Unoccupy Occupancy Laws

The future returns (pinterest)

The future returns (pinterest)

NYC Housing Policy Tools Series

Over the next few weeks, as we prepare for the Trump Era, I will spend time on various housing policies in NYC in order to help frame the the affordable housing crisis.  I have picked four topics related to NYC housing laws: rent regulation, zoning, occupancy, and property taxes.  I concede that there are other policy tools that could be included (particularly around financing) but these four tend to have an immediate impact on the most people.  The hope for this blog series is to explain the current policy tool kit in New York, but also to show why questioning the underlying assumptions about housing policy might be able to expand it. 

Part 3 of 4: Unoccupy Occupancy Laws

No good deed goes unpunished and I submit NYC’s occupancy laws as a good example.  Before we get to that, it’s important to know how miserable live in New York actually was less than 100 years ago – loud, dirty elevated trains; waste-ravaged streets; overcrowded, dank tenements.  Urban life for most people would look positively barbaric to New Yorkers today.  Improved technology, greater public health awareness, and socio-economic shifts radically changed the built environment of NYC, but that all happened because of active governance.

Occupancy laws - a blanket statement for multiple-dwelling law and housing maintenance law - from the first several decades of the 20th century reshaped how New Yorkers lived for the better.  The famous tenements of the Lower East Side made it one of the densest habitats on the earth, ripe with disease, malnutrition, and other physical dangers.  The city simply couldn’t sustain such a careless and inhumane growth trajectory.  

Progressives of the time created our modern occupancy laws to protect individuals and families from economic and environmental exploitation while protecting the broader public body from gross health and safety risks.  They did this by passing laws requiring basic amenities like natural light and windows, guaranteed heat and water, sanitary bathrooms, fire escapes, and other things we take for granted today.

Modern urban life would be intolerable, even impossible, without these types of far-reaching policies.  We are so accustomed to certain benefits of government intervention like this that we forget how necessary it was – and is.  Our private lives are vastly improved by sound public policy.

However, a byproduct of that amnesia is the slow, deliberate shift in our public policy from inclusive public good to exclusive private gain.  Here’s where the good deed of occupancy laws gets punished.  

NYC used to have a staggering variety of housing options.  Single residency occupants (SROs), boarding houses, and long-term hotels, private room rentals – all allowed residents across any income spectrum options to live affordably, if not luxuriously. These types of housing also fostered a deep, shared connection and sense of community, particularly among immigrant populations and transient workers.  This type of social capital was the bedrock of American society and kindled its economic progress.

Starting in the late 1950s, and especially in the 1960s and 1970s - when the city faced the crippling social and economic effects of deindustrialization – incumbent residents organized against these types of housing.  Some of this trend is an understandable, if ultimately uncompassionate, response to increased drug and criminal activity.  Neighborhoods didn’t like having SROs and boarding houses around because they were housing-as-last-resort for many disabled or addicted New Yorkers.  The corresponding social problems could have an economic cost to property values (though there isn’t much evidence of this.)

These residents responded by advocating for and succeeding in changing occupancy laws.  Most SROs and boarding houses were officially outlawed and have utterly disappeared over the following decades.  Renting out private dwellings – like basements and attics - was radically cracked down on.  Minimum room sizes and unit sizes were enacted. And finally, in 1987, apartments were no longer allowed to be constructed without full kitchens, bathrooms, and at least 400 sq. feet of space.

I’ve already discussed how rent laws and zoning laws have empowered the housing crisis, but occupancy laws are just as important.  When the city began its steady rebound by the 1990s, it didn’t have the housing flexibility it used to have during previous boom periods and we have all suffered as a result.  I believe the current and future demographics of NYC strongly indicate that an economic incentive does exist for amending our occupancy laws.  There are two broad trends that support this. 

