A New Era of Lodging: Airbnb’s Impact on Hotels, Travelers, and Cities
By: Harvard Real Estate Review
Tags: Airbnb, Housing Market, Hotels, Rental Market, New York

A New Era of Lodging: Airbnb’s Impact on Hotels, Travelers, and Cities

Alaa Raafat & Carlotta Weller, Harvard MDes Real Estate and the Built Environment ’18

Since it was founded in 2008, Airbnb, Inc. has become one of the most successful pioneers of the sharing economy, transforming the travel industry around the world. By helping more than 200 million guests find individual hosts, Airbnb has shaken up the hospitality business and urban real estate markets.¹ While large hoteliers everywhere are aware that Airbnb poses a threat, few know what impact the online rental site actually has on the industry as a whole. Our investigation shows that Airbnb may not be taking away all the hotel customers you might expect, but it is changing the habits of vacation travelers. As city officials worry that the online hospitality service is cutting the supply of rental units, they have responded to the hotel chains’ calls to regulate Airbnb. Even as they fight off the perceived threat, hotel executives are imitating the upstart’s methods by offering limited-service and small-room hotels and such technological innovations as a customized mobile application.

Fig 1: Airbnb launched the Trips platform in 2016 to entice customers with more immersive experiences with their hosts.

AIRBNB, A NEW KIND OF HOSPITALITY SERVICE

Airbnb, an online rental platform for privately owned rooms, apartments, and house, provides a simple technological infrastructure which hosts and guests use effortlessly to promote and book homes. By providing free access, Airbnb quickly generated a dedicated following of users and hosts and swiftly overcame the initial entry and mobilization barrier. Airbnb’s product is typically more affordable than traditional accommodations and offers its customers a local experience. Although Airbnb is considerably lacking services that most guests usually desire when traveling, Airbnb’s costs are relatively low compared to hotels, which is a significant factor in attracting customers.² Besides offering an inexpensive lodging alternative and unique experiences, Airbnb has continuously introduced new features to its customers, who are now able to not only book a space but also an activity or experience with a local host.

Airbnb has produced a new kind of travel by attracting a different tier of travelers who would not have traveled before because of the higher average daily rate (ADR). It also encouraged travelers to extend stays, which leads to an increase in travelers’ expenses, positively impacting local economies through higher tourism revenues. According to the US Travel association report for 2017, travelers have generated 2.4 trillion in economic output, generating $217 billion in taxes. Airbnb data shows that their guests stayed on average 2.5 days longer than hotel guests in New York City, generating $632 million in economic activity, supported 4,580 jobs and paid $31 million in sales taxes. Initially Airbnb appealed mostly to budget leisure travelers, who reflect 60 percent of the hospitality market. In order to capture the 40percent of business travel, Airbnb introduced Airbnb Corporate Travel, which targets corporates who are looking for a more consistent and flexible option for multiple people.³The number of corporate travelers using Airbnb grew from 250 in 2015 to 250,000 in 2017, including S&P 500 companies such as Morgan Stanley and tech giant Alphabet.⁴ As Airbnb aims to target a wide range of customers, it will continue to grow utilizing its large user base and international exposure making it more powerful than large hotels groups.

The Attraction of Airbnb: Convenience, Cost, and Experience

Airbnb provides a simple technological infrastructure which connects hosts and guests. By providing free access, Airbnb quickly generated a dedicated following of users and hosts and swiftly overcame the initial entry and mobilization barrier. Not until the transaction is confirmed by the host and guest does Airbnb charge the guest an additional transaction fee of 6–12 percent and hosts a 3 percent transaction fee.⁵ Although Airbnb considerably lacks the services that guests typically desire when traveling, Airbnb offerings cost on an average in large U.S. cities 28 percent less than the average daily rate for hotels in central business districts, which is a significant factor in attracting customers.

