As my four columns of troops approach the city, a fifth column of people inside the city will support us and undermine the government from within.
General Emilio Mola, advancing on Madrid, 1936 (paraphrased from Wikipedia)
By: David A. Smith
According to Gordon Gekko’s reading of Sun Tzu, every battle is won before it’s fought.
And greed is good
And that in my view is the dynamic now playing out in New York City, where Airbnb’s brilliant stealth multi-year campaign, which I’ve documented before, has now reached the crunch point, where its fifth column – apartment occupants making money on the side by renting their pads – are now ready to take on both the Mayor and the Governor of New York – and I’ll bet they win. As presented in Crain’s New York (August 24, 2016):
A third of Airbnb revenue comes from apartments turned into hotels, says study
Data is revealed as Cuomo ponders bill forbidding advertising of such units
Although this is a New York-based story, hence the focus on the share of Airbnb revenue from New York, I’m very confident that Airbnb’s revenue distribution is highly, excessively concentrated in high-cost, high-scarcity cities: New York, San Francisco, Boston, Washington DC, because when there’s plenty of supply, the ‘hotel room premium’ – that is, the price of a hotel room versus the price of an Airbnb rental – will be highest.
Seasonality and price spikes
AHI posts on Airbnb and cities
September 18, 2013: Outbreak of informality, 2 parts: New York City wakes up to the invisible invaders in its midst
October 16, 2013: We know where you live, 2 parts: The New York Attorney General’s efforts to compel disclosure of Gotham’s ‘unregistered’ Airbnb hosts
November 18, 2013: The enemy of my enemy, 3 parts: How Airbnb’s disruptive intrusion has made allies of the unlikeliest folks, hoteliers and anti-growth advocates
January 20, 2015: Aiding and a-bedding, 3 parts: How Airbnb has infiltrated and co-opted the intelligentsia of major cities like San Francisco
September 17, 2015: Housing policy’s original sin, 5 parts: How Berlin’s rising rents and Airbnb lettings spurred the enactment of rent control, which of course will end badly
Big NIMBY cities never have enough hotel rooms – the development cycle sees to that – and then they slap on hotel taxes, tourist taxes, and other politically logical soak-the-outsider costs. The dynamism of hotel pricing (even more rapid-response than airline pricing, though not as responsive as flower-bouquet pricing around romantic holidays) assures that if there is temporary scarcity, the room rates jump – and that creates economic pressure which will bring marginal landlords into the Airbnb system.
Using information scraped from Airbnb’s site, FiveThirtyEight analyzed both the share of commercial listings and the percentage of Airbnb’s revenue they generate in the 25 largest markets across the country. One number makes it clear how important the city is to Airbnb: New York represents a third of all listings and revenue in those markets.
And that means New York City isn’t an idle destination for Airbnb, it’s the beachhead into the high-value high-scarcity high-profitability cities on which Airbnb’s existence depends.
While Gov. Andrew Cuomo ponders legislation to sharply restrict advertising of Airbnb rentals, a new study from the data-based website FiveThirtyEight shows that at least a third of rentals are commercial – meaning entire homes or apartments are rented out for much of the time.
Naturally, high-scarcity cities, in addition to their inherent NIMBYism, are also prone to self-asphyxiating activities like confiscatory rent control, which encourages overconsumption by connected insiders, overhousing, snowbirds and absentee owners, multi-apartment households, and much more fun.
What makes Airbnb so spectacularly entertaining, in a blackly humorist urban sense, is that it simply monetizes what has already been rampant for decades in NYC. And by monetizing, Airbnb makes that capture of hidden wealth-transfer subsidy visible. Now the elected officials who have known for decades that rent control created winners and losers have to be shocked, shocked, that people are making money from the benefit that was supposedly not a benefit at all, just a protection against landlord rapacity.
Whoa, whoa, who’s the rapacious one here?
Subletting and transferring of rent-controlled apartments in New York falls into the category of Anonymous Activities that I introduced in my first Airbnb post, Outbreak of informality:
Assume there a collaborative Anonymous Activity that both parties willingly enter into, but government for one reason or another disapproves of. A full definition is provided in the box.
