airbnb-the cause of the housing shortage and rising real Estate Prices

Authors note:  Keep in mind when you are reading this that I am a free market economist and if you wanted to categorize me you could call me Chicago School

People might find this crazy but Airbnb causes housing instability.

Airbnb is a DISRUPTIVE TECHNOLOGY and sometimes disruption is good.  It forces people to think outside of the box.  Airbnb has allowed people to utilize extra space in their homes and make money.

Before Airbnb if you wanted to stay in a place other than your home, you would stay with a friend, or rent a hotel room.

Are hotels good or bad? You are welcome to your opinion on that.  However, you must understand the economics of a hotel and how it fits into local housing situation.

When an entrepreneur considers building a hotel, she has to think about a whole host of things, here are a few they must consider:

• Is there enough demand to justify building?
• Who is the demographic they will market to?
• Where will the workers come from?
• Can they build/zone a hotel in that particular location?
• How easy is it for others to enter the market and take away their market share?
• How long will it take to make money?
• 
  

This is a long term decision and it takes a while to raise capital, get the permits, build the hotel, then ultimately pay back the investors.

Where do hotels make the most sense:

• Vacation locations
• Near entertainment venues (we can group this with vacation locations)
• Near high population areas

Let us take a couple of examples that show that Airbnb has not just been disruptive, but has actually hurt the most vulnerable.

Vacation Locations- Orlando Fl(Disney World), Truckee CA(Lake Tahoe), Reno NV (Casinos)

These 3 locations have been in the news because airbnb is hurting their economies.  

On the surface and at the beginning this appears to be great for the local economy.  Now more people can come, and at perhaps lower prices.  Essentially these towns can house more people without the Long term Capital Expense of building a new HOTEL.  That is a good thing right?

NO NO NO

Investors are buying up inexpensive housing options (small houses, multifamily homes) and converting them from LONG TERM RENTALS(LTR) in to SHORT TERM RENTALS(STR- OR AIRBNB) 

What this is doing is displacing the workers that are needed to work at Disney or Tahoe or the Casinos.  If you are going to take these inexpensive housing options out of the mix, they need to be replaced.

These numbers are just for the example, they may not be accurate.

Let's say you have a small apartment just off Donner Pass Road in Truckee.  In the past you might rent this by the month for $900 to someone who worked locally, either in a restaurant or one of the tourist shops.  They were able to live near to their work and be part of the community in which they work. 

Let's say that there are 3 hotels in the Downtown area and another 4 a bit further away, and the average nightly rate is $187 + tax for $213/night. Let's also say that you have this little 1 BR apartment and the location is actually walking distance to where the tourist wants to be. Now with airbnb you can rent this for $130 a night (assuming also the occupant pays the taxes and cleaning fees) as there is a limited number of hotels and people like the location.  

As the owner of the 1 BR apartment you have struck silver like in 1863.  You only have to rent your apartment 7 Times a month or 83 days a year to be ahead (assuming you have limited additional cost for utilities.  And now you are guaranteed you will be paid since the occupants of your airbnb pay with credit card, and you do not rely on them to pay rent.

Prior to airbnb your apartment was worth somewhere around $130k ($900 X 12 X12(annual rent multiplier)).  Now if you are able to rent it 50% of the time it is worth around $285k (182 days X $130 X 12(annual rent multiplier)).

Airbnb has created the opportunity for the entrepreneurial person to buy up these properties and convert them into airbnb.  It has created vast wealth, presumably out of nowhere.

Now I don't have to make the capital investment to build a hotel, I can just buy a couple houses and convert them to airbnb and I'm in business.

Who has this hurt?

• The hotels- maybe yes maybe no- they do have to compete against airbnb now
• The local renter/worker- Definitely as they now have to pay more for their rentals
• The local buyer- Prices inevitably go up on all real estate types
• 
  
• The local economy- Workers have to either pay more, live further away from their jobs or make more money at their jobs to pay for increased rent. When these apartments are not being used which is 50% of the time, there will be no one around utilizing the services of the community.  In boom times there can be too many people and in normal times not enough people

Now let's address High Population Areas- I will use Worcester, MA with a population growth of 14% in the last 10 years.

People now want to spend more time in Worcester, there are colleges, hospitals and jobs, and a low vacancy rate on apartments.

The low vacancy has had the effect of raising rents, but airbnb has exacerbated that. Instead of adding more hotels to the market for the increased need for STR, airbnb has picked up the slack by taking rooms out of the hands of LTR and putting them into the hands of STR.

Why is this a problem?

Yes it is good to have the ability to simply add more hotel rooms for events like parents weekend through airbnb, but if there is really a need for more hotel rooms, then Capitalist Entrepreneur will build another hotel so they can make money.  And that hotel will be located in the location that is allowed by the city and makes the most sense to the developer.

The unintended consequence of airbnb is that rents rise, real estate prices rise, and the incentive for the developer to build a hotel is gone.  If airbnb is here to stay and the community of Worcester embraces it, there is a need for other types of housing to be built to make up for those that have been converted to STR.  The problem here lies that if I build an apartment building, that is allowed in a certain area and use it for STR, haven't I just built a hotel that is illegal according to zoning?

As I mentioned at the top I am a free market economist.  I believe that free markets do best to allocate resources.  I believe in Rational Expectations. You would think that I would be in favor of airbnb as it allows the owner of the real estate to use it as they wish.  

Actually I could be in favor of allowing the owner to exercise their property rights, but if you can rent rooms in a building anywhere, you should be able to put a hotel up anywhere as well.  You can't have it both ways.  

If we as a community are going to limit the ability of one group to put up a hotel on land they own, in turn it makes sense to limit the ability of others to rent rooms in their homes or apartments they own as STR.