Fig 2: Largest Lodging Companies by Listings. | Source: STR Airbnb Report 2016

Fig 3: Largest Lodging Companies by Listings less unavailable, shared room, private rooms and large listings. Source: STR Airbnb Report 2016

Besides offering an inexpensive lodging alternative, Airbnb has continuously introduced new features to its customers, who are now able to not only book a space but also an activity or experience with a local host, such as concerts, cooking and fitness classes. As the peer-to-peer online marketplace expands, Airbnb continues to differentiate itself from competitors through its variety of listed products, its brand recognition and particularly the loyalty of its customer base.⁶ ⁷

AIRBNB’S IMPACT ON HOTELS

Airbnb claims to be the most prominent lodging company, with three million listing worldwide in 2017 and a presence in more than 65,000 cities and 191 countries, overtaking hospitality giants such as Marriott and Hilton. Airbnb’s share of the hotel industry grew from 1.3 percent in 2014 to 4.5 percent in 2016 viii announcing their first profit in 2016 due to 80 percent increase in revenues.⁸ A report by Morgan Stanley estimates that Airbnb’s awareness level between travelers grew to 80 percent in 2017, while the year to year increase in travelers using Airbnb rose by 25 percent. However, Airbnb supply is fluid, which makes it challenging to measure its actual impact on market share. Major hotel brands have started to acknowledge the growing impact of online platforms. Accor’s president Sebastien Bazin, for instance, expressed his concerns that hotels such as Accor, Marriott, and Hilton, which represent 30 percent of the total global hospitality market, are suffering because of hospitality online platforms such as Airbnb and OTAs such as Expedia, and that effect is even bigger on independent hotels because they lack the financial resources and bargain power.⁹

Hotels have also experienced a significant impact during compression nights which typically allows them to increase their ADR and margins. As such, with Airbnb in the field, it is harder to maximize their return because of the availability of short-term rentals supply. According to the hospitality research company STR during the pope’s visit to New York city in 2014, Airbnb increased the lodging supply of 116,000 hotel rooms by 17.¹⁰ The number of compression nights has increased significantly since 2007 with occupancy rates exceeding 95 percent with 35 percent higher ADR than non-compression nights. HMG Hospitality president Yolanda Bender and Hospitality Group’s president Rober J. Habeeb, discussed in an interview with Hotel Management in 2015 that they have witnessed a drop-in occupancy in high compression periods and anticipate that short-term rentals will continue to negatively impact the industry due to the unpredictable oversupply.¹¹

Fig 4: ADR Premiums on Compression Nights in the U.S. | Source: STR Airbnb Report 2016

On the other hand, during regular seasons Hotel occupancy was highest on weekdays while Airbnb occupancy recorded its highest rate on weekends, indicating, that the nature of Airbnb’s travelers is leisure whereas hotels are more business-focused. ADR for hotels was highest on weekdays and dropped on weekends due to the competition by Airbnb for leisure travelers.¹² Consequently, Airbnb allows its effective occupancy rate, a ratio of available units for rent and actual units rented, to be elastic and adapt seasonally according to demand. This provides Airbnb with a competitive advantage over hotels that don’t have the flexibility to adjust their supply accordingly.

HOTEL INDUSTRY RESPONSES: LIMITED SERVICE HOTELS, EFFICIENT DESIGN, AND TECHNOLOGICAL ADVANCES

The disruption by Airbnb is pushing the hospitality industry to reinvent itself and adapt to new customer needs. In order to compete with Airbnb’s focus on convenience, cost, and experience, hotels have increased their efforts to stay relevant by implementing innovative strategies. As such, branded and independent hotel have responded to the peer-to-peer rental platform by expanding its limited service hotel offering in order to attract price-sensitive travelers. By implementing efficient design strategies and expanding into innovative hospitality services such as micro rooms, hotels aim to compete with Airbnb’s customer segment. Lastly, hotels are increasingly incorporating new technologies into their day-to-day operations to compete with Airbnb’s cost effective business model.

