Philadelphia. Instead, he ended up staying in southern Delaware and now oversees all day-to-day operations at SoDel Concepts.

He was one of hundreds of college students working at the beach, renting a place with friends and cramming the days and nights with shift work and days on the beach.

Today, things are a little different.

“Back then, in Dewey Beach, group homes were introduced where you could rent a house and have fun and work. I don’t think it’s so much that any more,” Dickinson told the Delaware Business Times. “Some of the people who owned multi-unit buildings where the large group of kids were going have been flipped to seasonal homes or upgraded and rented out.”

Much like the rest of America, Delaware has been contending with an affordable housing crisis. Bright MLS, the real estate listing service, found that the median home price rose more than 40% between 2019 and 2022, or a brisk pace of 13.7% annually.

In Delaware, the median home price was $369,000 in March according to a market report from the Delaware Association of Realtors. There’s a plethora of single-family homes out on the market and the 2023 Delaware Housing Needs Assessment shows that 50,000 renters in the state pay more than 30% of their gross income on utilities, rent and more. The 2023 Delaware Population Consortium predicts that the county’s 65 and older residents may hit 99,362 people in 2030 – or a third of the county’s projected population.

Others, like Grotto Pizza Jeff Gosnear, are struggling to find workers in a tight labor market, although it’s become a little easier as the COVID-19 pandemic continues to fade further in the rear view mirror. Grotto Pizza hopes to head into Memorial Day weekend with 750 seasonal workers for all its locations. Typically, it hires about 350 people in the month of May.

“Right now, we should have 320 openings in the summertime throughout our stores,” Gosnear said. “There’s more demand for workers and we’re competing against not only each other, but in construction and even health care. There’s so much of an influx of people coming down here, all the industries are needing the workforce to support it.”

The past and the present

Gosnear had lived in Dewey Beach but was looking to move to Rehoboth Beach. He said a decade ago, college students were flocking to Delaware’s beaches and renting a place between $16,000 to $18,000. But now, with retirees migrating from New York and New Jersey and more to enjoy the close proximity to the beach and the more favorable tax structure, that is becoming less of a reality.

In 2020, the State Office of Planning reported that the median housing value was $231,000 and the household income was $79,262. Fast forward three years, their last report found that the median household income was $73,000 – and a minimum threshold of $114,000 was needed to spend at least 30% on household costs of a house of $380,000.

“Some of those houses that were $400,000 to $500,000 are now worth $1 million,” Gosnear said. “What’s happened is you see a lot of people who were renting to workers decided to sell it. Let’s face it, $60,000 a year salary is not the same thing if you have an offer for $1 million for a house.”

Exacerbating the problem is Sussex County’s unexpected success as a haven for professionals eager to get out of the home office during the height of the COVID-19 pandemic. The county and the resort areas had long been marketing the “shoulder season” with events in April and October, but once it became clear that the disease didn’t spread so easily outside, rentals and hotels boomed with business well into the season and the winter months.

That caused a trickle-down effect to get some property owners that may have rented out to the seasonal workers to quickly flip to renting on Airbnb or other platforms and make more money.

La Vida Hospitality Managing Partner Josh Grapski previously said finding housing for summer workers used to not be an issue but, as the years pass, it’s become harder. It’s actually a core question for La Vida’s interview process.

“It’s gotten to the point where we rented apartments and sub-rented to some of our J-1 Visa students to make sure we had enough housing to give,” Grapski said. “We do hire year-round, but it’s just as similar to hiring someone who works two or three years with us. But we’re seeing people we’ve worked with for years say that they love working with us, but it’s just so expensive. It’s being felt in that regard [of hiring long-term] as well.

Many hospitality executives also pointed out that in the past few years, securing housing for the J-1 Visa program could complicate things.  The cultural exchange visitor program offers students from other countries, typically Eastern Europe to come to the United States to work and learn about the county.

While Delaware may not need as many J-1 visa workers compared to neighboring resort Ocean City, Md., it still brings hundreds to the workforce to sometimes handle shifts from two jobs. Still, the primary sponsor, the employer, has to find a place to work.

Some like La Vida took the option of sub-leasing apartments out. Grotto Pizza, however, has places for about 20 visa students and connections for other employees, putting them in touch with others who are looking for roommates or renting out a room.

TKo Hospitality, which manages 16 hotels including those in Delaware and Maryland, opted to not become primary J-1 visa sponsors. That means that they could become a secondary employer for some visa holders, but they would not have to play a more hands-on role in finding housing for them.

“In the last two years, we rented apartments, and a lot of the time we learned that the world was different now. There were some struggles in getting the visa, and sometimes we were paying for apartments that could have had four residents and only had two,”  TKo Hospitality President Vince DiFonzo said. “We had to eat the cost of $45,000, I’d estimate.”

