New York Hospitality by Vijay Dandapani
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Airbnb and the grabbing economy

August 13, 2016

Economic issues dominated in the primaries of the US presidential elections but neither party or candidate has so far acknowledged the sharing economy, a phenomenon that is roiling a number of industries by upending their business models and the regulatory framework they operate in.  That is surprising given the implications for consumer choice, labor and tax revenue besides a host of other known and unknown effects on the economy.

A particularly unfortunate aspect is the clubbing together of all firms in this space.  The pairing of Uber and Turo or Kickstarter and Prosper or Airbnb and Dogvacay makes little sense from either the standpoint of operating models or a regulatory framework.  That does a disservice to firms like DogVacay that truly have enabled a new industry by putting underused assets to use while abiding by rules and regulations.

An oft-cited but almost entirely inapt pairing is that of Uber and Airbnb, two mega unicorns with almost nothing in common except perhaps their response to the regulators and industries they have “disrupted”. Taxi cartels oppose Uber for the obvious reason: competition that heretofore was not permitted by the authorities resulting in protected status for the taxis along with higher prices and limited consumer choice.

 

The lodging industry to which Airbnb unquestionably belongs, however, has no such protection. New York City epitomizes that with its addition of hotels at a dizzying pace over the last ten years with the room count nearly doubling since 2006.  This has largely been enabled by the exceedingly low cost of capital along with the dramatic growth in tourism that began during the Bloomberg administration. 

 

While the hundreds of new lodging choices makes for a challenging operating environment it represents tremendous economic growth with tens of thousands of new jobs and hundreds of millions of dollars in additional revenue for the City.  These new hotels have transformed formerly moribund neighborhoods from Harlem to Gowanus in Brooklyn to Long Island City in Queens. 

 

On the other hand, the alleged disruptor, Airbnb’s actions have had significant negative consequences to the social-compact that guides laws and regulations for hotels.  Entire homes and buildings particularly in the midtown Manhattan area are being used as de-facto hotels without access for the disabled or fire-protection standards mandated for high-traffic commercial uses and individual racial biases that cannot find expression in a hotel.  That also gives the lie to the suggestion that these web platforms have revived the outer boroughs.

 

Further, real-estate and income tax subsidies meant to spur home-ownership are being used to gain an unfair competitive advantage.  In New York, unsurprisingly a good deal of the illegal transient occupancy growth in New York has occurred in rent-regulated buildings with many beneficiaries of rent regulations quickly snapping up the online arbitrage opportunity by extracting market value for their "ownership" of prime real estate.

 

It is with that in mind that a bipartisan bill supported by an unlikely troika of hotel and office building owners, labor and housing advocates passed the legislature in Albany.  The bill is limited to Class A multiple dwellings that are built and regulated to cater to permanent occupants. The prohibition against transient occupancy in these dwellings is to ensure that they comply with fire, building and other safety codes that are considerably lighter.

 

An oft repeated bromide of Airbnb points to their model allowing for better utilization of resources by using homes as hotels. Perhaps. But why not then use dining rooms at homes as restaurants and bars and conference rooms in offices as banqueting halls?   Why not allow private pilots to take on paying passengers in empty seats?  The answer is obvious except to those who deliberately refuse to acknowledge it. 

Airbnb suggests that safety regulations are inapplicable on account of the website’s "trust" mechanism predicated on identity verification. It is a spurious proposition indicated by incidents of African-Americans being turned away on account of their skin color. Their “direct contact” mechanism promotes an unfounded safety trope as borne out by incidents involving property damage and prostitution.

Airbnb is a de-facto lodging company with a concentration in dense urban areas.  A recent study noted that 55% of the $2.4 billion spent by Airbnb users on lodging was in only five cities: New York, Los Angeles, San Francisco, Miami and Boston. Its New York City “inventory” equals over 20% of the total hotel rooms pointing to a majority of rentals being illegal.

This regulatory free-pass translates into a substantial loss in taxes. Their oft-expressed desire to pay hotel occupancy taxes does not redress a number of issues. Regular transient buildings comply with the American with Disabilities Act, pay real estate taxes at exponentially greater commercial rates, have more stringent building codes and have higher wage costs.