First, a lot of New Yorkers live alone.  In 1960, 185,000 New Yorkers lived alone - today it is 1.8 million.  The housing stock is simply not designed for that type of isolated living.  We often lament the fact that too many commuters drive alone to and from work, clogging the roads and polluting our environment. I would argue that one person taking up so much space and resources is a similar economic and environmental ill (not to mention the impact of social isolation and loss of social capital).

Second, New Yorkers (like the rest of America) are aging.  1 in 5 Americans will be 65+ in twenty years and already 20% of New Yorkers are - up from 12% in 2000.  The cost of supporting an older population in isolated, dispensed homes is already causing panic in many health policy circles.  NYC is not prepared for this at all.

I should speak for a second on two related trends – Airbnb and shared housing.  Airbnb has gotten into trouble for violating many occupancy laws, but the primary one is having a non-resident live for less than 30 days in an apartment. They grossly overplayed their hand and have eaten crow in NYC (and other cities) but the basic problem for them is that their model turns a residency into a hotel. I don’t think amending occupancy laws should support this model at all.

Shared housing is sort of a niche millennial market at the moment with some notable big players toying with it.  It’s a sound concept and one in sync with many of the principles we share at homeBody.  The problem with shared housing in its current iteration is its limited reach and appeal.  It is prohibitively expensive to join one of these living arrangements.  Part of that is simple economics - marketing to a well-identified audience - younger, wealthier tech savvy workers who are more open to shared living experiences. But part of it is also practical reality – they have to work within a narrow lane of occupancy laws. 

This is also true of micro-apartments, an en vogue idea that has some sound concepts but relies, fatally in my opinion, on the status quo of occupancy laws.  To date, I don’t know of any efforts of these organizations to lobby for changing occupancy laws, but they would be strong partners to help.

I believe we should amend occupancy laws to encourage a return to more flexibility in the housing market.  Shared housing, micro-apartments, SROs, senior housing, combined-housing (different non-related demographics sharing) are all ideas that have succeeded in the past and are currently succeeding in small amounts in NYC and elsewhere. 

If someone new to the city/country wants to live closer to a job downtown cheaply and doesn’t mind sharing a bathroom and kitchen, why not? If a student wants a cheap (or even free) place near school that includes living with senior citizens, why not? If several families want to pool resources and share space, why not?

Experimenting with occupancy seems to me like a cheaper public policy tool than tax incentives (which we’ll cover next week) and a more equitable policy tool than current rent laws. This is not to say the basic public good initially ensured through occupancy laws should be relaxed – healthy and safety standards can be protected while still introducing more innovation.  This is a vastly under-explored topic that should get a fair shake in public policy discussions. Remembering why these types of laws were passed originally is a good start.

Airbnb Forced to Squat in NYC

Will Airbnb get evicted from NYC? (pbs)

Will Airbnb get evicted from NYC? (pbs)

Last week, Governor Cuomo signed into law a bill making it illegal to advertise short-term rentals in the state of New York and outlined extensive fines for the people doing so. As a result, Airbnb, the short-term rental $30 billion unicorn, has filed a federal lawsuit to stop the bill.  At stake for Airbnb is its largest single domestic market in the US (over $1b in revenue annually) and possibly more. How has it come to this and what will happen next?

I’ve written extensively about Airbnb and what I see as the pros and cons to the service.  It’s complicated to say the least. But I have no love for how the company has operated in New York. They set themselves up for such a dramatic (and expensive) loss.

The majority of business activity conducted on Airbnb has been illegal since 2010. That’s the basic premise to understand here, and what Airbnb knew from the get-go.  You can argue if the state should care if you rent your apartment or room for under 30 days or not, but that’s what the law currently says. Airbnb chose to ignore that, to lobby to relax some of those regulations, and half-heartedly crack down on egregious bad actors on the platform.  

They wanted to shoot first and ask questions later, much like Uber did initially, which was an obvious template as a business strategy to enter NYC.  The thing is, Uber eventually came around and played ball with the state and the city.  You have to be a TLC certified driver on Uber.  That was a big, undesirable concession that Uber chose to make. 

