New York deflates Airbnb

New rules may temper Airbnb in New York, but its future still looks bright

IN 2007, Brian Chesky and Joe Gebbia came up with a wheeze to rent out two air beds in their San Francisco apartment, because a conference had left the local hotels full-to-overflowing. Thus, Airbed & Breakfast was born. Since then, the firm’s only contraction has been its name. Today, Airbnb’s website lists over 2m properties for short-term let in 191 countries. Piper Jaffray, an investment bank, estimates that bookings through the firm will reach $14.4bn in 2016, compared with $52m in 2010. Analysts think the upstart might fetch $30bn were it to be taken public. That would make Airbnb worth more than Marriott, the world’s largest hotel chain.

But legislation signed in New York state on October 21st has taken some of the puff out of Airbnb’s mattress. New York City is the firm’s largest market in America, with around 35,000 properties available for rent. But many of the hosts offer their apartments illegally. In 2010, the state passed a law banning rentals of whole units in residential blocks for less than 30 days. (It is legal to do so if the tenant is living there at the same time.) To encourage people to comply, Andrew Cuomo, the state governor, approved fines for those who flout the rules of $1,000 for a first offence, rising to $7,500 for recidivists.

The bill will severely limit Airbnb’s ability to operate in the city. At issue is the way that its business model has evolved. The firm was conceived as a marketplace to rent a spare room to tourists. Entrepreneurs, however, quickly spied a more lucrative opportunity: acquiring a portfolio of empty properties and offering them as a direct, often cheaper, competitor to hotels. According to data gathered by Tom Slee, author of “What’s Yours Is Mine”, a book on the sharing economy, 27% of Airbnb listings in New York are offered by people who own multiple properties (see chart).

Locals complain that Airbnb guests, filled with the holiday spirit, can be noisy and inconsiderate neighbours. Worse, they say that as apartments are scooped up by investors to be rented out on a short-term basis, residents are forced out of town. Arun Sundararajan, a professor at New York University and author of “The Sharing Economy”, thinks this idea is overplayed. Pressure on housing stock in New York, he says, is affected more by population increase and rent controls than sharing-economy rentals. But not everyone agrees. According to Mr Slee, while Airbnb may indeed have a limited impact on a city in aggregate, for those who live in neighbourhoods that become Airbnb hotspots such effects are all too real.

Still, some worry that Mr Cuomo has bowed to pressure from powerful vested interests, including hotel lobbyists and unions. The occupancy rate in New York’s hotels is close to 90%, among the highest in the country. Limited supply means premium prices and such advantages are jealously guarded. A study commissioned by the Hotel Association of New York found that people switching to Airbnb will directly cost its members around $780m in the city in 2016. It projects that by 2018 that will rise to over $1bn a year. Professional Airbnb hosts, say industry groups, should be classed as hoteliers, pay taxes as such and comply with the relevant health and safety regulations.

Airbnb is challenging the state law on the grounds that, as an online marketplace, it is not responsible for the content that others place on its site. (The state counters it is going after the hosts, not the site.) The firm has a good case, reckons Mr Sundararajan. Firms such as YouTube and Facebook have already invoked such a defence successfully. But perhaps the greater danger is that other cities will feel emboldened to craft their own restrictions. Last year Airbnb agreed to require people in San Francisco who rent out their entire homes to register with the city, and to cap the number who can do so. But when few hosts signed up, the city decided to apply more pressure, with fines of $1,000 a day for each unregistered San Francisco host on the site.

Europe has acquired a similar taste for regulation. Earlier this year, Berlin banned most short-term apartment lettings in response to a dearth of residential housing and the unsociable behaviour of lessees. Hosts flouting the rules face a €100,000 ($109,000) fine. (As with New York, those renting out a portion of their own apartments are unaffected.) According to Mr Slee’s data, the proportion of serial hosts in Berlin listing on Airbnb has fallen from 36% in 2014 to 20% today.

In Barcelona, meanwhile, authorities have threatened to fine the firm €600,000 for such illegal listings and required hosts to obtain a licence. Ada Colau, the city’s mayor, was elected after promising to rein in holiday rentals. Not all cities see Airbnb as a curse. London, which has some 47,000 Airbnb-listed properties, has talked up the advantages of encouraging sharing-economy accommodation, particularly for its unfashionable outer boroughs where few hotel tourists ever venture.

Source: This article appeared in the Economist Print Edition Oct 29, 2016 with the headline: Deflating Airbnb