In 2008, two roommates in San Francisco, Joe Geebia and Brian Chesky—both unemployed and in need of spare money—purchased three airbeds and put an ad online offering bed and breakfast for attendees of the International Design Conference. Since most hotels were sold out, they could easily rent out the three airbeds. They repeated this experiment in August 2008 during the Democratic National Convention in Denver and successfully rented out spaces. Today, the company known as Airbnb has become a mega blimp and, in a short span of seven years, it has reached cruising altitude. For Airbnb, the sky is the limit.
The concept of sharing space is nothing new. Landlords and renters, mostly long term, have dealt directly with each other, and the hotels took care of the short-term rentals of tourists and transient guests. The two businesses operated in tandem and did not cross paths. Airbnb entered the hotel market and changed the basic rules. By providing an incentive to the landlords or lessors, and offering them a platform to convert their residential rental space to a de facto hotel, they can list their living spaces on the Airbnb website for rent, which could be a space in a room, a spare room or their entire livingquarters.
But, Airbnb is doing hotel business with an unfair advantage. Among the company’s violations are:
• Renting out residential units as accommodation for travelers is in violation of land-use regulations and zoning ordinances. In some parts of Venice, CA, whole blocks have been used for illegal hotel operations. No public hearings and approval are held for any of these conversions. A local developer has been trying to build the Abbot Kinney Hotel in Venice, CA, an 82-room property, for more than three years and has gone through 14 community meetings with 250 irate citizens strongly objecting to the proposed hotel development. The Coastal Commission will take a minimum of two years to approve a hotel project near the coast, and will invariably turn down the project or impose severe conditions. Meanwhile, a condo on the beach can be converted into a de facto hotel via Airbnb in a day.
• Hotels are subject to numerous health, safety and insurance requirements. Hotels are commercial properties and are regulated differently compared to residential properties. Airbnb facilitates owners/hosts to utilize their residential spaces like hotels without being subject to any of the same regulatory checks to which actual hotels are subjected.
• Airbnb does not have a uniform policy for collection and remittance of the Transient Occupancy Tax. In many cities, the company doesn’t even collect the hotel tax. Cities lose out on revenue that could have been invested in improving the services they provide to their residents.
• Most hotels are required to keep detailed registries of all guests. These registries are often used in criminal investigations and to regulate shady motels. Airbnb hosts do not maintain suchrecords.
• Hotels are subject to the Americans with Disabilities Act (ADA) compliance standards. It is impossible to expect Airbnb rental units to comply with ADA as the units are not standardized, and also they are residentialproperties.
• Every hotel is required to carry sufficient insurance as mandated by the lender. A homeowner’s existing insurance may not cover any such liability as homeowners are not supposed to engage in renting out theirresidences.
Impact of Airbnb on local cities
Airbnb has facilitated the large-scale conversion of residential units into tourist accommodations. This has created an acute shortage of rental units. In Los Angeles, nearly 7300 units have been taken off the rental market, which is equal to seven years of housing supply. Increased tourist traffic in a residential neighborhood alters its character while introducing new safety risks.
Airbnb rentals are not commercial enterprises employing regular full-time workers. They do not provide as many jobs as hotels. Airbnb rentals do not employ front desk staff; valet and parking attendants; shuttle drivers; security officers; and janitorial staff. The proliferation of Airbnb units will create large-scale unemployment in the hotel sector.
Moreover, Airbnb has a significant impact on hotels. Studies conducted in New York, Los Angeles and Austin, TX, have shown that Airbnb has had a significant effect on hotel occupancy and ADR. The New York Hotel Trades Council estimates that Airbnb has added about 10,000 rooms to the city, or about 10% of the 100,000-room inventory. The direct loss from Airbnb operations on the New York City lodging market from Sept 2014 to August 2015 was approximately $ 451 million, according to an HVS Consulting & Valuation report.In Austin, where Airbnb supply is the highest, the impact on hotel revenue is roughly 8-10%, with lower-priced hotels and hotels not catering to business travel being the most affected segments. In Los Angeles, the total revenue generated in 2014 by Airbnb out of 11,400 units was estimated to be around $80 million.
The elephant in the room
Airbnb is a hotel company, and its main function is to generate revenue by providing accommodation to guests. The problem is Airbnb is not playing by the same rules that a hotel does. It has an incredible advantage to adjust its supply of accommodation in a short period with negligible costs. It may take years to build a hotel but just days to add rooms to Airbnb’s supply. The website started in 2008 and had 1.4 million listings in May 2015. It has expanded to more than 34,000 cities and 190 countries. The company is expected to grow its revenue to $10 billion by 2020 with $3 billion in EBITDA. According to The Wall Street Journal, Airbnb was expected to raise $1 billion in funding at an estimated valuation of $24 billion. Its value is higher than Marriott, which is at $21 billion, but slightly less than Hilton, which is valued at $28 billion.
An initiative to restrict short-term rentals, Proposition F, was on the ballot for voters in San Francisco on Nov. 3. The measure was defeated 55% to 45%. Cities are unable to come up with a plan to regulate Airbnb. No city has been able to effectively limit the growth and negative effects of the large-scale conversion of residential units into tourist accommodations. In Portland, OR, Airbnb and the city agreed to work together to create a regulatory framework that would allow the city to collect hotel taxes in exchange for creating a new category of housing in its planning code—the Accessory Short-Term Rental. Each time a city normalizes the company’s activities, Airbnb becomes a more stable, secure investment. Receiving legitimacy from major markets creates an ideal condition to solidify its base.
Airbnb is a real threat to the hotel industry, and numbers support that fact. It has been used by 60 million people in 190 countries. Hilton was founded in 1919 and Airbnb in 2008; Hilton had 95 years head start. Today, Airbnb’s valuation is 85% of Hilton’svalue.
Those funding Airbnb have gotten so excited over the next big thing that they have overlooked the reality that this new business model in its current format is largely based—particularly in the U.S.—on evading regulations and breaking the law. If Airbnb’s services are profitable when operating on a level playing field, it will be providing real value to the economy with its innovative technology that facilitates the use of underutilized resources.
The hotel industry has not felt the need yet to wake up to counter Airbnb’s grandiose plans and has pressed the snooze button too manytimes.