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The Long-Term Horizon For Short Term Rentals

In August, Airbnb will turn 13 years old. Like most teenagers, Airbnb is having the worst time of its life. Still the worldwide leader in short-term rentals, the San Francisco-based tech giant that disrupted the travel industry is still struggling to recover from a pandemic that just won’t quit. The company is losing ground, even in its own backyard. With legal battles coming to a head in every corner of the globe, is the future of short-term rentals (STRs) tied to the future of Airbnb? 

Airbnb is the poster child for the Disruption Economy. It’s hard to think of a company that’s caused so much actual disruption. Giving homeowners the chance to make money off their extra space by renting it out has made vacation homes accessible to everyone. That model has fundamentally changed travel, hospitality, entire neighborhoods, and laws. From the earliest days, that disruption has caused a stir. Much of the early market consisted of illegal listings, much of the market likely still are. The promise of a payday has encouraged owners and renters to violate leases and insurance coverage. A general lack of safety and security regulations has piled on problems. 

A mass shooting, sexual assaults, drugs busts. Name a crime, it’s likely happened at an Airbnb somewhere. In June Bloomberg reported Airbnb spends an estimated $50 million every year on payouts to hosts and guests when things go awry, employing a team of 100 ‘black box’ agents across the globe to keep the disasters out of press and doll out checks. In one instance, a rape victim was paid $7 million for agreeing not to ‘imply responsibility or liability’ on Airbnb or the host after a ‘career criminal’ entered the listing with a duplicate key. Airbnb claims fewer than 0.1 percent of stays involve safety issues. Last year 193 million nights were booked on the platform, which would result in 193,000 safety incidents, according to the company’s own accounting. 

The company is also disrupting neighbors. Investors looking to tap into the short-term rental phenomenon have bought up properties, turning quaint local neighborhoods into transient travel meccas, undermining the permanence of these places. Evidence suggests Airbnb pushes home prices higher, benefiting homeowners and landlords. Higher real estate prices push out long-term residents, shifting the demographics of the neighborhood. The ‘Airbnb effect’ as it’s become known is gentrification on steroids without the permanent residents. The more popular the city, the worse Airbnb problems have become. An analysis by the Economic Policy Institute found what little benefit short-term rentals produce likely does not outweigh the economic costs. A peer-reviewed study by Northeastern University in Boston looking at the city’s short-term rental market over the course of 7 years found a positive correlation between higher penetration of Airbnb properties in an area and higher violent crime rates. 

“The large-scale conversion of housing units into short-term rentals undermines a neighborhood’s social organization, and in turn its natural ability…to counteract and discourage crime,” the paper’s authors Laiyang Ke, Daniel T. O’Brien, and Babak Heydari wrote. 

Airbnb insists the study was flawed, only looking at one city, Boston. Similar studies in other cities are producing similar results. Researchers in Barcelona found  “the density of [Airbnb] lodgings is associated with crime in a positive and significant way.” Correlation isn’t causation, but the numbers are alarming. Crime exists in traditional lodging too, but robust on-site security that includes surveillance, relationships with local law enforcement, and training programs to identify victims and perpetrators all help traditional lodging create an environment that makes guests feel safe. 

Crime concerns are just the latest bludgeon for the growing number of grassroots activists to beat Airbnb with. Growing for nearly a decade since the company’s first major scandal, opposition to Airbnb is reaching a fever pitch. Airbnb, which recently went public, now with an $86 billion market cap, has warned investors that local backlash is mounting and could hurt. In the Airbnb investor prospectus, the company says managing its success against the growing wave of angry neighbors and unfavorable local laws is among the biggest challenges it faces globally. 

Laws regulating or outright banning STRs are being considered in practically every city worth visiting with approaches as different as the cities themselves. Colorado’s mountain towns, home to popular ski resorts, have become a microcosm of the issue. In competition with each other, each is looking over their shoulder at how they’re handling short-term rentals, wary of making the wrong move. Breckenridge Town Council voted against a full moratorium but said the option is on the table, according to reporting from Summit Daily. Last month Vail also voted down a moratorium, favoring a study to learn more about the problem instead. Steamboat Spring did vote to extend its 90-day pause to six months while the city works to find solutions. Popular tourist destinations like New York City, San Francisco, Las Vegas, New Orleans, and Honolulu have all passed some form of restriction or outright ban. Airbnb has challenged the bans and regulations in court to varying effects. The most high-profile case saw a Texas court of Appeals rule Austin City Council ordinance banning STRs starting in 2022 was unconstitutional. The case did not settle the issue, even in Texas. A judge in Arlington, Texas recently upheld an STR ban. 