Airbnb didn’t seem to learn that lesson and continued to stonewall the state on data sharing even as Attorney General Schneiderman's 2014 report showed that 72% of listings were illegal. (Jared Meltzer, the NY public policy leader for the company, used to work for Schneiderman.)

So two years ago, Airbnb had a choice to make.  They could make some concessions (such as voluntarily removing ‘professional’ hosts – people renting out multiple properties for extender periods of time - or share data and crack down on bad actors) or they could holdout and hope the tide turns in their favor.  The basic economics were clear – the majority of the company’s revenue in the city came from such professional listings.  They followed the money.

They also made political mistakes by ignoring legitimate concerns from housing advocates and local politicians.  Their PR strategy was to demonize any resistance to Airbnb as being in the bag for the price-gouging hotel industry.  The hotel lobby is a powerful and rather unsympathetic special interest group, one that certainly lobbies hard against Airbnb, but the company was wrong to dismiss the concerns many New Yorkers have about affordability in their neighborhoods.

As a result of this strategy, it became an all-or-nothing situation and they lost.  Now, they have to turn to the courts with great uncertainty about the possible outcomes.

Airbnb stakes its legal defense on two points: first, under the Communications Decency Act, Internet companies can’t be held responsible for any content published on its site by its users and, second, the law also violates the company’s and its users’ First Amendment rights. 

The problem for Airbnb is that the law doesn’t hold them responsible – it fines the hosts posting their listings.  It doesn’t actually block anyone from using the platform; it just raises the stakes to use it illegally.  A First Amendment case also falls into dubious grounds because the state isn’t blocking any form of communication for the company or users; it’s just preventing postings that violate other state laws.

The other challenge for Airbnb will be how to make the case that their business doesn’t rely on others violating other laws.  If 72% of their NYC business was in fact illegal, it’s hard for a court to find an unfair hardship.  Does Airbnb bring a separate case against the state on those occupancy laws? Doesn’t it kind of have to?

This isn’t an isolated case for Airbnb, either.  They are under fire in several cities in the America, including their hometown, and in other countries.  The stakes couldn’t be higher for the company.  At some point they have to alter this model significantly and/or alter a lot of local laws.

It’s a shame that Airbnb resisted reasonable attempts at compromise with New York.  When it seemed clear that Governor Cuomo was going to sign the bill into law, they made an 11th hour attempt to do so, but it was too little too late.  They have not made enough friends on either side of the aisle in Albany.

They also assumed, incorrectly, that “average New Yorkers” would universally support the company.  They clearly misread or ignored the impact the affordable housing crisis is having on those average New Yorkers. Whether Airbnb actually harms housing affordability is difficult to determine (short answer, yes, but only in a few neighborhoods) but even the perception of a company damaging the affordability of the city is enough to turn off a lot of New Yorkers. It was hubris not to understand that.

That’s not to say that the courts won’t find some middle ground for the company and the state/city to go back to the drawing board over.  There clearly is some compelling argument for this type of economic activity for New Yorkers and there are enough New Yorkers who were using the platform legally that now might be thrown into legal limbo as a result.  It's easy to see where the court would argue that the law is an overreach

Whatever the result is, it won’t be good enough for Airbnb. Their entire business model is based on the revenue generated from the professionalization of their hosts.  They need more of those hosts renting more rooms for more nights if they want to justify their investor’s expectations.  That simply won’t happen if the company has to rely on hosts listing their spare room once or twice a year. 

I’ve said before that I think Airbnb is a great small idea, but a terrible big idea.  Someone renting out their kid’s bedroom now that they have moved out or a couple renting out their apartment for a weekend once a year hurts no one.  But once you take giant amounts of venture capital and have to grow exponentially to justify it, you have to chase the bigger sources of revenue.  You have to hope that neighborhoods turn into permanent hotels.  So far, that seems to be a losing strategy. 

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.