Is Airbnb Really Ruining Rental Markets?

by | BiggerPockets.com

Those who benefit from the status quo hate disruptive technology.

Just look at the millions of dollars the taxi industry has spent lobbying for state and local governments to regulate—or outright ban—ride-sharing services like Uber. And, of course, the hotel industry has spent millions of dollars trying to do the same with vacation rental services like Airbnb.

It’s a strange and ironic case of corporate hotel lobbies invoking social justice arguments to sway politicians. “Supply of rental housing is being eaten up by vacation rentals! No one can afford to rent anymore! Where’s the regulation?! Where’s the taxation?!”

Is there something to their arguments, these defenders of the status quo? How much has Airbnb impacted rental markets?

Regardless of their obvious self-interest, these hotel lobbying groups aren’t entirely wrong. But they’re far from right, too.

The Case Against Airbnb

Airbnb rentals are most prevalent in the most desirable neighborhoods, in the largest cities, where tourism is concentrated.

In other words, Airbnb has little impact in rural areas, in the vast tracts of suburban sprawl, or in low-income neighborhoods. It’s a phenomenon seen mostly in high-rent, high-demand urban neighborhoods.

Here’s the argument presented by hotel lobbyists and tenant activists: In urban neighborhoods with already high demand for housing, Airbnb rentals deplete the supply of housing for residents.

And they’re right, to an extent. HousingWire reviewed the New Orleans housing market and found that if every home listed for rent on Airbnb were suddenly listed for long-term lease, long-term rental listings would spike by 30%.

Put like that, it sounds shocking—except that number is misleading: Many people read that statistic as “oh my gosh, Airbnb housing is taking up 30% of available rental housing!”

That’s not actually what that statistic means.

Related: My Client Tripled His Income Using Airbnb: Here’s What He Should Know About Taxes

It’s not referring to total rental housing; it’s referring to rental housing that’s vacant right now. If New Orleans has a vacancy rate of 4%, then they’re talking about all Airbnb rentals being able to add another 30% to that 4% (or about 1.2% of total rental housing).

Is it real? Yes. Is it an overwhelming economic force? No.

airbnb-tips

The Rise of the Sharing Economy

In a very real sense, the sharing economy has helped democratize industries once dominated by corporations and unions. Average Joe can now participate in the hospitality industry, courtesy of Airbnb. And corporate hotel chains don’t like it.

This democratization is not just a pleasant concept. In a survey of Airbnb hosts, nearly one in five reported that the revenue they earned by hosting guests has helped them avoid eviction or foreclosure. That’s 16,000 Americans who kept their homes in the top 10 U.S. cities alone.

That doesn’t mean that the business community feels quite so warm and fuzzy about the sharing economy. Anyone looking to sell something has cause for concern when consumers start sharing those somethings, rather than everyone going out and buying their own something.

Here’s how mortgage industry analyst Rob Chrisman puts it: “If everyone on the street doesn’t need to buy or own their own shovel or their own car, and the world needs to make fewer of them over time, what does that do to manufacturing-related GDP as the years pass?”

The most obvious rebuttal to that argument is that the U.S. economy has not been driven by manufacturing for decades. Most manufactured goods are imported, so if American consumers bought less of them, perhaps we could shrink our trade deficit with rival economies like China.

Manufacturing may no longer be the backbone of the U.S. economy, but consumption is another story. Still, the sharing economy boasts plenty of other benefits: less waste for landfills, less spending for consumers, less of consumers’ paychecks becoming corporate profits, and more going to mom-and-pop providers.

How Some Cities Have Tried to Legislate Away the Sharing Economy

Some cities really, really don’t like Airbnb.

There are some legitimate concerns about housing supply, outlined above. Then there’s the hotel lobby, which has spent a massive amount of money to bend legislation their way.

But what cities hate most about Airbnb is the loss of tax revenue.

New York City outlawed most short-term rentals on Airbnb. In the higher-demand areas of New Orleans, such as the French Quarter, the city has also banned most short-term rentals.

Santa Monica has gone full-regulation on Airbnb hosts, requiring business licenses, making hosts to stay on-site with renters, and imposing a hefty 14% tax on rentals. What few Airbnb rentals are allowed in New York are also subject to heavy taxes.

They might have paused to consider some other solutions.

Market Solutions: Supply Side

There’s an old proverb that applies nicely to disruptive technology and the sharing economy: “When the wind changes, there are two types of people: those who build walls and those who build windmills.”

Regulation-happy governments have reacted by building walls, trying to resist technological and economic change by regulating it away. But what if we instead tried a market-based approach, by streamlining regulatory changes instead of piling them up?

The hotel industry has been disrupted by the sharing economy. Imagine that 15% of hotels go under and the other 85% evolve and survive. The 15% of hotels that go under represent valuable real estate that could be converted to residential use—if city governments are nimble enough to rezone them without years of red tape.

Likewise with the “retail apocalypse.” We have acre after acre of retail space falling fallow, in prime locations that could be rezoned to residential use, in these cities where local governments worry so loudly about housing supply.

