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Debt & Equity

The sharing effect: Airbnbʼs impact on real estate market

By Stuart Eisenberg and
Anthony La Malfa, BDO USA, LLP

Used by more than 60 million people in 190 countries, Airbnb – the trusted community marketplace for people to list, discover and book unique accommodations around the world – could become the preferred lodging of choice for travelers in the near future. And investors agree.

In late June, Airbnb closed a $1.5 billion funding round with a staggering $25.5 billion valuation, one of the biggest private rounds in history.

Given the growing and expansive reach of, and interest in, Airbnb, it is increasingly positioned to meaningfully impact the real estate industry, especially the hotel and multi-family rental markets as it shifts demand away from traditional options.

In fact, the dramatic growth of Airbnb is catching the attention of many hotel professionals, whether they want to admit it or not.

STUART EISENBERG
STUART EISENBERG

Its valuation alone has already surpassed the market cap of major hotel chains like Marriott ($20.6 billion), Starwood ($14.1 billion) and Wyndham ($10 billion), and it’s close to eclipsing that of Hilton ($27.4 billion), as well.

A report from Boston University reveals that in Texas, each additional 10% increase in the size of the Airbnb market resulted in a 0.37% decrease in hotel room revenue.

There also appears to be a similar dynamic in New York, according to the New York Times, which reported that “hotel room price growth in New York has lagged historical levels during the economic upturn, according to research by Sean Hennessey of New York University’s Tisch Center for Hospitality and Tourism. While some of that is because of the increase of hotel construction and number of available rooms, he said, hoteliers also cite the advent of a “shadow inventory” including Airbnb and others as a reason for the price stagnation.”

Furthermore, a report by the Hotel Association of New York City found that Airbnb negatively impacted the lodging industry and broader city economy to the tune of $2.1 billion.

While many believe that the hospitality startup has thus far only been affecting lower-budget hotels and more offbeat markets, others are closely monitoring the direct or ripple impacts Airbnb’s burgeoning momentum may cause.

Of particular concern is Airbnb’s ability to lure the ever-elusive corporate traveler, who has historically preferred to lodge at hotel chains for the ease of booking and discounted rates they provide business travelers.

But CNN Money reports that Airbnb said its business travel program has experienced 700 percent growth over the past year. Airbnb has also signed up more than 250 companies, including Google (GOOGL, Tech30) and SoundCloud for its corporate program.

ANTHONY LAMALFA
ANTHONY LA MALFA

To counter the current and potential impact, hotels are using price reductions to remain competitive.

There is also the possibility of increased deal flow as Airbnb eats a larger piece of the hospitality pie.

Hotels struggling to stay afloat could become increasingly attractive targets for both strategic and financial buyers. Strategic buyers might be looking to expand their footprint or find synergies that help them stay price competitive.

Financial buyers, including private equity firms, might also target hotels experiencing a decline, as they tend to specialize in buying distressed assets and seeking opportunities to turn them around.

Some companies might also explore mergers as a cost-cutting method, as it can allow businesses to find efficiencies and consolidate resources, allowing them to become more price competitive against up-and-comers like Airbnb.

As the sharing economy takes root, it’s also reached the multi-family sector and impacted the apartment rental market, particularly in major cities like New York, Chicago and San Francisco. Demand for rentals is always high in these markets, but inventory is notoriously scarce. For example, the city of San Francisco sees just 2,000 new units added per year. A report by the San Francisco Chronicle found that while most Airbnb rentals are rented out only occasionally to travelers, at least 350 properties in the city appear to be used as full-time vacation rentals.

Findings like these add weight to the assertion that the platform removes already-scarce housing from the rental market.

In a tight market like San Francisco’s, a few hundred units off the market can have a significant impact. Critics have argued that transforming would-be long-term rentals into lucrative vacation rentals artificially pushes prices up, adding to the housing crises present in many major metropolitan areas.

Furthermore, the sky-high prices faced by renters in tight markets creates an added incentive for entrepreneurs to capitalize on the profit potential of short-term rentals, which sustains this cycle of upward pricing pressure.

Photo by Tim Regan/ FlickrSome users have realized the potential to exploit the price difference between short-term and long-term rental prices, taking advantage of the high returns they’re able to earn by renting an in-demand apartment to use solely for pricy vacation rentals.

According to the New York State attorney general, almost half of Airbnb’s New York City revenue came from just 119 users who had at least three listings on the site. He suspects that many hosts are violating a law forbidding residents from renting apartments for less than 30 days if they are not present in the unit.

While there are local regulations in place in many jurisdictions to stymie this activity, it appears the current guidelines are no longer effective. Local lawmakers are working to address this, increasing fines and penalties for rule-breakers.

For example, some members of the New York City council have argued for a $10,000 fine for illegal short-term rentals.

And proposals to tighten the rules are supported by residents – this summer, more than 15,000 signatures were collected in support of a pending ballot measure in San Francisco that will more tightly regulate short-term rentals and Airbnb. The measure will cut the number of allowable rentals per unit down to just 75 nights per year, and will also allow neighbors to sue violators for up to $1,000 per day.

While proponents of Airbnb argue that the shared economy allows for new friendships and cross-cultural connections, the repercussions for the established hotel and multi-family markets appear to be undercutting this assertion and putting pressure on cities to make meaningful change to minimize the effects.

As the conflict between Airbnb’s rapid growth and the escalating pushback from consumers and lawmakers comes to a head, it’s likely that the company could even further evolve and spur other new lodging alternative start-ups, bringing about lasting change in the industry.

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