Fig 5: Yotel combines efficient room layouts with a technology-based interface. | Source: Yotel.com

The conventional hospitality market has introduced new lodging products that target budget-conscious travelers. The growing trend in hotels includes smaller, efficient guest rooms with significant emphasis on communal and social spaces. New hotel brands are shifting away from full-service lodging and are moving towards limited-service as consumers desire unique experiences at lower cost. Limited service hotels are becoming more appealing to travelers by providing everything they need without the extra cost associated with services such as restaurants and banquets. According to Jan Freitag, Senior Vice President of Lodging Insights, the limited service hotel trend has been growing particularly in sub-markets.¹³ In order to capitalize on this shift in the market and to respond to the growing threat of Airbnb, established branded hotels are introducing new limited services hotels to benefit from the lower operating cost and achieve higher profit margin. According to the 2017 CBRE Hotel report, limited service brands in New York achieved a 45.5 percent profit margin verses 35 percent for full service hotels.¹⁴ As a result, Marriott Hotels & Resorts introduced Moxy hotel, a mid-scale chain that offers small affordable rooms and does not have a restaurant. Instead it provides a full meal self-service 24/7, full service bar, coffee bar, and microwave ovens. Moxy hotel uses social media channels as one of their marketing tools to appeal to travelers while providing benefits through its Marriott rewards loyalty program.¹⁵

According to JLL, a shift in consumers’ needs has also driven the three and four-star market to a more efficient and minimalist standard design.¹⁶ Major branded hotels are looking down ten years when millennials will account for their largest customer base. This young traveler group is typically more social, looking for common space, shared workspace, a gym, cafés, and trendsetting bars while accepting to stay in simplistic rooms with limited closet space and no desks. Yotel, a European boutique hotel chain focuses on technological innovation and highly efficient room design with moving beds, convertible couches, and a tech-wall with USB and multi-power units. As a result, when Yotel opened in New York in 2011, it only planned for 300 rooms. However, the company managed to increase their efficiency to 669 rooms. ¹⁷ Similarly, Hilton introduced Tru Hotel with over 100 locations planned by 2020. According to Hilton, the chain is targeting the 15 to 20 million midscale customers and developed a scalable prototype of 82 to 150 rooms on 2 acres. Hilton’s Tru hotel rooms are larger than Marriott’s Moxy’s and require a lower construction cost of $84,000 per room.¹⁸ Rooms are designed to maximize the use of space and efficiency with sizes ranging between 230 to 280 square feet, and typically do not provide closet space or desks. Tru’s amenity spaces also include a shared working space, a fitness room, breakfast counter and a 24/7 market for self-services meal.¹⁹

Hotels have long battled the rise of low cost travel providers, but the growing demand of peer-to-peer travel platforms has instigated companies to expand their services, similar to how they responded to the rise of online travel agencies (“OTA”) such as Expedia. Large hotel brands like Accor and Hyatt are also interested in entering the timeshare peer-to-peer market in order to expand into more segments, take advantage of the rapid growth of home-rental startups and to test a variety of offerings and innovate its guest experience. In 2016, Accor hotel acquired the luxury short term rental Onefinestay brand for $168 million and in 2018, Hyatt Hotels Corporation invested in Oasis platform.²⁰ Historically, hotel executives have distanced their companies from short-term rental platforms, arguing that due to the difference in product and quality control they were not direct competitors. However, Accor’s and Hyatt’s move into the upper priced home-sharing segment signalizes a drastic shift for hotels and encouraged other larger hospitality groups to follow. ²¹ At the beginning of 2017, AccorHotel acquired 100% of Travel Keys, a brokerage firm representing more than 500 luxury homes and VeryChic, a digital marketplace of luxury hotel rooms, apartments, and vacation packages with a total of 5 million members.²²