Generational shift

The hospitality sector often sees many past employees from the previous season come back following summers, and some places like SoDel and TKo tap into other markets. SoDel in particular sees a lot of educators work in the summer weeks, while TKo Hospitality sometimes rely on staff at its event venue, the Lighthouse, to work on the hotel side.

In today’s world, the summer workforce for both is getting younger, organically building a pipeline to develop them into long-term employees.

“We work with a lot of high school students or those who just graduated, particularly considering the attitude about college,” DiFonzo said. “There will always be workers, and it’s up to us to find them and train them. It’s a big part of our culture. But every generation is different. Right now, it’s very important to this generation to be flexible at all times and to have a company with a clear vision.”

SoDel also taps into younger demographics, namely high school and college athletes that can start out bussing tables and work their way to waiting tables and serving alcohol once the proper training is complete. 

From Dickinson’s point of view, as someone who did work their way up to an executive level role in a restaurant group, southern Delaware has the advantage of a circle of different restaurant groups in a close area. He also said there’s many workers who have earned and saved enough money to buy their own condos to rent out.

“If the whole area was developed, it wouldn’t work [to bring workers here]. But we have a small community of restaurants that cross fine dining, fast casual, fast take-out, and more, and the workers already know what’s available to them,” Dickinson said. “I don’t know if this atmosphere would work in a big city with 500 restaurants.”

Future solutions

Some restaurant executives have tried their hand at solving the workforce housing issue to middling success. Grotto Pizza recently scrapped its plan to include 12 apartments in its new corporate offices off Coastal Highway because it could not become “financially viable.” Gosnear said that construction costs are so high that the project was coming in $2.5 million over budget.

It’s a familiar tale to Preston Schell, president of land development company Ocean Atlantic. His company is preparing to open its first workforce housing project in Lewes, Dutchman’s Harvest. That project has 140 units, with 42 units bought by the Milford Housing Development Corporation to sell for households making 80% area median income. The rest will be sold to people working locally.

“Those units will be for sale from mid $200,000 to high $300,000. Arguably, that’s $150,000 to $200,000 below market,” Schell said. “It’s not an easy issue to address, because it’s not feasible to do market rate as a for-profit developer. Most times, the problem is that the project can’t be financed.”

The construction costs and interest rates continue to be so volatile that a developer has to take out a loan to cover roughly 60% of the project cost with about a quarter of the apartments discounted to start at 42% area median income and up to 80% area median income.

“There’s some tax credit money, other federal and local programs that are currently set at too low a number to really make an impact in this issue. It’s like creating seven units here, 10 units here,” Schell said. “It probably makes more sense to build a project every year for six or seven years to address this.”

Sussex County officials have been working on addressing the affordable housing issue for years. Senator Russ Huxtable has been working on a slate of affordable housing bills this session, including Senate Bill 244, which would allow any county that collected a lodging tax to use it on workforce housing programs and lowering the cost of housing projects.

Huxtable told DBT that the lack of affordable housing was not just one issue, but a “web of complicated issues, each layered on top of each other.” With the high demand for new houses pushing prices and the lack of short-term rentals have spread the market thin.

“Without affordable housing, the supply of seasonal workers gets stretched thinner and thinner. And that takes its toll on our small, local businesses, who can no longer find the workers they need,” the senator said.

In particular, his bills, Senate Bill 23 and Senate Bill 25  would work to lower the cost of developing affordable housing units to make it more of a viable investment again.

SB 22 would create a new state incentive program modeled on the Downtown Development District program to offer 20% of the construction costs for housing projects in high-density areas. Meanwhile, SB 25 would help lower the cost of new projects by exempting low-to-moderate income dwelling units from the state’s 2% improvement tax.

“While these are critical and necessary reforms that will help make affordable, workforce housing a viable option for developers, we also really need buy-in from our county and municipal governments because, at the end of the day, land use decisions are almost exclusively the purview of local jurisdictions,” Huxtable added.  

“So while I’m working to encourage the Delaware General Assembly to use all the tools in its toolbelt to incentivize, encourage and promote the development of affordable, workforce housing, we also need our local jurisdictions to take the baton and hand them across the finish line,” he said.

In 2022, the Sussex County Council revamped its rental program to allow developers to build apartment complexes by right with a density up to 12 units per acre without a public hearing. The program also expedites the site plan review process but also requires open space and other infrastructure improvements as well as tying the rent to a maximum of 80% of area median income, or $60,100 for a family of four.

As of mid-May, the program has three new applications in various stages in the planning process. Chapel Branch Apartments would bring 84 units, with 24 in the county’s rental program, and School Lane Apartments would have 201 units and only 15 in the rental program.

Even with local and state possible solutions, there’s still one issue left to wrestle with: the “not in my backyard” mindset of the neighbors.

“Generally, it’s frustrating to see that people who are buying homes here and becoming a bigger part of the voting base don’t really want to see these projects,” Schell said.

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