Cities Forcing Airbnb to Shift Strategy

Floods of the frat variety (nytimes/williamwidmer)

Floods of the frat variety (nytimes/williamwidmer)

Stepping away from the Carson-at-HUD controversy for a moment, Airbnb has quietly signaled a significant tactical change in its approach to working with city governments. The Silicon Valley company, which currently has an estimated $30 billion value, has gained a reputation for stonewalling local governments as it expands across the globe.  This has included actively flouting local laws, refusing to share data (or sharing cherry-picked data) and ignoring local housing advocates and neighborhood groups. As a result of this behavior, the company is experiencing a severe backlash - whether it’s losing lawsuits or being completely banned.  It appears they are finally abandoning their ‘shoot first’ growth strategy.

The biggest recent news concerning the company came from right here in NYC.  The state passed a potentially crippling law making it illegal to advertise short-term renting in the state, which could jeopardize Airbnb’s biggest single domestic market.  The law stems from several years of the state unsuccessfully attempting to work with Airbnb to come to terms with existing occupancy laws. The company adopted a hard-nosed strategy (similar to Uber’s strategy against the TLC, which it ultimately abandoned as well) that made a lot of enemies in NYC and Albany (Governor Cuomo signed the law in October). 

Whereas many New Yorkers agreed with Uber about how awful the TLC was and welcomed the catch-me-if-you-can strategy, Airbnb was mistaken to assume that New Yorkers felt the same way about the hotel lobby.  New Yorkers simply don’t feel the pain of an expensive hotel room as much as they feel the pain for not getting a cab when they need it.  They do feel the pain when tourists overrun their building or neighborhood.  Misunderstanding that nuance proved costly.

As Airbnb has done in the past (including in its home city of San Francisco) it decided to sue.  The legal argument is somewhat convoluted, but the basic hope of the company was to clarify its liability with the new law (they wanted to make sure only a host could be found guilty and not the company.) The strategy also clearly was to put popular pressure on the city and state and to use its deep war chest to force both to make a better deal with the company.

Once it became clear that the company would not be found liable under the new law (and that there was no political pressure to cave to the company,) Airbnb quickly settled (separately with the city and state) and has accepted the ruling that will come into effect next year.  This was a big win for opponents of Airbnb (and a big loss for potential hosts) but the move was likely a tactical retreat for the company rather than a total surrender. How the new law will impact Airbnb’s revenue will be clear relatively quickly and will likely dictate the scope of a future legal counter-strike.

Having apparently learned its lesson over the last few years in NYC, this week the company demonstrated a radically different approach with New Orleans – it struck a deal with the city government and local groups before a prolonged legal fight.

The deal outlines an agreement between the company and the city to share its list of registered hosts, to ban any hosts in the French Quarter, and to crack down on ‘party houses’ that have negatively impacted local neighborhoods.  This was seen as a major concession to the city, the hotel lobby, and local residents – three groups the company has all but ignored or dismissed previously whether in New Orleans or other cities.

Though New Orleans is a dramatically smaller market than New York, the company has clearly signaled that it no longer sees fighting these groups as the fastest growth strategy. Though it remains to be seen if this will be the new model for the company in other cities, the backlash has clearly spooked the company’s investors enough to shift gears. 

To be clear, growth is still the driving force of Airbnb (just as it is with any company) and there doesn’t appear to be any cultural shift within the company.  Any company that takes that type of capital and hits that type of valuation is under tremendous pressure to increase growth to justify such lofty expectations.  But as cities and residents become more aware of the pros and cons of the company, they are starting to organize in a way that threatens the established pace of growth.  The company has exhausted its “shoot first” growth strategy and has to recalibrate in a more informed marketplace. It took too long for them to recognize this, but perhaps they have now.

Understanding this makes anticipating what happens next in NYC and New Orleans relatively easy. Airbnb has made concessions that will no doubt harm short-term revenues in these markets, but it has bought valuable time to let the political heat subside (while continuing to expand to other friendlier markets.)  During this period they can evaluate how vigilant these cities are on enforcing the new agreements and how much of a price (literally or figuratively) the company would pay for dragging its feet. They have already been accused of this in several international markets.

If either city’s policies appear to be manageable, they will have helpful case studies for other eventual conflicts and move on.  However, if NYC or New Orleans significantly damage the company’s revenue, Airbnb will most certainly sue in federal court.  The company’s investors will leave them no choice.  How those scenarios form and play out is just speculation at this point, but you can bet their legal team is preparing for all of them.

Airbnb likely expected some of this backlash and hoped for a delaying-action as it continued to expand.  Now it must recognize that in more mature markets, it must make concessions to local interests.  This may or may not harm growth in these markets or new markets, but a new strategy is inevitable now.  The pressure to continue to grow – and to justify its evaluation – will not subside, however.  Playing nice with cities is one way to keep growth going. Another is to create new streams of revenue, which it has already begun to do.  But if these efforts don’t meet investors’ expectations, Airbnb could very easily come back with its guns blazing. 

