It has been a rough stretch for Airbnb, the overwhelming leader in short-term home rentals. Though the company is reportedly close to securing a financing around that would value it at around $30 billion (which would make it the second most valuable startup behind Uber), the longterm prospects of Airbnb have started to come into doubt for the first time. The company, which was founded in San Francisco in 2008, has effectively been banned in New York State, is currently suing its home city, and has been accused of allowing racial profiling on its listings. Most distressingly for the company, and for renters, a recent report confirms what many housing advocates have long warned: Airbnb is damaging the rental market. A lot.
The report, published by two leading tenant advocacy organizations, MFY Legal Services and Housing Conservation Coordinators, focuses exclusively on the NYC housing market, which is Airbnb's biggest market by far, creating over $1 billion in revenue in 2015 (of which Airbnb only takes a cut). The report has identified so-called 'impact listings' that meet three criteria: Rentals that are an entire apartment/house, are regularly listed, and are operated for commercial use (by someone who lists multiple units).
Impact listings have removed roughly 10% of the rental housing stock from the market, according to the report. Over 8,000 of Airbnb's 51,000 NYC listings fall into this category and would likely move the vacancy rate from around 3.5% to 4% if they were prevented. These are huge, awkward numbers for Airbnb given their repeated claims that they don't negatively impact the housing market.
These numbers mask just how concentrated this effect is, however. Over 90% of NYC's listings are in Manhattan and Brooklyn, and over 53% are further concentrated in just 5 'macro neighborhoods': East Village/LES; Greenwich Village/West Village/SoHo; Hell's Kitchen/Chelsea; Williamsburg/Buchwick/Greenpoint; and Bed-Stuy/Crown Heights. In these neighborhoods, the report shows that in some cases the vacancy rates would double without these impact listings. It also shows a strong correlation between the number of impact listings and median asking price for rents. This suggests that landlords in these neighborhoods are focusing on lucrative short-term renters while also benefiting from the corresponding pressure on rent prices.
That last point shows the real problem with Airbnb: the professional lister. Once it becomes more lucrative to rent to short-termers in these desirable neighborhoods, you have created a perversive incentive for people who hold leases within them. At some point people start gaming the system in two ways. First, a professional lister grabs up multiple leases and manages them commercially. Second, landlords become their own professional lister and withhold long-term leases in their buildings. The report, conservatively, shows that 30% of all NYC listings fall into this category.
Airbnb was founded on the intention of people renting out a spare room if they are home or their apartment if they were gone for the weekend. A lot of people use the site for just such a purpose. However, it is clear that Airbnb's revenue has increasingly become reliant on these professional listers, which have gotten the company in a lot of trouble for pretending otherwise. Particularly in New York State, they have often stretched their numbers to fit their preferred narrative. One study shows that while Airbnb is technically accurate to say about 85% of NYC listings are from people who live in their apartments, over 50% of the actual bookings come from professional listers (who, as stated earlier, only represent 30% of listings.)
It's also important to note here that NYC's Multiple Dwelling Laws make much of how Airbnb currently operates illegal. You are not allowed to rent an apartment out for less than 30 days if a tenant on the lease is not present. Airbnb confirmed that over 50% of its listings violate this law when it published its own data last December, despite attempting to frame the argument positively. Airbnb only released this data after pressure from NY Attorney General Eric Schneiderman and his own critical report from 2014. Also worth a read, it outlined the many hotel tax laws and fire and safety laws that the majority of listings also violate. Airbnb was clearly mistaken if they assumed those violations would be tolerated in the state.
As I discussed in my previous blog about the legislative session in Albany, Airbnb suffered a huge blow when the state made advertising short-term full-apt rentals illegal and attached significant fines to anyone found guilty. This effectively adds material weight to the previously existing laws and prevents Airbnb from operating in its normal fashion. It remains to be seen how this will play out (a number of their investors have been vocal about protesting the law) but the bottom line is that Airbnb's political strategy has been much less successful than its business strategy and the consequences could be huge for the company.
It's important to point out two things that complicate this picture from a housing perspective. First, much of the pressure on Albany came from the hotel industry rather than housing advocates. It's a sad irony, somewhat lost in all the grandstanding, but the only way that Airbnb's impact on housing has been addressed politically is through hotel lobbying. If Airbnb hadn't had such an impact on lodging revenue in the city, they very likely wouldn't be facing such a political storm. Second, Airbnb has made attempts to 'legitimize' its services in New York over the last few years by at times voluntarily removing listings of rent-regulated units or blatantly commercial listings, and by proposing to pay hotel taxes on behalf of its hosts. It is clear that in regards to the former, they have not made enough of an effort, and for the latter, negotiations evidently broke down at various points. If you're left feeling confused about whom to blame for the current nature of Airbnb in the city, you're not alone. That's how it goes in New York.
The larger problem for Airbnb is a matter of purpose. While it's initial intention (made famous by its sanctified seed deck) was to provide some extra money for renters/homeowners and a better experience for budget conscious travelers, the rush to scale and raise money has made focusing just on that intention impossible for the company. I have no doubt that the founders and early investors saw the potential virtues in disrupting hotels and didn't see the likely vices in disrupting housing. However, those vices are impossible for the company to ignore now, but it seems poorly designed to address them. If the company sees a path to growth by focusing on single-listers (not likely) as was its intention, these latest issues could just be growing pains for a maturing company. If the company doesn't see a path to growth without professional listers (more likely), then it might be in for some bigger problems in other markets in the future.
As a practical matter, Airbnb should have been smarter about its lobbying efforts, particularly in NY. I briefly mentioned their half-hearted attempts to get ahead of certain problems, but they were only partially successful and clearly avoided other larger problems connected to housing that they must have been aware of given their data access. This goes back to their focus on the hotel industry rather than the housing community. They probably just didn't see the necessity or value of having housing advocates on their side while trying to lobby in Albany against the hotel industry. (It's possible they didn't think they would ever get them onboard. Perhaps a self-fulfilling prophecy at this point.)
They could have taken the long-term view of sincerely focusing on single-listers while cracking down on multiple-listers, or they could have taken a hotel tax from users voluntarily and donated them to housing or homeless advocate groups to establish good faith with local communities. In turn that could have helped win over city and state leaders. (Even Uber played nice with the TLC and the state eventually.) Instead, through some combination of accident or arrogance, they have made many enemies in Albany - a place that's hard to get things done in even without enemies. This damage isn't unfixable, but they need to make some significant changes to begin the process. The company's internal struggle to appease policy makers and investors would be fascinating to watch.
I'm not sure how you take what Airbnb has gotten right about 'hotels' and avoid what it has gotten wrong about 'housing.' I have some ideas and we'll see how they play out, but clearly there are reasons to defend aspects of its model. There are fewer reasons to defend Airbnb. They have gravely miscalculated their political standing in many markets where they operate and have callously ignored or fumbled opportunities to have honest conversations with local stakeholders to get the kind of buy-in that could sustain them. They have absolutely disrupted the hotel industry and are probably capitalized enough to weather the inevitable backlash from it. However, the fact that they have seemingly failed to appreciate how much they have disrupted the housing market could prove to be what costs them the most in the long run.