Outright bans are not a viable solution for some city governments relying on appreciating property values to bolster budgets. New research from McGill University and Cherre found STR regulations reduce Airbnb listings by 12.6 percent and residential permits by 13.8 percent. Permits increase the property value by 38 percent on average, so a 10 percent reduction in permits due to STR regulations represents a loss in property value of $3 billion per year across the 15 cities studied. If property taxes are around 1.5 percent, then STR bans cost $45 million in potential lost revenue per year for the cities in the sample. That’s something most city officials understand, which is what’s giving pause to many cities considering bans. Major population hubs may be able to afford the regulations, but smaller towns that rely more on tourism may not have the stomach for them. 

Legal issues, scandals, and fevered local backlash were growing for a decade at Airbnb. Then a global pandemic that upended their entire business model hit. Talk about disruption. A LendingTree study showed in 20 major Airbnb markets, listings are dramatically dropping in 19 of them. Denver, Chicago, Boston, San Diego, New York, and Oakland all saw listings drop by more than 20 percent. In Seattle, listings dropped by 42 percent. The average minimum days of stay has skyrocketed, up 237 percent in New York. Despite taking 2020 squarely on the jaw forcing the company to lay off 1,900 people, Airbnb plowed ahead with an IPO, debuting before a mostly empty stock exchange on December 10. The company’s value soared past estimates, becoming the biggest U.S. IPO in a year defined by a lack of travel and lodging. 

What’s miraculous is a global pandemic may have helped Airbnb. The company’s CEO certainly seems to think so. “When the crisis happened, we became functional. We became focused and lean and mean and more efficient,” Chesky told Fast Company. As Benjamin Landy put in his piece, the pandemic may have saved the company from itself. Brutal conditions forced a reckoning. Airbnb is restructuring towards longer stays to adapt. A growing number of life-long renters who enjoy not being tied down by a deed are ushering in a new era of nomads the company plans to tap into, according to Chesky. Remote work is enabling people to live anywhere and many are eager to get out and experience someplace different. What that market size looks like is still a mystery to be revealed when the dust from the pandemic finally settles. 

Airbnb is also making efforts to reconcile its sordid past. For the first few years, Airbnb’s founding vision of community likely relied too much on trust, making the platform ripe for exploitation, which happened with regularity via illegal or fake listings, bait-and-switches, and other scams. Now Airbnb is reigning in hosts, enforcing controversial party bans, while offering an olive branch in the form of hundreds of millions to help cover hosts’ losses in 2020. To make amends with housing advocates, Airbnb launched City Portal, which tracks STRs and tax revenues, complete with support hotlines and tools that make it easier to find and report illegal listings. After nearly a decade of legal battle, no municipality has yet to land a fatal blow, at this point, it’s hard to see how any authority could. In Airbnb’s early days, when the company was highly concentrated, legal threats made a difference. Now that the company has become far more diversified, with no city making up more than 2.5 percent of revenue, it’s even harder for city laws to stop Airbnb. 

All of this has monumental consequences for the STR sector because Airbnb has become shorthand for short-term rental, like how we refer to facial tissues by the brand name Kleenex. Airbnb managed a 5 percent revenue increase in the first quarter of 2021, though net losses still topped $1 billion. The company was hemorrhaging money before the pandemic, posting net losses in 2019, 2018, and 2017; it may have once turned a profit, but it’s struggling to get back to those days. Airbnb may be able to survive scandals, backlash, and legal battles, but the companies own balance sheet may be the biggest problem. How long investors will let Airbnb post losses is a conundrum. The long-term rental market isn’t nearly as large as the short-term rental market, what Airbnb’s shift to capture the former means for its growth horizon is literally a multi-billion dollar question. STRs hit a 41 percent market share of total travel lodging during the pandemic, a new record, as residents deemed STRs safer than traditional hotel bookings. 

After the year the travel industry has had, it’s hard to see short-term rentals upending the travel industry. Major traditional lodging and hospitality operations have been able to circle the wagons and cut deals in a way individual Airbnb operators haven’t. While Airbnb is showing signs of recovery, U.S. hotel operators are already back on track. Revenue per available room was up 5.7 percent last week from the same period in 2019, according to data firm STR. All hotel sectors except luxury and upper-upscale saw revenue gains over 2019 levels in July,  according to reporting from travel industry experts Skift. Subsidies provided by investors for STRs are ending, revealing the true cost to guests experiencing sticker shock at the mounting fees. Airbnb prices are up 35 percent. The rising costs of Airbnb listing and steep discounts in traditional lodging is threatening the value proposition the sector is built on. Hotels are now offering housekeeping, dining, room service, pools, and other amenities for marginally higher prices without requiring guests to wake up and clean the place themselves before a strict 10 am checkout. Didn’t clean it right? That’s another fee. 

Like many other tech companies that promised disruption, fueling it with millions of investor dollars, the market reality is catching up with Airbnb. How long Airbnb can outrun economic forces will tell us a lot about the future of STRs. What’s clear is the paradigm of travel lodging hasn’t shifted as much as Airbnb has hoped. It may yet, but for now, Airbnb is competing against traditional lodging on a level playing field. Price, execution, and efficiency will define the next phase of Airbnb, not disruption.  

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