The transient lodging industry employs over 50,000 people in New York City alone and has been a pillar of stability during the Great Recession. In contrast, the beneficiaries of this regulatory end-run are the promoters of one of the world’s top unicorns along with a few hundred highly paid data scientists and a small but growing list of  commercial operators  of illegal hotels.

This is not to suggest that there is not a legal model for home-rentals. Just as Napster spurred Steve Jobs to create iTunes, Airbnb ought to promote an entirely legal vehicle for home-rentals. As a leading data-driven company it could very easily achieve compliance. Hotels have no issue if Airbnb partakes of the same trough but should not be made to accept a playing field that can never be made level.  Then again Airbnb really is all about the grabbing economy and has precious little to do with sharing of any kind.

The Shadow hotel industry's impact on hotels

March 03, 2016

“Where there is smoke there is fire” goes the old, if trite saying. There has been plenty of smoke, most of it aired by Airbnb, when it comes to characterizing the home-rental market.

Among the things it purports to have created is a whole new tour and travel market; enabled hundreds, if not thousands, of homeowners and renters meet their housing costs; and liberated entire sections of the populace from financial ruin. The fire, metaphorical and literal, lies in the millions of dollars of economic loss to society and potential physical damage stemming from a near total lack of fire-safety systems.

Airbnb and, surprisingly, more than a couple of CEOs of large hotel brands together with several consultants espouse the notion that the former is in a different space and therefore not competitive with the hotel industry. That is fanciful and wishful thinking at best even though the proponents likely come to the same conclusion for very different reasons.

Whatever the reasons, studies are starting to show that the shadow hotel market is indeed a threat to the legal hotel industry particularly in large conurbations like New York. The latest and, perhaps, most well-researched of them is by CBRE’s Hotels’ America Research team that was released in January. While noting that, during a 12 month period ending September 2015 Airbnb users spent $2.4 billion on lodging, more than a whopping 55% of that was spread over only the five cities of New York, Los Angeles, San Francisco, Miami and Boston.

The CBRE’s report has a compelling level of granularity going so far as to winnow down the Airbnb list of hosts to multi-unit “hosts” (Airbnb jargon for hotel operator) and stack them against regular hotels to determine penetration. The report consciously left out occasional renters/rentees whose profile is what Airbnb seeks to project in their bid to be portrayed as good corporate citizens.

The report specifically points to a correlation between Airbnb supply growth to cities with higher ADRs and occupancies with the metropolitan areas having the highest number of “active” Airbnb units. Unsurprisingly, the latter is shown to grow in response to compression in the traditional hotel market due to events like the super bowl, the Pope’s visit and New Year’s Eve.

CBRE also developed an Airbnb competition index that incorporated ADRs from Airbnb and regular hotel ADRs as well as the inventory levels of the two competing suppliers into a measure of potential risk for these hotel markets. Perhaps the most telling aspect of the report is that the index for New York City topped the chart coming in at 81.4 with an active (excludes hosts who rent sporadically) unit supply that is 20% of the total hotel room count.

The vanishing number of compression days, particularly in New York City which reported a grand total of three per the city’s visitors bureau (NYC & Company) in 2015 versus nearly ninety a decade ago, is certainly a direct consequence of the foregoing, hotel supply growth notwithstanding. That is only underscored by Airbnb’s boast of having achieved an astounding 47,000 room nights for last New Year’s Eve! As CBRE’s report rightly concludes, Airbnb’s impact on hotels is at least twofold: ADR growth will continue to be stymied while also serving to curb hotel construction. It also makes the lens for hotel development considerably more murky as it is almost impossible to guess when new “active” hosts will enter the market in response to compression given the development window for an Airbnb unit is merely a few hours compared to over two years for hotels.

Reports in a similar vein from last year point to the target market for multi-host operators on the Airbnb platform as being in the same business arena as hotels include an industry overview analysis brought out last summer by Bank of America Merrill Lynch which noted that 67% of Airbnb’s listings are competitive with the traditional hotel industry. At about the same time, HVS issued a report pointing to an estimated room revenue loss to the New York hotel industry of approximately $450million.