The rapid growth of short-term rental platforms has not only incentivized branded hotels to participate, but also lead to an increase in economy and midscale hotel development throughout the U.S.. Brands such as Ace Hotel shift away from the traditional hotel model of large rooms and opulent lobbies and move towards an innovative and affordable concept, while focusing their attention on contemporary design and the expansion of communal amenity spaces. Ace Hotel argues, that travelers are craving high quality and open communal spaces and are willing to make sacrifices in the fit out and size of the bedrooms.²³ The demand for affordable, urban accommodations with communal spaces and enhanced customer experience has pushed the boundaries of hotel living further and lead to the introduction of independent midscale micro hotels such as Arlo in New York. The newly established hotel chain provides 250 “micro” rooms, high tech integrated services, efficient room layouts, and locally inspired designs and amenities. It also aims at creating a digital booking system, which, similarly to Airbnb, allows guests to flexibly check –in and request services while providing communal spaces suitable for groups or social interactions.²⁴ As the number of short term rental platforms grows, group bookings are becoming more popular. Customers are increasingly appreciating group living experiences provided by companies such as Airbnb or HomeAway, and hotels are finally catching up to the trend. A decade ago, bunk beds were not acceptable in hotels, now they are spreading not only in small boutique hotels like Arlo, but also in upper scale hotels like the Kimpton’s and the Andaz Hotel San Diego by Hyatt, which provides king size bunk beds.²⁵ In addition to providing group booking service, bunk beds also increase per square foot revenues for hotels at lower cost.

IMPLEMENTATION OF TECHNOLOGY

The hotel market is gradually introducing new technologies to enhance the customer experience and generate a competitive advantage over Airbnb. Technology is increasingly playing a more significant role in the hotel industry as brands also focus to mitigate the digital disruption by peer-to-peer sharing platforms and OTAs. Hotels provide guests with a customized mobile application that manages pre-arrival check-in services, reward loyalty programs, and location-specific offers. Emerging technologies for operations and customer communications aim to deliver an enhanced customer experience from the point of booking to the guest’s feedback. Hotel brands such as Marriott have initiated the transition into online check-in services for rewards members, while independent mid-scale hotel Yotel introduced check-in counters similar to those used for the check-in process at an airport.²⁶

Fig. 8: Starwood Keyless Application | Source: My SPG

After $1.7 billion of Marriotts $13.3 billion gross bookings were generated from mobile apps, the hospitality giant augmented its development of the Marriott hotel application, which helps guests to keep track of their reservation and request upgrades. Two thirds of the services provided via the app do not relate to the booking itself but rather to the stay and experience of the guests who have checked in over 20,000,000 times via the app to date.²⁷ As a consequence, hoteliers are also rethinking the value of reception desks and how online check-ins could alter booking processes. Starwood, for example, provides guests with a Bluetooth-enabled application through their loyalty program Starwood’s Preferred Guest (SPG) that can be used as a room key.²⁸

Technology does not only shape hotel operations but also serves as a strategic marketing tool for hotels, short-term rentals, and online travel agencies. It becomes evident, that technology is already a significant innovation factor in the hospitality sector, contributing to a rise in revenues, bookings, and customer experience. It can be applied in various forms, including mobile applications, marketing, bookings, and operations throughout the hotel value chain and enhances the competitive advantage of lodging companies within the accommodation sector.

Fig. 9: Upscale Kimpton Hotel chain introduces bunk bed rooms, increasing revenues per square foot. | Source: The Basecamp Hotel in South Lake Tahoe, Calif., has bunk beds in 15 of its 74 rooms, some with twin beds stacked over queens. PHOTO: EVA KOLENKO

FURTHER EXPLORATIONS

Airbnb listings predominantly consist of around 63 percent entire homes, 34 percent private rooms, while shared rooms account for around 3 percent of all listings. Although these percentages have remained relatively robust, the trend seems to move towards more private rooms due to an increase in regulations in the homeownership market. Additionally, the preferred size and market segment of Airbnb listings continue to be urban smaller rental units. The majority (47 percent) of Airbnb’s supply is apartment units, 39 percent is houses and the remaining units assort to a variety of different asset types, including castles or boats. Significantly, all entire home listings, nearly 70 percent are either studios, 1 bed, and 2-bed units.²⁹ As Airbnb’s supply continues to grow and put pressure on the hospitality and residential markets, the platform has been criticized by cities to regulate their services, Airbnb is currently working with municipalities to find solutions and expand their services.

