The Curious Effect of Airbnb

PART 1: Seeking a fair share

Airbnb stands to lose 57 per cent of its revenue in Vancouver if new municipal regulations are approved this summer as expected. The story is a familiar one globally as cities in many of the 191 countries in which the company operates rein in the explosive growth of home-sharing and short-term rentals (STR’s), perpetuated largely by the easy-to-use platform of the start-up-turned-giant.

Berlin and Barcelona have banned forms of STRs outright. American tech hubs like Austin, Tex., and Boulder, Colo., implemented — and struggled with — a permissive approach. Vancouver is somewhere in the middle, its new policies looking to extricate benefits from home-sharing’s mess of unintended consequences. Despite the well-promoted international progression to better regulation, the challenge is, and has always been, with regulation enforcement.

Vancouver has had in place for years a bylaw designed to control STRs. Most cities have one. Their failures have been rooted in an enforcement approach out of step with Airbnb’s advances and a modern digital culture. With new targeted regulation, Vancouver could become the Canadian vanguard of STR control, but only if they evolve as home-sharing community police.

The Reckoning of Airbnb

Headlines have been turning on Airbnb for the better part of two years, first in cities like San Francisco and New York, then, with more frequency in 2016, as the platform achieved scale in other cities. At a time in Vancouver of peak foreign investment and plummeting vacancy, advocacy groups lined up in opposition: Renters claimed Airbnb siphoned away long-term rental stock, thereby driving up prices; hotel industry lobbies claimed Airbnb facilitated the operation of informal hotels, reducing bottom lines and threatening employment; condominium boards and neighbourhood associations claimed Airbnb increased transience, decreasing safety and quality of life; city budget hawks claimed Airbnb diminished the tax base, making it easy for landlords to avoid paying dues; and real estate investment watchdogs claimed Airbnb attracted off-shore buyers, heightening an already critical foreign ownership crisis. For many, Airbnb was the key to an over-stuffed closet full of urban skeletons.

Of course the STR issue is bigger than just Airbnb, but in Vancouver, not by much. According to Host Compliance LLC, a San Francisco-based STR analytics and services firm, while there are currently nine STR platforms operating in the city Airbnb has cornered an 85 per cent share of the 5,927 unique, active listings. The firm also helped city staff prepare a September 2016 report for council which suggested Airbnb’s listings have been doubling year over year since 2009 but with only 3 per cent properly permitted and following the law.

The Rise of Airbnb
The Rise of Airbnb

Regulation 2.0

Section 10 of Vancouver’s Zoning and Development Bylaw codifies a ban on any rentals for less than 30 days. Kaye Krishna, Vancouver’s General Manager of Development, Buildings and Licensing describes this “core planning principle” as a residue of cities’ antiquated attempt to define a renter from a tourist.  “It’s my understanding that [the bylaw] evolved over time in response to how hotelling and SROs were contributing challenges in neighbourhoods and with transient populations.”

But despite altruistic motives, the bylaw’s anachronism has been the source of its impotence. “Our bylaw enforcement is complaints based,” says Krishna. “We don’t have a practice of going into peoples’ homes and checking on those [compliance] things.” According to the staff report, a total of 80-nuisance- and safety-related STR complaints were logged by the city’s 3-1-1 hotline between 2013 and September 2016. The inability to widely enforce the bylaw was not so much a matter of choice but a dearth of intel.

Krishna has recommended the city move on from the Berlin-esque ban to a nuanced regulation which proposes to allow property owners or renters to rent on a short term, but only their principle residences and only with a City-issued business license. Rental of non-principal residences — investment properties, accessory units or some laneway houses, as examples — for less than 30 days would remain illegal, a stance consistent with the City’s “emerging policy on taxing empty homes.” Additionally, STR units would have to be maintained as safe dwelling units, as defined by the Vancouver Building Bylaw.