Cities could also approve more housing permits if they’re so concerned. San Francisco’s city government has been whining for years about how high rents are, how there’s no affordable housing, etc. But look no further than their new housing approval process. New development must be approved by neighborhood councils (cue the not-in-my-backyard moaning), approved by the city planning commission, and then ratified by a board of supervisors. If a housing construction project survives all that, it’s subject to an appeals process.

Related: How to Use Airbnb to Travel & Live for Free in Retirement

Compare San Francisco’s new housing numbers to Seattle, which has a more streamlined approval process. San Francisco saw 15,730 new housing units added from 2010-2016, compared to more than double that in Seattle (32,000). Since 2000, San Francisco saw 38,000 new homes built, compared to 70,000 in Seattle.

This is doubly impressive, considering Seattle only has a population of only 700,000, compared to the 900,000 in San Francisco!

airbnb_expensive_real_estate_markets

Market Solutions: Demand Side

Guess what? When rents get too high in one neighborhood, people start moving to another neighborhood. Look no further than Brooklyn’s rise in popularity in the 2000s, after Manhattan grew too expensive in the late ‘90s.

Regulators like the idea of instant results and keeping firm control over those results. They dismiss market economic forces as “theory,” yet it’s already happening: Demand has already started shifting away from these very neighborhoods.

Young adults have been moving to less expensive cities. Since 2010, second-tier cities have actually seen much higher population growth among millennials, relative to their populations. Consider these top eight cities for relative growth among young adults: Virginia Beach, Richmond, Riverside/San Bernardino, Memphis, New Orleans, Austin, Pittsburgh, Baltimore—not expensive cities like New York City, Los Angeles, Chicago, San Francisco, Seattle, Washington DC, Houston, Dallas, etc.

And many are abandoning these expensive, high-demand urban neighborhoods entirely. New studies by Zillow and Harvard have found that most Millennials plan to move to more affordable suburbs, if they haven’t already done so. In fact, nearly half of millennial homeowners already live in the suburbs, compared to only 33% living in urban neighborhoods.

Airbnb, Rental Markets & Commercial Operators

Technology changes. Economies change. And that change and disruption are happening faster than ever in today’s world.

That means governments and regulators will need to become faster too—more agile, more efficient—if they’re to actually serve their constituents as they claim. If our bureaucrats keep moving at 20th Century paces, we’ll continue to see empty malls sitting next to neighborhoods with no affordable housing.

Here’s a quick example of how city governments could have approached Airbnb, if they’d been less keen to toe the hotel industry’s line and less greedy for tax revenues.

Individual property owners renting out rooms or renting out their homes short-term rather than long-term are hardly villains. If there is a problem, it lies in the rise of commercial operators. These are businesses buying up homes in the highest-demand cities and operating them as Airbnb rentals.

Take Vancouver, for example. Over a third of the city’s Airbnb home listings are owned by a small handful of owners.

That suggests a new form of the hospitality industry, rather than participants in the sharing economy. If cities are so eager to regulate and tax, perhaps they should have started with these commercial operators, rather than banning homeowners from filling their extra bedrooms as they see fit.

Still, there are plenty of market solutions to these rental housing concerns if regulators could become agile enough to keep pace with today’s world. Instead, we’re seeing 20th Century bureaucracies trying to address 21st Century problems.

Get used to disruptive technology because it will only come faster and faster. You can build walls, or you can build windmills; which would you rather build?

It’s that time of week again—we’ve stirred the pot, and now it’s time for some indignation! Seriously, though, what do you think about the rise of Airbnb and the sharing economy? Do property owners have a right to lease them for as long (or short) as they like?

Comment below!

About Author

Brian Davis

Brian is a rental investor with 15 income properties, who provides free video training to help everyday people start earning passive income at SnapLandlord.com. He's also the co-founder of SparkRental.com, which provides free services & education for landlords. His rental management is almost completely automated by now, allowing him to travel the world (his current home base: Abu Dhabi).

23 Comments

  1. As a consumer, I love AirBnB. As an observer, I could understand how it frustrates residents. As usual, when government gets involved they tend to ruin things for people trying to get innovative and earn extra money.

  2. If my town is any indication, hotels that go bust do NOT get converted into housing. They just sit, sometimes for decades, until someone comes along and makes them a hotel again.

    • Brian Davis

      Hi Katie,
      That’s exactly the problem – large city governments tend to be bureaucratic and rigid, rather than lean and agile. Imagine if the city rezoned the property as residential while the owner was still in bankruptcy, so the property could be auctioned off with residential zoning as part of the bankruptcy liquidation?

  3. Angel Gutierrez

    Very good article! I’m impressed! You actually took the time to lay out and describe some very key factors that are changing the face of our business for decades to come and beyond…

    Also, the fact that stupid short-sighted and meddlesome governments continue to lay ruin to private business(of which they know zero) and get away with it blows my mind…

    I took a ride up the California coast last month on my motorcycle and planned to camp out at AirBnB’s along the way… only to find out they were ALL sold out MONTHS in advance..!