Airbnb now encounters several legal issues which could weaken its relationship with local jurisdictions and hosts. The increase in legal restrictions for disruptive short-term business models such as Airbnb is posing a significant threat to the company’s growth strategy and its position in the market. Governments are increasingly responding to hoteliers who are arguing that real estate owners are offering illegal accommodation through Airbnb, however, it may be premature to assume that illegal accommodations are the reason for hoteliers’ pressure to introduce new laws. The Wall Street Journal argued in 2016, that 95% of Airbnb listings in New York of entire homes are posted by individual hosts and not by multi-listing hosts. Furthermore, Airbnb supposedly took down 3,000 illegal listings of its total 40,000 New York rentals, as Airbnb sets a limit for rentals in one property and bans hosts that do not comply with these objectives, however hotels remain persistent in applying pressure on local governments to generate additional ordinances and minimize Airbnb’s presence in cities like New York in order to limit its competition.³⁰

While the hospitality sector has observed the growing impact on its industry by Airbnb, its growing effect on the residential market is less obvious and quantifiable but increasingly tangible. Airbnb rentals are more flexible and scattered than hotels and provide lodging options in areas that would not be a primary destination for tourists or hotels. But the growing concentration of listings in certain neighborhoods has significant consequences for those residential communities. However, Airbnb argues that their inventory is marginal and is not affecting the residential market because it only represents a small fraction of the total housing inventory in the US. According to the Airbnbs D.C. housing report in April 2017, only 8,700 of their entire homes listings were rented, representing less than 3% of the D.C. area housing units. However, the total number of D.C Airbnbs entire home listings amount to 14,100, representing 4.6% of the Washington D.C. housing market. In 2017, 82% of Airbnb listings in New York City were outside of the main tourist hotel area, generating $105 million in economic activity outside of Manhattan.³¹ ³² Hence, while Airbnb may not affect the residential market if listings are spread equally throughout the metro, the concentration of homes in touristic or urban areas with low vacancy rates may impact affordability. As such, the reduction in vacancies increases rents in certain areas.

Furthermore, compounded with the current growth rate in urban areas, Airbnb’s competition with the long-term residential rentals may lead to an increase in urban gentrification, especially in gateway cities. According to Jamie Lane, a senior economist for CBRE Hotels (2017), single-family and townhouses are most impacted in the D.C. area.³²

Similarly, in New York City, according to a report by BJH Advisors from June 2016, the disproportionate share of Airbnb has increased rents in Manhattan and Brooklyn, because 90% or over 51,000 units are located in these two areas which account for less than 60% of the housing supply in New York City. Evidently, 53% of Airbnb listings is concentrated in five neighborhoods including East Village, Soho, and Williamsburg. Out of the 51,000 units listed on Airbnb, 8,058 are defined as impact listings, which are units that are most likely to cause a shortage in the supply of residential rental housing in low vacancy areas. However, over 50% of these listings was posted by multi-listings hosts.³³ According to BJH, if the 8,058 were made available to rental market it would increase the vacancy rate from 3.4 percent to 4 percent. Furthermore, if the listings in the West Village, SoHo, and Greenwich Village were made available for long-term rentals, it would increase the vacancy rate from 2.9 percent to 5 percent. Similarly, in the Chelsea neighborhood it would increase the vacancy rate from 4.2 percent to 5.7 percent. This concentration is driven by the premium price that hosts can charge in these areas, for example, in SoHo and West Village the average monthly premium is $822 over the median asking price for long term rentals.³⁴

Fig 10: Airbnb entire home listings in New York. | Source: Airbnb

REGULATORY AND LEGAL ENVIRONMENT

Airbnb’s impact on decreasing vacancies and growing rental rates in the rental market as well as hoteliers efforts to limit Airbnb’s exposure to the accommodation sector has forced municipalities to search for effective solutions to control the growing tension between hospitality providers and ensure affordability. This has led cities to increasingly impose new restrictions on the company, partially resulting in a universal illegality in cases such as New York City or San Francisco.³⁵ The mayor of Boston recently announced that a new executive order aims at assessing whether commercial short-term rentals are sustainable and units are violating occupancy and zoning codes. Marty Walsh also stated: “This order is an important step towards a comprehensive policy to address commercial short-term rental operations.”³⁶ As of April 2018, the conversation between the City of Boston and Airbnb heated up after a proposal to restrict short-term rentals to 90 nights annually for owners who rent an entire home.³⁷ The city’s effort to study the online platform’s influence shows that local governments are trying to understand the impact and find a solution that includes all parties: property owners, guests, and neighborhoods.³⁸