Report: Airbnb is hurting housing in NYC

5 parts of the city account for nearly 60% of Airbnb's listings (myf report)

5 parts of the city account for nearly 60% of Airbnb's listings (myf report)

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.

That sweet spot that screws a lot of New Yorkers (myf report)

That sweet spot that screws a lot of New Yorkers (myf report)

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. 

Number of units missing from the rental market (myf report)

Number of units missing from the rental market (myf report)

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. 

Albany Blows it On Housing (and In General)

Is Albany upside down or just being itself? (ny mag)

Is Albany upside down or just being itself? (ny mag)

Last week, New York's State Legislature, acting more like an embattled frat house cramming for finals, passed a series of largely unremarkable bills in the final hours of its 2016 session.  Although we can all rejoice about now getting Bloody Mary's at 10:01 AM on Sundays, it's impossible not to deem the session a massive failure given what wasn't resolved.  Despite a desperate need for action on housing and a number of key bills and initiatives on the docket, no housing laws were passed.  There is plenty of blame to go around, notably the bitter feud between the Governor and the Mayor, but the bottom line is that the housing market right now is crippled by uncertainty and a lack of vision at a time when the future of affordability, particularly in NYC, hangs in the balance. I will highlight three areas where the Legislature has undermined, skipped, or out right blocked the chance for sweeping housing reform and give my take as to why.

Cuomo's Failed 'Memorandum of Understanding'

When Governor Cuomo announced his massive $20b 5-year housing plan back in April, he included $2b for 2017 to be spent on affordable housing and fighting homelessness.  In place of details, he outlined a Memorandum of Understanding (MOU) that was to be worked out among the "Big Three" (the Governor, the Senate Leader, and the Assembly Leader) at a later time.  This type of action, which excludes rank and file legislators from debate and negotiations, is notorious in Albany and decried by many taxpayer advocates and policy watchers because it is the source of so many shady deals in other areas of government. It has never been used in a housing bill, let alone one of such scale.  The Governor's decision to use this tool is even more stunning when you consider that two former members of the Big Three have been sentenced to prison on corruption charges (more on this later.) 

Back when I wrote about the growing feud between Governor Cuomo and Mayor de Blasio, I pointed to this plan as a signal to see if the Governor was serious about housing policy or simply trying to embarrass and impede the Mayor's own housing plan. If the Governor could reach a sweeping agreement to fund affordable housing, it could be seen as a generational shift in housing policy and in how business gets done in Albany.  Well, here we are in June and there is no MOU and no policy.

Our tax dollars at work (newyork.com)

Our tax dollars at work (newyork.com)

Clearly the biggest unfinished item is 421a, the controversial tax incentive given to developers for including a certain number of affordable housing units per building.  The bill sunsets every 4 years and Governor Cuomo allowed it to expire in January when negotiations over union construction wages broke down. This has left plans for thousands of housing units up in the air and threatens to kill Mayor de Blasio's housing plan in the cradle. Though a compromise is still possible, the fact that one hasn't been found yet shows a shocking lack of leadership and/or a childish level of personal animosity.

I've written a lot about how flawed 421a is as an affordable housing tool.  At best, it is a wildly expensive way to create a tiny fraction of the needed affordable housing units and, at worst, it is a market-warping give-away for developers that prevents more affordable housing units from entering the market. Certainly some advocates welcome the delay on 421a and would like to see it scrapped altogether. Others think that affordable housing can not happen in any form without it.  I certainly believe it should be reformed significantly to create better targets and measurements for affordable housing, but scrapping it abruptly leaves existing projects in chaos. 

The frustrating thing about this session however, is that there was never any serious talk about reforming the policy, nor was there any ability to given the ambiguity of the MOU.  The initial breakdown came when the carpenter's union rejected the wage floor suggested by the Real Estate Board of NY, which was more or less the same language in the current Republican-controlled State Senate proposal.  That is where the negotiation stood six months ago, and where it stands now.  We are left with a maddening binary decision between extending it as is or letting it die. Neither one makes any sense given the political landscape.

A compromise on this particular element is probably a few horse-trades away and you can argue one way or the other over the union's current position, but the fact that there was no larger review of the policy should anger every voter and taxpayer.   421a is not a short-term or long-term solution for creating affordable housing.  Perhaps, if properly designed and part of a larger effort, it could be an effective tool, but there was no ability for the legislature to debate this. Additionally, the Democrat-held Assembly attempted to expand the nature of the MOU by tying any reform of 421a to additional state funding commitments to NYCHA, but the Governor has not shown any interest in this effort and no deal has been struck.  This appears to be dead on arrival.

Despite the ambitious scale of the Governor's suggested housing plan, we have seen no details or policy discussions, no deal within the existing MOU framework, no sense of what it would take to accomplish one, no sense of how and where billions of dollars would be allocated in housing across the state, and no ability for our elected officials to properly debate these issues.  Is it any wonder that a deal wasn't struck?

