Monday, October 20, 2014

Airbnb’s Positive Impact in New York

By Randolph May and Michael Horney

New York State Attorney General Eric Schneiderman released a report last week on Airbnb’s effect in New York City (NYC). In conjunction with the report’s release, he issued a press release with the following statement: “We must ensure that, as online marketplaces revolutionize the way we live, laws designed to promote safety and quality-of-life are not forsaken under the pretext of innovation. The joint city and state enforcement initiative is aimed at aggressively tackling this growing problem, protecting the safety of tourists and safeguarding the quality-of-life of neighborhood residents.” 
The key findings in the report do not provide convincing evidence that Airbnb’s presence presents a “growing problem.” In fact, they provide the opposite. Some key findings pulled from the Attorney General’s press release read:

“Commercial users run multimillion-dollar businesses”
“Gentrified neighborhoods account for vast majority of Airbnb revenue”
“Short-term rentals are displacing long-term housing options”

The phenomena described by these findings do not have inherently negative effects on the economy – or on NYC’s residents and consumers. In fact, the effects may well be positive.

“Commercial users run multimillion-dollar businesses” implies that individuals are taking advantage of entrepreneurial opportunities and providing valuable services to satisfy a consumer demand. Are traditional commercial hotels not running multimillion-dollar businesses? This finding sounds like increased competition in the lodging market.
“Gentrified neighborhoods account for the vast majority of Airbnb revenue” simply may mean that consumers value lodging in upscale neighborhoods if the price and location align with their desired lodging experience.

“Short-term rentals are displacing long-term housing options” is a market outcome that may simply reflect consumer preferences based on a variety of trade-offs regarding the available price, location, comfort, amenities, and options. In a leading tourist destination like NYC, it is not surprising that many consumers may value short-term rentals over long-term ones. This has a positive effect, not a negative one, because increases in short-term rentals bolster a growing tourism economy. (See FSF blog on Airbnb and European tourism here.)

But, according the Schneiderman, the most important finding from the report is that 72 percent of Airbnb transactions in NYC from January 2010 to June 2014 allegedly were “illegal hotels.” However, as explained in a paper written by Free State Foundation Research Associate Michael Horney and me, “The Sharing Economy: A Positive Shared Vision for the Future,” markets have efficient self-regulating mechanisms. Competition between Airbnb and other home-sharing applications like Roomorama and VRBO and traditional hotels and inns creates a “check-and-balances” system to help ensure quality service. Additionally, Airbnb specifically provides mechanisms to help ensure quality service, such as a feedback rating system and a $1 million insurance policy.

As Attorney General, Schneiderman’s perspective is that so-called “illegal hotels” are automatically bad because his job is to enforce the law. But consumers are not forced to use Airbnb; they voluntarily choose to use Airbnb’s application engage because they value its service. If “illegal hotels” were harmful to consumers than the revenue from Airbnb transactions ($282 million estimated for 2014) would not be increasing year-to-year.

This is not an argument for ignoring valid laws or regulations, even one that may need updating or repeal to account for new digital age circumstances.  But apparently, Airbnb has been compliant throughout the whole investigation by providing the data used to produce Schneiderman’s report.  And, according to a New York Times article, Airbnb spokesman Nick Papas said: “We need to work together on some sensible rules that stop bad actors and protect regular people who simply want to share the home in which they live.”

In our view, New York State’s law which prohibits New Yorkers from renting out their apartments for less than 30 days without being present may not be sensible considering the vast amount of tourism and business that occurs in NYC. In addition to the self-regulating mechanisms it has instituted, Airbnb is also subject to health, safety and consumer protection laws and regulations of general applicability. Therefore, there is no reason to suspect that unsafe and unhealthy conditions for consumers will become prevalent, even in what Mr. Schneiderman characterizes as “illegal hotels.”

The most important conclusion to be drawn from Attorney General Schneiderman’s report may be one he does not intend to highlight: Airbnb is much more important for the NYC economy than most people realize. And this conclusion ought to lead to the derivative conclusion that the 2010 law banning short-term rentals and any other outdated regulatory impediments should be changed to allow for this important economic activity to benefit visitors as well as New York residents who wish to share their residences.