“We really want to enable people — residents who live and work in the city — to benefit from short-term rentals,” she says. “But we want to mitigate against people doing this in a way which has a negative impact on the availability of long-term rentals and a disproportionate effect on the vacancy rate.” By simply limiting STRs to only principle residences, Vancouver sweeps out most of the unwanted consequences: The threat of units leaking away from the long-term rental market, attracted by the more lucrative business model Airbnb and others can provide, is avoided with units rented only in a shared capacity or when the permanent residents have temporarily vacated. The city expects half of the estimate 4,450 “entire unit” listings and most of the private room listings could be legalized and up to 1,000 STR units may return to the long-term rental stock. The definition also precludes professional landlords from operating informal hotels, foreign interests from participating in the market while the licensing requirements help facilitate host compliance for safety, cleanliness and tax remittance purposes.

Following provisional Council approval in October, the proposal was returned to staff for final consultation and drafting. “As it stands, we are planning to stick with what we put forward in the fall,” says Krishna, who expects the final report to be submitted to Council for approval in June or July. An additional tax on STRs is still being explored which would include GST, PST and likely the 3 per cent Municipal and Regional District Tax. “We’re [now] working out the “how” – the implementation.”

Tech v. Tech

Host Compliance’s CEO and founder Ulrik Binzer has worked with 65 municipalities in the United States and Canada seeking a fair approach to STRs and believes Krishna’s next step is the most critical. His own interest in STRs piqued in 2015: “In the little town I live in just north of San Francisco, out of the blue, they decided to put in a full-out ban.” At the time, Binzer would rent out his home during the three weeks each year he travelled with his family to Europe. With the new ban, he couldn’t. A second reading of the policy by town council attracted a crowd. “To be honest, there wasn’t any data or thought to it,” he said. “I think it was one of those ‘stick your head in the sand’ kinds of things, like, if we ban it, we can pretend it will go away.”

A Harvard graduate and self-professed data nerd, Binzer set out to discover the true impact of STRs in his community: the type and number of listings; their locations; occupancy rates; and so on. He was appointed to a town committee to re-evaluate the ban but quickly found a wide gap between the data he wanted and was able to collect, and the data on offer from STR platforms — this was, in effect, the reason most municipalities were incapable of effective STR regulation enforcement.

Of course Airbnb had the data Binzer needed, but the company believed it was not obligated to help, quietly seeking protection under the United States’ Communications Decency Act, which other websites like eBay and Craigslist had successfully leveraged to avoid the liability of questionable user-generated content. In November 2016, however, Airbnb’s assertion was struck down in a San Francisco court and they have been facing a growing call to fully share their data and actively participate in the enforcement of municipal policies around the country.

A Communications Decency Act-style precedence does not exist in Canada, yet surprisingly Airbnb here has been trying to support cities in implementing a modern municipal code — a delicate effort balancing interests in profit and public image. In 2016, when Kaye Krishna called on STR platforms to participate in Vancouver’s consultation process for new regulations, only Airbnb stood up. On May 17, Airbnb released their Tool Chest 2.0, a document of best practices and “lessons learned through partnering with governments.” Although the document cites numerous official partnerships with jurisdictions around the globe, Airbnb confirmed to Building none exist in Canada.

Kaye Krishna sees a strengthening relationship with Airbnb as a key component of her work-in-progress enforcement strategy which also includes an “aggressive” reporting mechanism, data scraping and maximizing penalties and legal implications for violators. “[We want] to identify where there are egregious hosts operating clearly as a business with multiple listings, multiple units per building, or they are clearly running something like 365 nights per year.” The anticipated 57 per cent slash of Airbnb revenue comes as these multi-listing landlords are removed from the Vancouver market.

“They understand the policy framework we are trying to put in place,” notes Krishna of Airbnb. “On two separate occasions they’ve scanned their site and pulled down anyone who has posted who fits that profile.” In a November letter to Mayor Robertson, Airbnb indicated they had “proactively” removed 130 listings from the site believed to be “commercial operators.” When asked by Building, Airbnb did not commit to performing similar sweeps in the future.

