Airbnb Loses Ground in New York, Battling Housing, Hotel Industry

November 8, 2016 10:28 am Last Updated: February 8, 2017 12:44 pm

NEW YORK—It was never going to be easy for Airbnb in the Big Apple. The city’s history of housing shortages has long been marked by fighting the major part of Airbnb’s business model—renting apartments as hotel rooms.

Multiple layers of regulations restrict short-term rentals in New York City, backed by protective tenants, housing advocates, and the hotel industry.

Airbnb follows the ideology of digital disruption, arguing its service is just too practical and attractive to be crippled by regulations. It also wields a massive wad of investors’ cash.

Yet, after some lobbying, mostly by the hotel industry, state legislators have clamped down on Airbnb. On Oct. 21, New York Gov. Andrew Cuomo signed a bill making it illegal to even advertise rentals of fewer than 30 days if the permanent occupant is not living there too. Fines can reach $7,500.

Airbnb filed a suit against the new law on Oct. 21 to clarify the penalty system. It is a last ditch effort to stop half of its business in the city from vanishing.

While not yet enforced, the new law has convinced some hosts to take down their illegal listings, while others plan to monitor the lawsuit before making changes.

“This is crazy. I actually didn’t know anything was signed into law,” one host said in an email. She planned to take her listing down, “at least until I can read through things more.”

“I know about it,” said another. “There is an appeal. I’m waiting for more official info and warnings before changing anything.”

“If Airbnb tells us that our listing is not within regulations and requests that we remove our listing, we plan to follow their decision,” a host said.

“I am aware of the law. I guess I would say [I’m] slightly concerned about getting fined and am hoping to get guests during Christmas time, then [my listing is] coming down,” another stated.

If the bill is enforced, thousands of New Yorkers face losing supplemental income from renting their homes through Airbnb. On the other hand, thousands of apartments in attractive neighborhoods could be released onto the rental market, pushing rents lower.

Airbnb guest Megan Walsh reads in her room at the Echo Park home of artist Jonathan Entler, in Los Angeles, May 19, 2014. The vast majority of Airbnb listings are illegal, and "multi-million dollar businesses" of illegal hotel rentals are being run out of the most "gentrified neighborhoods" of New York City, according to a report Attorney General Eric Schneiderman released Oct. 16.  (AP Photo/Damian Dovarganes)
An Airbnb guest reads in her room in Los Angeles, May 19, 2014. The vast majority of Airbnb listings are illegal in New York City, according to an Oct. 16 attorney general report. (AP Photo/Damian Dovarganes)

Breaking Rules as a Rule

More than half of the 44,622 Airbnb listings in the city advertise entire homes and thus are likely to be illegal. A 2010 state law forbids renting apartments for fewer than 30 days unless a permanent occupant stays there too.

But the city has never enforced the law aggressively, focusing mostly on larger operations, such as when landlords convert many units in a building into hotel rooms. Even if they wanted to, inspectors would have a hard time catching small-scale violators in the act, unless somebody complained to the city.

And so Assemblywoman Linda Rosenthal sponsored the new bill to “help to crack down on bad actors who are depleting our affordable housing stock and destabilizing our communities,” she stated in a release.

Draining Stock

Last year, over 8,000 Airbnb listings were likely commercial, meaning they were empty homes that otherwise could have been available for rent, according to a report prepared by BJH Advisors, a real estate development and advisory firm.

That means Airbnb exacerbates a housing shortage that has grieved the city for most of the past century.

Since then, the company said it removed about 2,500 listings that were likely commercial.

The city has introduced over 14,000 new apartments to the rental market this year, which means commercial listings on Airbnb have less impact on rental stock, but may still be draining it by an estimated 6.4 percent.

The Real Deal attempted to estimate Airbnb’s impact on rental pricing in the city last year, but warned that the estimate could be far from accurate, as rents are affected by many other factors. Using their methodology, a renter paying $4,000 would be $20 per month richer if Airbnb didn’t exist.

Strangers in the House

Although some New Yorkers don’t like strangers in their buildings, Airbnb guests seem relatively disciplined. This is probably due to the review process—after a couple of bad reviews, a rowdy guest may have trouble finding a bed to crash on.

The city’s Office of Special Enforcement received 1,150 complaints about illegal hotels in 2014 and issued 886 violations, according to NYC Public Advocate Letitia James.

Squeezing Hotels

Hotels in New York City are still struggling to recover from the 2008 recession, and Airbnb’s success is rubbing salt into the wound.

“Traditional full-service hotels saw their operating profit margin decline from 30 percent in 2007 to 13 percent in 2012,” Lodging Advisors CEO Sean Hennessey told The Real Deal in 2014.

“The sector is struggling amid an expansion of traditional supply and the rise of technological upstarts such as Airbnb,” reported Ten-X, an online real estate transaction platform, on Oct. 20.

The hotel industry itself is creating even more competition by adding more inventory. Since 2013, 14,000 new hotel rooms have come online and 25,000 more are in the pipeline, according to the city.

Donations and Lobbying

The hotel industry and its affiliates donated at least $11 million to political candidates and national groups active in state elections nationwide in 2014, according to the Center for Public Integrity.

