How Will Stricter Short-Term Rental Laws Impact the Niche Industry?

Short-term rental companies like Airbnb have found massive success over the last 15 years as an alternative to traditional hotels and motels. But the rise of this market has also been met with criticism from hospitality industry trade groups, city leaders, and neighborhoods. Now, in a time when communities are wary of institutional investors buying up single-family homes to rent out, the backlash to short-term rentals (STR) has hit a fever pitch. Cities nationwide are considering or have recently passed stricter laws against short-term rentals. At the same time, the supply of new listings is multiplying, leading to many questions about what will happen with the niche industry in the future.

A lot is going on in the short-term and vacation rental market at the moment. Just last week, news emerged that the STR management company Sonder was in danger of being de-listed from the Nasdaq stock exchange. Shares at the company, which launched in 2014 in Montreal, had dropped to $1.27 at the beginning of this year, a big drop from where it started in 2022 at $9 a share. As of last week, Sonder shares were trading at 41 cents. 

Meanwhile, Airbnb’s fourth-quarter 2022 earnings report showed that the company closed out the year with its highest-ever number of active listings worldwide and a 24 percent jump in fourth-quarter revenue year-over-year. Airbnb leaders said they continue to see strong demand for rentals and expect that trend to continue. Airbnb is by far the largest STR platform but its biggest competitor, Vrbo, is looking to shake things up this year. Expedia Group, which acquired Vrbo in 2015, is set to launch a cross-brand loyalty program sometime this year to let guests earn and use rewards across Expedia brands, including Vrbo. Expedia’s CEO said earlier this year that Vrbo would be more integrated into the company’s other brands and would stand to benefit from Expedia’s B2B travel segments. 

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Airbnb burst onto the scene in 2008 and quickly disrupted the hospitality industry. In some ways, it’s not really a new idea. Short-term vacation rentals have been around for decades, and it’s common for apartment dwellers in big cities to sublet their space for short periods of time. But Airbnb made the process of renting out one’s space easy, offering up a user-friendly platform that gave hosts the reins to rent out their homes or extra rooms. More companies followed (including VRBO), and many offered management services for short-term rental operators. Now, 15 years after its launch, Airbnb has 6.6 million active listings in more than 100,000 cities and towns worldwide. But as these platforms rose in popularity as a more affordable lodging alternative, they have also been accused of helping drive up rent prices and negatively impacting housing stock. 

In an effort to better regulate the industry and cut down on negative impacts to communities, a number of cities are looking to reign in the market through more legislation. In March of this year, Dallas lawmakers considered a proposal that would effectively eliminate 95 percent of STR listings in the city. The proposal came from a years-long grassroots campaign called “Homes not Hotels,” started by neighborhood residents fed up with issues over excessive trash, loud parties, and even shootings at homes operating as STRs. Dallas’ City Plan Commission recommended that lawmakers define STRs as “lodging,” making the vast majority of the 1,700 rentals in Dallas illegal in residential neighborhoods but legal in certain commercial areas. The ordinance could be voted on by the Dallas City Council this month. 

Dallas is the most recent city weighing a ban on short-term rentals, but it’s hardly the first. Earlier this year, officials in New Orleans, a city heavily dependent on tourism, passed new regulations limiting STRs after a heated debate among city residents. Now, owners of these kinds of rentals must live on the property and can only license one property per block. Philadelphia first passed regulations on vacation rentals in 2015, requiring hosts to obtain zoning permits if they operated units out of their homes for more than three months a year. Operating a vacation rental outside of a primary residence meant obtaining a hotel license. However, the laws hadn’t been enforced, and according to the Philadelphia Inquirer, the STR market was thriving in a “gray economy.”  When the pandemic hit in 2020, complaints over nuisances caused by STR renters surged, leading to a new bill passed by Philadelphia’s City Council in 2021 requiring STR owners to get a new kind of license. That law didn’t go into effect until earlier this year.

In New York City, which has a long history of regulations for Airbnb and other platforms, city officials recently passed a new law requiring STR operators to register their units with the city. Owners also have the option to add their property to New York City’s “Prohibited Buildings” list, which will then ban the operation of STRs in their building. Airbnb has fiercely opposed the new legislation, saying that the laws will hurt average New Yorkers trying to keep up with soaring housing costs by renting out extra spaces in their homes. Penalties for failing to comply with the new rules could result in fees ranging from $1,000 to $5,000. A leader of the city’s Office of Special Enforcement, which is tasked with investigating and enforcing laws around STRs, said this past December that he expected 10,000 listings to disappear once the new rules went into effect.

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Depending on who you talk to, the short-term rental market has been struggling lately, driven by a nationwide housing shortage. Last fall, as short-term rental owners bemoaned a sharp drop in bookings on social media, the hashtag #Airbnbust began trending. As a result of the slump in booking traffic, many owners dropped their prices significantly. In December, AirDNA, an analytics firm that tracks the short-term rental market, found that the number of future bookings was up 15.8 percent year-over-year, seemingly contradicting the narrative that the market was struggling. But while bookings have jumped since last year, there’s also been a substantial uptick in supply. Between October 2021 and October 2022, the number of available short-term rental listings rose 23.3 percent. “As the overall housing market has started to cool because of the economy tightening up, that has impacted sellers who would list their houses for sale,” said Redfin economist Taylor Marr. “To hold on to their low interest rates, they are saying, ‘Why not rent the house?’”

A study from the Harvard Business Review in 2019 found that renting out homes on Airbnb alone accounted for about 20 percent of the average annual rent increases in the U.S. But in a newer study, researchers looked back over ten years of Airbnb listings and residential permit applications in the U.S. and found a clear link between STRs and residential permits. The connection between Airbnb listings and permit applications suggests that Airbnbs can be an essential component of real estate markets and boost local tax bases. Even more interesting is that the finding shows that restricting short-term rentals could even negatively impact the local economy and reduce development.

Laws regulating short-term rentals have been around for years, but that hasn’t stopped more supply from entering the market as more owners look to rent out their spaces for short-term stays. Whether this new wave of stricter regulations will stymie future growth in the STR sector isn’t totally clear. Still, it will undoubtedly have an impact, especially in places with an intense community backlash to these kinds of properties. But it’s important to remember that though there are laws in place, actually enforcing them can and has proven difficult. And as recent studies have shown, short-term rentals might be unjustly vilified since they can have more of an overall positive economic impact in a community than a negative one.

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