The knock-on economic impact of these factors to municipal coffers runs into billions of dollars that likely will remain out of reach of jurisdictions as long as the regulatory free-pass enjoyed by Airbnb due to lax enforcement of laws and dissimulation from Airbnb persists. Airbnb’s oft-expressed desire to pay occupancy taxes will do nothing to redress a range of issues such as ADA, real estate taxes, building code differences and wage costs incurred by regular hotels.

In the end, the idea of attaining a level playing field is one that is simply unachievable even if Airbnb and its many smaller cohorts end up with the regulatory framework they are seeking so long as they operate as de-facto lodging facilities and not the occasional home-renter model they claim as their business model.

There is a model whereby home-sharing can be embraced legally and with the internet it can and should be a growing phenomenon. But the model should be predicated on legality. Just as (illegal) Napster arguably spurred Steve Jobs to create (legal) iTunes perhaps Airbnb will spur legal home-sharing instead of the rampant illegality that lies at the heart of their model. In the interim, for hotel owners the many insidious effects of a shadow lodging provider is an existential crisis,; one that needs to be addressed head-on.

Branded content: Leading or Lemming?

October 23, 2015

Digital ad blockers have been roiling the ad industry for a while resulting in a spike in branded content that runs largely ad free. The digital Chinese walls apparently worry even the biggest digital ad company, Google/Alphabet, whose CEO Sundar Pichai despite protestations to the contrary  announced an ad-free YouTube service labeled YouTube Red which racks up a monthly $9.99 charge. Advertisers though display no ambiguity and apparently are buying into the notion that consumers are increasingly repelled by ads particularly in the smartphone universe and investing heavily in branded content. Those well off the launchpad include Andrew Zimmern of Bizarre Foods fame and Travel Channel Host with a list of clients that stretches from General Mills to Toyota and US Cellular.

Marriott has also checked into this not so new yet fast growing arena as a recent Financial Times report says "The hotel group is making its own films and running a ‘newsroom’ in its push for online branding." The hotel giant has added "original film production to the (advertising) mix. And while "financing and producing two short movies is more in keeping with a media company than a hotel operator" it has similar objectives as any media company: to find audiences they can monetize and hopefully woo and bring into their loyalty fold.

Although as the FT points out this is not a new phenomenon for Marriott, having featured comic books in its Hot Shoppe diner chain in the 60's, the "latest twist on the genre is quite different, given that Marriott is the creator, producer — and distributor — of the videos. As well as the films, it recently commissioned a Hot Shoppe animated series, which will run to five episodes and air on YouTube." Marriott's  21st century take has resulted in a news “studio” at  headquarters in Maryland with the moniker "M Live" which has been designed to bring together the company’s public relations teams, an in-house creative agency and media buyers".

Marriott is scarcely alone in the old-new world of branded content. The legendary London hotel, The Savoy was the real star in a ten minute video titled "Girl Panic".  The video has an astounding 7 million (and rising) hits in its four year life on YouTube. Starwood's Luxury Collection also preceded Marriott with a short (Indie) film titled "Here" albeit with far fewer hits.  There are many others looking into leap into this promising space.

Nevertheless, there seems to be a paucity of metrics to gauge the new wave's efficacy. In other words is ROI quantifiable or is there a lemming like rush to follow the "leader"? A reason for the measurement problem is that branded content seeks to set itself apart from "regular" advertising and so cannot be discussed with consumers/guests in those terms and if the message is unsubtle it is likely to be viewed as an infomercial or worse, an outright ad.  Perhaps time will tell whether the old, if apocryphal, adage of the ad-man "fifty percent of ads are effective while fifty do not but we don't know which fifty it is!" applies here.

A data breach encore. A moral hazard issue?

September 29, 2015

Data breaches, hackings, online invasions etc occur with such distressing regularity that there seems to be a sense of ennui when these incidents occur. The breaches result in more than a loss of privacy as was the case with Ashley Madison, something which Facebook founder Mark Zuckerberg airily dismissed as a given some years ago, but often cause considerable financial harm to companies and individuals.