Until Airbnb and other platforms such as Expedia’s recently acquired HomeAway network are completely transparent with their operations, the data gap Binzer identified will persist and municipal enforcement will struggle. Vancouver has yet to decide if it will engage an external consultant to assist with analytics and host compliance, but this is exactly the niche Binzer is in, and competitors to his Host Compliance are hoping to fill. “We’ve built a whole suite of compliance and enforcement tools which makes it much easier for local governments to enforce the rules that they have put in place,” he says. “Most cities have found it is incredibly hard to solve the compliance challenge on a manual basis. You really need software and tools to do this”

Binzer’s tools include a streamlined host registration and permitting process, data scraping and analytics, host communications and provision of a 24/7 complaints hotline. “We realized the data side and the information needed at the time when you adopt an ordinance is only a small part of the solution. What we really needed was an ongoing compliance monitoring solution.” Host Compliance is now working with several Canadian municipalities, including Toronto, Edmonton, and B.C. ski-and-surf towns like Sun Peaks, Nelson and Tofino. When asked about Host Compliance’s future with a completely transparent Airbnb, Binzer responds: “I spend a lot of time thinking about that… We monitor 22 websites on a weekly basis and there are 125 websites out there which facilitate [STRs]. People are making a lot of money right now renting illegally on Airbnb, they are not going to stop when Airbnb potentially is forced to be more open. They are just going to move to these other websites. We have lots of examples of that in our data where a listing goes down and it comes up on another website a day later. It’s a cat and mouse game.”

Employing one tech start-up to police another has a certain binary poetry, but Binzer sees Host Compliance’s future as an industry “auditor” because most cities won’t have the faculties or desire to internalize the required effort and most platforms won’t want to deal with 30,000 cities or jurisdictions in North America. “It would be easier if the platforms have a relationship with us and we have the relationship with the cities and that way you can keep everyone to the same standard and make the software integration easier for everyone,” he says.   

Canadian Hotel Operating Metrics
Canadian Hotel Operating Metrics

Airbnb achieving scale in Vancouver unlocked a clutter of consequences. But unlike Berlin and Barcelona, Vancouver sees value in a healthy home-sharing economy and have created new regulations targeting its benefits. Their greatest challenge in realizing those benefits, though, remains in the unpublicized and dull realm of enforcement. They’ve failed once here already and an unsettled strategy moving forward is cause for some concern. In the absence of complete transparency from Airbnb and other STR platforms, enforcement’s tech-based, data-driven modernization is the key to Vancouver’s fair share future.

On February 24, 2017, Tourism Vancouver announced the number of overnight visitors to the city in 2016 had ballooned to over 10 million. Occupancy and average daily rates for Vancouver hotels, too, were reported as outperforming those in Toronto, Montréal and Ottawa for the same period. 2016 was a record year for the city’s $4.4-billion tourism industry, and the third record-breaking year in a row. But this new high mark comes at a curious time; one paralleling the exponential growth of Airbnb many early commentators predicted would deal a devastating blow to Vancouver’s hotels. Instead, there appears to be no impact all, a trend seemingly mirrored across Canada.

PART 2: The fuss that isn’t (yet?)

According to the 2017 Canadian Hotel Investment Report released by Colliers International Hotels in April, occupancy rates and average daily rates (ADRs) of Canadian hotels have generally been increasing since 2011, consistent with Statistics Canada reporting an increase in tourism of 9.4 per cent in 2016. “The Canadian hotel industry is firing on all cylinders,” the Report suggests, also predicting another banner year in 2017 with Canada 150 celebrations.

“A direct line between Airbnb and the lodging industry? I think you are going to have similar challenges as [determining] Uber’s impact on the taxi industry,” says Dr. Chris Gibbs, assistant professor at Ryerson University’s Ted Rogers School of Management. “It’s difficult to measure that.”

