Airbnb and the grabbing economy

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.

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.