    The infuriating part is that I HAD to stay at Motel 6’s(they’re the cheapest and plentiful ) at rates of $149/night and UP! Maybe I should’ve brought a tent. Every room was nasty and the staff they have running these places are the worst!

    By contrast, AirBnB hosts are VERY friendly and welcoming, provide great clean accommodations at a reasonable price and it all shows on the provider reviews on the website.

    I’m all for freedom and independence for the individual and all for the freedom to do what we want with our properties as we see fit.

    Here is A solution to the “government” issue when they insist on legislating prohibitions on what we can do with our properties by example:
    A friend of mine owns SEVERAL large apartment buildings in Escondido California . Most of that city’s residents are Hispanic . A few years ago, the city(in their infinite wisdom and attempt to cleanse the city of undesirable residents) came up with a law that says no one can rent to “undocumented ” persons without suffering huge fines and risk confiscations of property. This law clearly violates federal housing statues.

    The day of this “new law” ratification, my friend sent his attorney to court with a request for a permanent injunction against the enforcement of this new law and it was quickly granted as the city of Escondido’s attorney had no rebuttle of the clear violations this new law was making and the judge asked whether the city counsel ever asks for legal opinion on ANYTHING they do? The attorney said nothing and the permanent injunction was granted. I was present and VERY curious for the hearing.

    If more folks out there were more proactive about keeping government in check we wouldn’t have many of these government created/sponsered problems that we are subjected to enjoying today…

    The established casino industry tried like hell to stop the Indian gaming/casinos as well… it didn’t work.

    This is STILL America and the free marking with always innovate to solve problems and fill the needs of the marketplace .

  4. Kris Motola

    I am generally in favor of AirBnB but I understand the criticism. Personally I would be really annoyed living next to a full-time AirBnB because strangers coming and going all the time with some no doubt being disrespectful regarding noise, etc. since they are only there for a few days. It would be like living next to a hotel without the hotel’s oversight.

  5. The thing the regulators have overlooked is that Airbnb offers a fundamentally different product than hotels. It offers houses and condominiums which have a full kitchen and a private yard or patio. That is the thing that consumers have no access to other than Airbnb. Until Airbnb, there were timeshares and extended stay hotels, both flawed products. Unlike Uber which is basically a private taxi cab, Airbnb filled a niche that was never served before. That is the reason it’s so successful.

    • We do not advertise on airBnB. We use VRBO exclusively. We screen carefully because we have found there are basically two types of guests. One is families and other responsible groups. The other is someone looking for a party house. Since our house sleeps 25, we can usually tell when one or two people want to rent the whole house and object when we say we are going to lock the upstairs. One or two people trying to reserve a whole house usually intend a blow-out party.

  6. Naren Gunasekera

    As a traveler I love AirBnB (until there is an issue with a booking, their customer service is appalling) and the potential for investors I think is great. I would agree that there does need to be some way to limit big corporations from taking over this space and squeezing out competition. Hotels chains all over the world are lobbying hard to stifle this competition and it is unfortunate.

    Your point about housing shortages being self inflicted by a lot of these cities rings true as well. Local government is often inflexible and panders to the NIMBY’s without a lot of common sense or logic.

    Personally I see AirBnB as an opportunity in my long term plan to spend a good portion of my life travelling, buy well priced investment properties in a few countries, AirBnB them out and spend a few weeks at each. Kind of like the Porsche/Apartment Complex story in Rich Dad, Poor Dad.

  7. Susan McGee

    I am new into the rental business and I purchased a historic home that had been converted into a four-plex. I had originally wanted to open a bed and breakfast, but the home I purchased did not have enough bathrooms for that plan. However, it has worked great as short term vacation rentals. Yes, there is more work than long term rentals, with weekend or weekly cleanings and I set up breakfast in each unit, in advance. (This gives my guests the choice of having their breakfast anytime they want, rather than a set time. And because each unit has it’s own kitchen, they can feel like it is THEIR OWN HOME, while staying with total privacy). I live on premise in a separate unit and do provide oversight regarding my guests, so as to be a good neighbor and keep a watchful eye on my investment. And most importantly, I pay the city and the state a hefty hotel tax, so everyone benefits from my hard work. All short term rentals should be paying taxes, as I do.

  8. Noel Schewe

    I rented a house and then rented out my extra room to pay a huge portion of my rent. It freed me from stress from the payment every month and I got to live in a gorgeous house. Now I am helping others do the same. Oh, I should say, I have rented houses for others as an occupation and find it is simliar- long term versus short term.

  9. Pedro Martins

    While I appreciate many advances in technology and the like, my view on AirBnB (just like Uber and other similar sharing ventures) is that they are basically breaking the law. The arguments they bring forward to defend themselves such as “we are bringing a product that people want” and “government should keep their hands off private business ventures” are no different than the arguments that bootleggers made during Prohibition or drug dealers make today.

    There are reasons for the regulations and taxes imposed on taxi companies and hotels that range from safety to neighborhood values to infrastructure maintenance costs, etc. These companies should not be exempt from any of these no matter how much their CEOs and shareholders grunt against it.

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