Gibbs has been studying disruption in hospitality, sports and tourism for 20 years, and, in collaborative research with HLT Advisory, converted Airbnb listings to equivalent room nights to determine a truer sense of Airbnb’s market share. In Vancouver, he found “entire places” accounted for approximately five per cent of market demand and revenue over the last six months of 2015, with ADRs on these units only $5 less than those of traditional hotels. “No one has really done it properly, and I think it would be really challenging to do what we’d call a true displacement where you say this is causing hotels to lose 10 per cent of their business,” says Gibbs. “You’d have to model it and make some assumptions.”

What Visitors Pay: Vancouver Hotel
What Visitors Pay: Vancouver Hotel

In the absence of tell-tale data, the rationale for imperceptible impacts as Airbnb achieves scale is left to speculation. Some in the hotel industry have always believed Airbnb’s product targeted a different core consumer and that their popularity and hotel revenue were not inversely proportional. “We are in the business of hospitality. We are in the business of people serving people. We are not, in my humble opinion, in the business of lodging. I think Airbnb is more in the business of lodging,” said Hilton Worldwide CEO Christopher Nassetta at the Americas Lodging Investment Summit in 2016. Canadian hotels on average appearing unfazed by Airbnb may also be due to the overwhelming influence of other positive inputs to the tourism industry at large. Or, Airbnb’s own argument about the value of their offerings could be credible.

“Airbnb serves two ends,” says Alex Dagg, Airbnb’s public policy manager for Canada, “helping families make ends meet and increasing the tourism pie.” A controversial report commissioned by Airbnb and released in October suggests Airbnb guests and hosts in Vancouver contributed $402 million to the local economy during a 12-month period ending in August 2016. Critics, distilling further Airbnb’s own data, suggest the majority of this activity is not new and would have been generated if guests had stayed in traditional accommodation.

But independent consumer research released in August 2016 by Dr. Daniel Guttentag, a colleague of Dr. Gibbs at Ryerson University, suggests 30 per cent of Airbnb guests would not have travelled to a city were it not for Airbnb’s offerings, suggesting there is a hotel displacement factor of 70 per cent, but also that 30 per cent of all economic activity generated by the Airbnb community could be fresh. If true, record-breaking tourism in Vancouver could partly be Airbnb’s award to claim.

Alex Dagg also champions Airbnb’s ability to “democratize” the tourism dollar — redistributing it from downtown strongholds to mom-and-pop restaurants and coffee shops in outlying neighbourhoods — as a major urban “win,” but the elasticity of Airbnb rental stock may be the most intriguing factor for cities and hotels. “I think Canada is so well-positioned in global travel these days,” she says, “we’re going to continue to see an expansion and I think you need Airbnb to deal with that elastic supply.” Dagg cites Canada 150 as an example. “The hotels in Ottawa have been sold out for months, so if we didn’t exist in

Ottawa, a lot of people wouldn’t be able to come and share in the celebrations.”

Servicing visitors during peak travel periods is quickly becoming a hallmark of the platform and has helped cities bid for and accommodate big-ticket events, like the 2016 Rio Olympics and the 2017 NFL Superbowl in Houston, Tex. Availability of this mutable supply, though, gives pause for hotel developers as cities like Vancouver reach record-breaking occupancy. For now, James Chase, president of the BC Hotel Association doesn’t believe the rise of Airbnb has impeded hotel development in Vancouver. “We know of no developers who have delayed development plans. Logic would dictate it could happen; however, we have no evidence it has.”

Without strong proof of Airbnb negatively impacting the bottom lines of Vancouver hotels, calls from the lodging lobby and tourism advocates have largely focused on creating an equal playing field, ensuring Airbnb hosts pay all appropriate taxes and contribute to voluntary destination marketing funds. In a statement released to Building, Tourism Vancouver indicated their continued support for responsible home-sharing and short term rental regulation. With the proper Vancouver-specific framework in place, many believe Airbnb can be a significant contributor to record tourism in years to come.

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