NY Slant – Nicole Gelinas: AIRBNB’S IMPOSSIBLE ECONOMICS

October 24, 2016
Gov. Andrew Cuomo made global headlines Friday when he signed a bill enforcing an existing law against short-term apartment rentals. Airbnb, the biggest loser, could have avoided this outcome had it returned to its roots and allowed people to rent out only rooms, not entire homes, in New York City. The company didn’t take this tack, though, because it can’t. What Airbnb needs – growth in the world’s most expensive global cities – directly opposes what those global cities need: more apartments for residents.

Airbnb is not mainly a home “sharing” company, as its advocates as well as journalists often say. If it were, it would have no problem in New York City. Under longstanding city law, you can “share” your apartment, in that you can invite a friend or a stranger over to sleep on your couch or in your extra bedroom, and ask that person to share in the cost.

What you cannot do is turn your apartment, or any apartment, into a short-term hotel rental. That is, you can’t vacate your apartment for three days or a week, and rent it to somebody else. Nor can you maintain an extra apartment for this purpose.

This law is sound policy. A key goal of New York City is to increase its housing supply. When people illegally convert apartments into hotel rooms, they take apartments off the housing market. The law is not regulatory zealotry – it is basic zoning.

The bill that Cuomo signed Friday didn’t create these rules, it only added enforcement mechanisms. Starting Nov. 1, a person who lists an illegal apartment rental on Airbnb faces a $1,000 fine on his first offense, and a fine of $7,500 on his third offense. (Airbnb is suing in response to the bill.)

If the city uses this new state law properly, it will save taxpayers on personnel costs. Instead of having to visit apartments multiple times to catch offenders, city officials could demand illegal listers’ personal information from Airbnb.

The listings are easy enough to find. Virtually all of Airbnb’s whole-apartment listings on Saturday afternoon – from a “3 separate bedrooms! L-Train Loft” for $180 a night to an “Executive Suite on Wall Street with Breakfast” for $315 a night – look to be illegal.

Airbnb’s existential problem is that it needs these listings. New York is already Airbnb’s biggest market, with the city’s “hosts” and their customers taking in $1 billion in revenue last year. Airbnb takes a percentage cut of each reservation.

To maintain its market valuation of $30 billion, Airbnb also needs to grow the number of listings it has. Businesses grow most efficiently through scale. Adding customers who rent out parts of their homes – or even customers who rent out their entire home for a few weeks each year – is a painstaking process that results in little payoff. The rooms aren’t as valuable, meaning less money for Airbnb. The customers aren’t the wealthy globetrotters who might spend $300 a night in Paris one week and $300 a night in New York the next; they pay a fraction of that.

Airbnb is stuck with an impossible problem. The face it presents to the world – the face of a person with a two-bedroom apartment in Brooklyn who loves renting out her extra bedroom for fun and profit – is not what garnered it a $30 billion valuation. But the company’s most economically efficient business – serving as a mass-scale warehouse for entire apartments in dense cities – is illegal.

A tech-industry entrepreneur might respond: Why not build more apartments? Yes, why didn’t we think of that? But New York, like San Francisco and London and Paris and Berlin, is part of the democratic real world, not the libertarian tech world. People want to protect historic districts and preserve neighborhood character – the character Airbnb customers seek when browsing for a place to stay.

Consider: New York can barely build or preserve 20,000 low- and middle-income apartments per year. But Airbnb already lists nearly 20,000 whole apartments in the city for at least some of the time – and the company, it reminds us, is a “young company.” Cities such as New York already have a hard time getting their voters to accept new construction. Voters will like this idea even less if they grasp, correctly, that these additional apartments are serving as investment properties.

As it faced its day of reckoning in New York last week, Airbnb made a last-ditch effort to save itself. The company noted that its “typical host” in the city rents his apartment out for 44 days. That means, though, that half of “hosts” rent their apartments out for more than 44 days.

Airbnb also said it would voluntarily restrict its amateur hoteliers to renting out a single New York home. But thousands of “hosts” renting out single investment properties all or most of the time can have a big impact on the market. They can also hire contract-management services to clean apartments, just as “hosts” with multiple listings do.

Airbnb also said it would allow landlords to take a cut of rental revenue, an idea that ignored real-world considerations. The people in New York who are so cash-strapped that they must rent out parts of their own small apartments are precisely the people who don’t want their landlords to know that they are engaging in illegal activity. It makes them subject to eviction.

Mostly, Airbnb continued to push its main trope: the company is helping “tens of thousands of New Yorkers (in) turning their greatest expense – their home – into an asset.”

This, though, is the fundamental problem: If you are a renter – as two-thirds of New Yorkers are – you do not want to increase the “asset” value of your home, for the obvious reason that you do not own the asset. You’re creating a more valuable apartment for your landlord – by inefficiently working as an amateur hotel housekeeper in the meantime that eventually means the landlord can charge a higher rent.

In this case, what looks like an economic inefficiency – your apartment is empty and not earning money if you go away for the weekend – is actually efficient. The fact that your home is empty when you are not in it is the only thing that allows you to keep it as your home.

Source: http://nyslant.com/article/opinion/airbnbs-impossible-economics.html