Oh my God I love decriminalization!
Gambling, selling alcohol, and pornography used to be types of Anonymous Activity but no longer are, for reasons that will become clear in this post.
Government has only two postures it can adopt with respect to Anonymous Activity: (x) prohibit it, or (y) regulate, license, and tax it. If regulated, Anonymous Activity is by definition formal; if prohibited, by definition informal.
Just lie back and tax it
A third posture, (z) ignore it and hope it will go away, is totally illogical and virtually universal, and when the government adopts posture z the activity lives in a penumbra between formality and informality.
Conversely, if non-compliance with regulation of Anonymous Activity becomes rampant, the government faces the ignominy of being unable to enforce its own laws, and meanwhile paying the costs of enforcement, incarceration while losing the revenue that might otherwise have been gained from a lower-regulation, less-tax approach.
When that happens, what was illegal becomes legalized, wrapped in a cotton wool of epiphanies that Anonymous Activity is a ‘victimless crime,’ or that we can distinguish casual and recreational Anonymous Activities from the hard core, and maybe Anonymous Activity isn’t so bad after all. (Summon the doctors! Get the academic studies! We need peer-reviewed rationalization and we need it now!)
Rationalization is much easier than penance, you know
Here are the other key numbers for commercial rentals on Airbnb in New York:
As always, the power users are disproportionately impactful
The bottom line on the FiveThirtyEight analysis is that the vast majority of New York listings on Airbnb reflect what the site claims is its primary mission—allowing people to rent rooms or couches or apartments to supplement their incomes.
Even Crain’s New York can’t swallow Airbnb’s specious ‘mission’ claim – this is a company that encourages New Yorkers to violate New York laws, and in fact facilitates their violation with nifty apps. That may be a terrifically effective form of guerrilla policymaking but you can’t claim it’s done just with morality in your heart.
However, people turning their homes or apartments into hotel rooms, which is already illegal, accounts for about a third of Airbnb revenue generated in New York.
I always have a business strategy
I have the utmost respect, even at a distance, for the cynical shrewdness of the Airbnb management team, so I believe they absolutely knew they were creating a stealth application to undermine and explode urban zoning by destroying the hotel-anti-development cabal. That’s been the consistent theme of my Airbnb writings, although my emotional reactions to this perception have fluctuated over the three years. At this point I’m for what Airbnb has been doing, if only because (enemy of my enemy) they’re disrupting the restrictive and dysfunctional Zoning by the Taste Police that’s slowly strangling America’s cities.
Your Taste Police at work
The crucial issue here is whether such commercial activity raises rents, or in the case of New York, is concentrated on more affordable apartments — especially below-market, rent-regulated units.
No, that’s not a crucial issue at all.
The impact on rents is a red herring; the real story is the exposure of the shadow-renting economy caused by confiscatory rent control.
Scarcity and demand are driving up prices
As a principle of basic economics, if Airbnb enables the current built environment to be more efficiently used, by ‘soaking up’ the excess invisible under-consumption though leasing it for short intervals, that can only be decreasing housing-cost pressure. Conversely, if it makes being in New York City for a short stint more affordable, then that is bringing economic activity into Gotham, and that may boost demand but it also boosts city revenues.
Finally, if the Airbnb stealth leasing is occurring in regulated apartments, that’s bilking the public … but nobody wants to talk about that.
Keeping Manhattanites invisibly subsidized for half a century
The fight over the Airbnb advertising bill pits one of the most innovative and aggressive disruption companies and its allies in the city’s tech community against an unusual coalition of tenant advocates, landlords and their organizations like the Real Estate Board of New York, hotels and the powerful hotel unions.
As I posted nearly three years ago, the enemy of my enemy can be, if not my bosom buddy, at least my temporary-ally and putative friend.
Gov. Andrew Cuomo’s decision whether to sign the bill will say a lot about who has the most clout in the city.
Or who has the most clout with the Governor, which is not at all the same thing.
“I’m not talking to you.”
“That’s good, because I wasn’t talking to you first.”