Ethics Reform

This question brings us to the other major inter-related failure of this legislative session: ethics reform.  As I mentioned earlier, this past year we have seen two of the Big Three in state government sentenced to a combined 17 years in prison on multiple corruption charges. This is on top of more than 30 state elected officials meeting the same fate over the past decade.  Assembly Speaker Sheldon Silver and Senate Leader Dean Skelos, along with Governor Cuomo (who has been accused of blocking a commission on ethics), effectively ran the state between the three of them for years, during which New York has been seen as the most corrupt state in the Union.  The calls for reform have been deafening, but action has been slow and punchless.

The legislative session did pass one important ethics reform when it agreed to ban public officers convicted of office-related crimes from receiving pensions (it still has to be voted on next year to become part of the State Constitution.) This is a positive step for sure, but fails to address the types of crime that has gotten leaders into trouble in the past.  Specifically, there was no action taken to limit outside income for state legislators, to limit 'housekeeping' donations to political parties, or to close the so-called "LLC loop-hole" that allows unlimited donations from these corporate structures despite the ease with which individuals or corporations can hide behind them. 

2 out of 3 of these guys are going up the river, but stopping before Albany (ny post)

2 out of 3 of these guys are going up the river, but stopping before Albany (ny post)

All in all, here again we see a shocking failure of leadership across all parts of Albany. The fact is that the current system, as corrupt and ineffective as it is to the larger population, works well for both parties.  The unique nature of power in New York State allows for both parties to control just enough to keep the peace (and their seats) while blocking bolder policy initiatives and reforms.  Until ethics reforms pass on a larger scale, the status quo will remain in Albany to the determent of all New Yorkers - and truly sweeping housing policy won't see the light of day.

Airbnb Crackdown

A potential major blow to Airbnb is the final piece of legislation that I'll touch on because it could have an impact on housing in certain neighborhoods in NYC.  The bill, which has passed the Senate, bans any advertising of apartment rentals under 30 days, which is already illegal in NY state, and creates a series of fines for an owner caught listing them.  Whether this represents a true crackdown on the service remains to be seen (it also must pass through the Governor's Office before becoming law.)

It might seem like a surprise for me to include cracking down on Airbnb as a blow against housing, given how controversial the company and the practice are.  In addition to being illegal in NYC, there is no doubt that it has an adverse affect on housing costs in certain, trendy neighborhoods and has negative impacts both on potential renters blocked from finding units and on existing tenants or neighbors surrounded by strangers. (I also have a philosophical problem with a company that is fundamentally based on exploiting peoples' income insecurity around housing, but I'll have more on that at another time.)

I feel better already (weandthecolor)

I feel better already (weandthecolor)

The problem is how to separate the good actors from the bad actors, which this bill (and NY's general dwelling laws) does not do.  A couple going out of town for a long weekend once a year that wants to rent out their apartment, with the consent of their landlord or neighbors, is simply not a problem.  However, despite Airbnb's claims, there are a lot of renters that amass a large portfolio of apartment leases or building owners that opt to focus exclusively on short-term tenants (they also have a huge problem with racial discrimination by renters on the site, which they are are trying to combat). Airbnb doesn't release much data, but when it does, it appears that these types of actors are the majority of its listings.  Airbnb won't be completely honest about this for the simple reason that they make the majority of their money on 'professional' Airbnb renters. They can't justify their model to investors if they do rely on that couple going out of town once a year.

I think there could be a responsible way of allowing landlords/tenants/neighbors to make short-term rental agreements, but no doubt pressure from the hotel industry simply won't allow that discussion right now - and that's really where this bill came from.  This is less a win for tenant advocates as it is for hotel developers.  What could have been a chance to force Airbnb to evolve and become a stakeholder in NYC has instead likely inspired the company to double down on aggressive lobbying to fight the existing laws rather than improve its practices. Housing in NYC will continue to suffer in any event.

I have advocated for a broad reinvention of our housing and dwelling laws before and I absolutely think we should include short-term rentals in the discussion.  The toothpaste is out of the bottle with Airbnb and bad actors will still find ways around even this law. Rather than try to force it back in, we should...find more toothbrushes to put it on? (I'm tired and need to publish this before the Mets game, sorry.) At any rate, this bill doesn't come close to considering how best to handle Airbnb and similar technology-driven companies. (A bill to allow Uber and Lyft to expand upstate was blocked in the Assembly.)

The Airbnb law is the perfect example of rhetoric masking reality in state politics. New York isn't alone in this, but it is certainly more naked about it (not lease because of how many people seem to fail at balancing the act and get busted.) Special interests have a right to lobby their elected officials, but unfortunately that comes increasingly at the expense of the common good, which is never as well organized or funded. Albany is evidently trapped in a particularly vile cycle of sacrificing the public good whether out of greed or flawed ideology or both.  This could have been a significant legislative session given the public demand for action, the amount of ideas on the table, and the amount of actors across all spectrums who were engaged in the debate, but it wasn't.  The more the state government fails to take advantage of these circumstances, the harder it will be for them to materialize again.