Short-Term Rental Gain vs. Long-Term Affordability Pain (5 mins)

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Paul Heydweiller

Paul Heydweiller is in the Baker Program’s Class of 2018 pursuing a development concentration. Paul interned with the Related Companies in Chicago, IL during Summer 2017, and he worked for six years for a boutique real estate valuation and advisory firm in Newport Beach, CA. Paul is a native of Rochester, NY and has an undergraduate degree in business administration from the University of Notre Dame.

Just days after key committees on the Los Angeles City Council backed a new set of short-term home sharing regulations limiting such activity to primary residences and capping short-term rentals to 120 days per year, a report from the Office of the Comptroller of New York quantified the estimated impact of home sharing on New York City rents at $616 million in 2016 as a result of pressures on residential rents.  This recent news from the nation’s two largest cities has once again sparked debate over home sharing services like Airbnb.  While Airbnb and other home sharing hosts profit from short-term rental activity, the ability to defray rent expenses undoubtedly leads to increased rental rates – particularly in locations that are most desirable for short-term guests.  Further, hotel owners and operators are negatively impacted by the increased supply of available rooms for short-term guests.

Let’s dive into the specifics of the New York City Comptroller’s report and analyze how well Los Angeles policymakers are addressing the specific issues identified in the Big Apple.

 

Specific Impacts on New York City Rents

NYC Comptroller Scott Stringer; Source: NYC Comptroller Office

The Comptroller Office’s report concluded that between 2009 and 2016 average residential rental rates increased by an average of 25% citywide.  Of this increase, Airbnb alone accounted for 9.2% of the increase, indicating that Airbnb accounted for a 2.3% increase in rents over that period.  Applying this percentage to all residential rental buildings in the city, the Comptroller estimated a total increase in residential rents of $616 million resulting specifically from Airbnb.

The report’s conclusions are even stronger when looking at specific neighborhoods.  The Comptroller concludes that for each 1% of homes in a neighborhood listed on Airbnb, rental rates in the neighborhood increased by an additional 1.58% annually.  Supporting this conclusion, the report states that rental rates in eight key neighborhoods in Manhattan and Brooklyn accounted for 50.4% of all Airbnb listings in 2016, and the average rent in these neighborhoods increased by an average of 34.7% since 2009 – well above the citywide average increase of 25%.

A second report conducted by McGill University in January 2018 uncovers perhaps the most concerning evidence against Airbnb’s impact on neighborhoods.  The report indicates that 12% of Airbnb hosts account for 28% of total revenues in New York City.  These hosts typically target specific neighborhoods that are most desirable to tourists and other guests, and the operators are commercial in nature, having the ability to dynamically adjust rents to maximize income similar to most hotel chains.  These units typically do not have a permanent tenant in place, and thus residential units are being made unavailable to the city’s residents for commercial hosts to pursue profit without paying hotel occupancy or business taxes.  Further, many of these listings are illegal under current regulation in that the landlord’s representation must be present on site during short-term (under 30 day) stays – typically not the case for Airbnb occupancy.

The Comptroller’s report has drawn criticism from AirDNA, which was the primary data source utilized for regression analyses in the report.  AirDNA claims that the Comptroller’s failure to differentiate between active and inactive listings as well as between entire apartments/homes and shared rooms produces flawed results.  While these differentiations may produce slightly different results, however, the overall impact calculated by the Comptroller should remain relatively unchanged.  The total impact calculation also appears to be supported by comparing the estimated $616 million impact to the total Airbnb host revenues of $657 million in 2017.

 

Targeted Policymaking in Los Angeles

Meanwhile in Southern California, a Los Angeles City Council subcommittee has drafted the framework for a new city ordinance regulating home sharing services like Airbnb.  The framework will now go to the City Planning Commission and City Attorney to draft a new ordinance, which will then require full City Council approval to go into effect.  The proposed policy changes appear to respond directly to the same impacts seen in New York, drilling down into specific neighborhood impacts.

Los Angeles Home Sharing Rally; Source: NPR

The proposed policy centers on the legalization of home sharing specifically within primary residences within the city (currently illegal).  The policy would also place a limitation of 120 days per year of short-term rentals on each property, although hosts may apply for an increase to 180 days of short-term rentals only if approved by neighbors within 100 feet.  These policies are clearly targeted at removing an Airbnb investor market from the Los Angeles housing market, requiring a permanent occupancy to meet the primary residence test as well as capping the number of days a single property may be leased on a short-term basis.  Through these changes, the City hopes to hand housing back into the hands of Angelenos who have seen rents rise dramatically over recent years, while still allowing for the collection of supplemental income by renting out that permanent residence on a short-term basis.

Despite what appears to be positive and logical steps toward a home sharing solution, Los Angeles City Council has received criticism both from Airbnb and some long-time locals for being too restrictive on home sharing.  While Airbnb’s motives are relatively transparent, the criticism from locals comes as more of a surprise but is logical when considering those who rent out single rooms in their primary residence to travelers throughout the year for supplemental income.

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As it appears the move toward a sharing economy will continue, the efficiency of space use within the city will also continue to be challenged.  These challenges will likely come to the nation’s largest cities first, setting the stage for debate on a broader scale.  Just as a substantially wider array of products have been made available in the markets for office (i.e. co-working) and residential (i.e. co-living and microunits), home sharing offers an alternative product in the hospitality space that will likely result in the obsolescence and ultimately redevelopment of outdated product.  While this evolution will come with growing pains like residential rent increases, the more efficient use of limited urban space should allow cities to more effectively deal with many of the urban challenges we face today and into the future.

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