The Shadow hotel industry’s impact on hotels

“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.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.