After New York Attorney General Eric Schneiderman subpoenaed Airbnb for a trove of data in 2013, the hotel industry poured close to $200,000 into his campaign chest, Politico reported.

Assemblywoman Rosenthal, sponsor of the state’s new bill banning short-term rental advertising, was re-elected Nov. 8.

Two of her top campaign donors are the New York Hotel and Motel Trades Council and Local 6, the city’s hotel employees union. Each gave $8,800 to her $134,000 campaign fund. The international hotel employees union (Unite Here!) chipped in another $4,100, according to the National Institute on Money in State Politics, a nonprofit.

These three donors gave over $492,000 to New York State’s lawmakers during the 2016 legislative session.

Meanwhile, Airbnb pushes its interests in New York through its Stronger Neighborhoods PAC via political ads, allocating up to $11 million to the effort, rather than making campaign donations, Daily News reported on Oct. 11.

In 2014, the company and its executives and funders donated at least $920,000 to candidates and outside groups for state elections nationwide.

Last-Ditch Effort

In response to Airbnb’s lawsuit, the court asked the company and the city and state to come up with an agreement that would clarify the matter, The Wall Street Journal reported.

Rosenthal said the law doesn’t apply to Airbnb itself, just to the hosts advertising illegal rentals. A first offence will cost them $1,000, the second $5,000, and the third $7,500.

“The lawsuit seems quixotic to me,” said Rebecca Tushnet, professor of law at Georgetown University, in an email. “Airbnb may merely be trying to get the city’s lawyers to make binding assurances that [the law] doesn’t govern Airbnb directly; that’s the best reason I can think of to sue, other than publicity.”

Airbnb alleges a few other problems with the law, but those will all become moot once the city clarifies that it won’t use the law to fine the company, according to Michael Siebecker, professor at University of Denver Sturm College of Law and expert on corporate law.

The city won’t enforce the law until the court decides on a preliminary injunction. The injunction, if granted, would stop the city from enforcing the law until the suit is over.

“We are taking the steps necessary to enable us to enforce the state law,” said Melissa Grace, mayor’s office spokeswoman, in an email. “Our focus has and will continue to be operators of illegal hotels who put people in unsafe conditions and take affordable homes off the market. We will continue to apply current state law to hold bad actors accountable.”

Airbnb co-founder and CEO Brian Chesky in San Francisco on April 19, 2016. (AP Photo/Jeff Chiu)
Airbnb co-founder and CEO Brian Chesky in San Francisco on April 19, 2016. (AP Photo/Jeff Chiu)

A Brief Outline—From 1901 to Airbnb

1901 Tenement Housing Act

The city introduced complex regulations and zones—residential, commercial, and industrial zones. The height and bulk of buildings is limited to allow at least some air and sun in; fire codes dictate strict safety standards.

The law was replaced by the 1929 Multiple Dwelling Act and then amended multiple times.

Some regulations are likely never enforced—such as the prohibition on more than three unrelated people sharing an apartment—even if it has four bedrooms.

There are also a plethora of building bylaws and lease agreements, some of which even ban a house guest staying overnight.

Selective Enforcement

This culture developed out of the maze of regulations. Simply put, as long as the house guests behave themselves, the super won’t make a fuss about rule breaking.

Illegal Hotels

Since the early 2000s, state and city legislators complained about “illegal hotels.” Some landlords converted single-room micro-apartments in their buildings to hotel rooms, boosting their profits. The transient clientele was annoying some tenants and the converted units depleted rental stock.

Mayor Michael Bloomberg formed the Office of Special Enforcement in 2006 to crack down on the practice. But by 2008, such hotels appeared in more than 200 buildings, legislators and tenant advocates estimated.

Meanwhile, the powerful hotel industry threw its weight behind the crackdown, unhappy with non-unionized competition flouting safety regulations and hotel taxes.

The rogue hotels fought city lawsuits through ambiguities in the law, so the state established the 30-day minimum in 2010.

2010 Multiple Dwelling Law Amendment

This rule restricted short-term rentals.

Based on the law, the city Housing Maintenance Code now requires that:

  1. Apartments in residential areas can only be rented for more than 30 days
  2. A maximum of two people can rent an apartment for fewer than 30 days, if the permanent occupant resides in the apartment.
  3. The permanent occupant can leave the whole apartment to maximum of two people for fewer than 30 days as long as the occupant leaves for personal reasons and the guests don’t pay.

The city started to close down the large operations, but seldom busted ordinary folk for breaking the 30-day rule.

Airbnb

Airbnb was created in 2008 by two San Franciscan roommates to help make rent. They rented out airbeds in their living room and provided a homemade breakfast.

A year later they launched the website and it grew exponentially. Currently, the website lists some 2.3 million rooms to rent and the company raised over $2.6 billion from investors.

The website allows hosts to rent a bed, a room, or a whole home for one night or more. Airbnb charges a 3 percent fee to the hosts and a 6 to 12 percent fee to the guests.

A number of cities with tight housing markets, like New York, San Francisco, and Berlin, have since created laws restricting short-term renting promoted by Airbnb.