Whether privacy has gone the way of the dodo or not data breaches present a different set of problems to consumers and businesses alike and ought not to be countenanced much less endured by firms. Nevertheless, some interesting research reported earlier this year in The Conversation suggests that there is an element of moral hazard at work that fails to incentivize companies to take data breaches more seriously and invest in cyber-security.

Benjamin Dean, the author of the article in the Conversation cites the example of Target where "the gross expenses from the data breach were $252 million. When we subtract insurance reimbursement, the losses fall to $162 million. If we subtract tax deductions (yes, breach-related expenses are deductible), the net losses tally $105 million."  That Mr. Dean points out was a rounding error amounting to a mere 0.1% of sales in 2014. In other words, Target had no incentive to step up its cyber-security both due to a de-minimis (to them) loss as well as very little if any customer blowback.

 

In the hotel space, the latest victim is Hilton Hotels and many of its brands as reported on the website Krebs on Security which focuses on cyber security. The site reports that the data breach was first noticed by Visa in an alert to various banks saying that it occurred sometime between April 21, 2015 to July 27, 2015.  Visa's policy precludes it from naming where the breach occurred but sources at five different banks soon "determined that the common point-of-purchase for cards included in that alert had only one commonality: They were all were used at Hilton properties, including the company’s flagship Hilton locations as well as Embassy Suites, Doubletree, Hampton Inn and Suites, and the upscale Waldorf Astoria Hotels & Resorts." 

It is not clear yet whether these breaches in the hospitality industry (Choice hotels had one a couple of years ago) stem from the same lack of financial incentive that has been ascribed to Target but its recurrence ought to spur a far more consumer sensitive industry than retail to be more proactive and responsive. After all in retail consumers  merely visit as opposed to staying or living in hotels. A memorable stay can quickly turn sour when on returning home guests find  both their privacy and finances ravaged.

Resorting to fees to boost profits

September 04, 2015

Hotel fees for "use" of a resort's facilities as well as other "amenities"  have unfortunately come under the scanner in a variety of forums and even invited comment from a Federal Advisory Committee focused on airlines surcharges. USA Today recently ran a story pointing out that "U.S. hotels are projected to reap a record $2.47 billion this year from fees and surcharges that require guests to pay extra for everything from getting into their room early to leaving bags with the bell staff" per a recent report from New York University.

While there is a lack of transparency on the part of a few operators the industry is unfairly being tarred by the brush used on the airlines, particularly US airlines.  With the exception of Southwest most of the others continue to find innovative ways to pick passengers' pockets while steadily constricting their offerings. United Airlines, for instance, is notorious for its steep baggage fees and outrageously high costs for sitting in any of the rows in the front of their economy cabin allegedly for an extra inch or two of leg room and insult to injury by "upselling" while passengers board the plane!

Left out in the clamor over undisclosed fees is that hotel room rates across the United States are actually below what they were for the peak year (2008) when rates were $107. Adjusted for inflation that amounts to  $117 in 2014 as compared to the actual average room rate of $113 for last year. While consumers are obviously unbothered by the escalating costs (real estate taxes for example in New York City have gone up between 35 - 70% for the same period) what is pertinent is the range of amenities that hotels have added since the advent of the Great Recession. These range from the by now ubiquitous free WiFi and continental breakfast to the more esoteric electric car charging.

Perhaps hotels need to do a better job of price perception by consumers and steer away from the airline or what's worse Uber's (surge) pricing models and take their cues from giant suburban retailers who give the impression of being cheaper than their specialty counterparts even if, on many occasions, that is not the case.  "Unbundling" amenities that indeed are optional (and desirable)  is also another way to overcome consumers' ire at "mandatory" fees.  In any event, a better job of conveying the fact that a highly fragmented industry like hotels can never act in the rapacious manner of a quasi-oligopolistic grouping like airlines is what is urgently needed.

 

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  • President of Apple Core Hotels, a chain of 5 midtown Manhattan hotels offering value and comfort in the heart of the city.

    Member of the board of Directors - Hotel Association of New York.


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