New York City recently introduced the New York State Multiple Dwelling Law, which prohibits short-term rentals of less than 30 days if the owner is not present during this period.³⁹ It is estimated, that 55% of all Airbnb rentals are in violation of this law and listed illegally.⁴⁰ Similarly, San Francisco prohibits rentals of fewer than 30 days in its entirety if they are not licensed and require offered units to be registered with the city.⁴¹ Other restriction may also include limiting short-term rentals to certain locations and proximities or enforcing bans on entire cities, such as Berlin or Paris. Additionally, cities such as New York City have induced restrictions on advertising, limiting Airbnb’s communication channels to online platforms with the aim of diminishing its access to new customers. Consequently, landlords are adjusting lease agreements to fit new regulations and, in many cases, prohibiting tenants to rent out spaces through Airbnb. Local governments are also making the case, that due to the limited housing supply and the decrease in available rental units, an abundance of short-term rentals will only enhance this lack and negatively impact both the housing market and affordable market.⁴² Finally, in addition to more jurisdictional control of short-term rentals, it also provides the opportunity for local governments to earn additional revenue from taxes and fees, which in return could be invested in the greater good of the city.⁴³

It is more important to local governments that Airbnb is currently not contributing to tax revenues while benefiting from tourism promotions financed by hospitality taxes. This provides Airbnb with a competitive advantage over traditional hotel and lodging providers.⁴⁴ As a consequence, jurisdictions have, firstly to determine the legality of short-term rentals and secondly identify a taxation system for short-term rental businesses in order to prevent them from capitalizing on revenue gained through taxes on illegal properties and listings. As a result, some municipalities introduced an occupancy tax to alleviate operations of short-term rentals in their jurisdiction and so encouraged a system of trade rather than control.⁴⁵ Through the new aforementioned Airbnb occupancy tax of about 5.87%, 8.87% in sales tax, plus $3.50 in nightly fees, New York City could generate an additional $28.5 million in tax revenues. Similarly, the online rental platform can use comparable tax agreements as leverage negotiations with other cities and in that way ensure continuous growth and lower entry barriers into new markets.⁴⁶

The increase in legal restrictions for disruptive short-term business models such as Airbnb is posing a significant threat to the company’s growth strategy. Startups and young ventures which are predominantly based on advanced technologies often outpace current legislations.⁴⁷ Historically, Airbnb’s business model thrived due to minimal regulations, which strengthened the incentives for both, host and guest, to ensure a steady and robust increase in bookings and most importantly, build a global network on trust.⁴⁸ Airbnb is reacting to specific anti-Airbnb regulations city-by-city without an inclusive taxation or political strategy. Importantly, most jurisdictions realize that enforcing a fine or ban requires an extensive amount of time, labor, and resources that many municipalities cannot devote. Most hosts offer single listings and therefore would require significantly more resources to persecute than the lost revenue. This, however, means that Airbnb benefits from potentially illegal listings while not being concerned about fines or consequences.⁴⁹

CONCLUSION

The hospitality market has witnessed substantial growth despite disruption by online peer-to-peer platforms like Airbnb and OTAs like Expedia. The short-term rental platform Airbnb represents less than 5% of the market share. The effect of Airbnb on the lodging market is marginal, except during high compression periods as demand growth outpaces hospitality supply. However, when hospitality supply outgrows demand and Airbnb continues to increase its stock the hospitality market will experience a larger impact. Nonetheless, Airbnb has contributed to a shift in the lodging sector and how consumers perceive travel by utilizing the shared economy and creating a peer-to-peer virtual trust between local hosts and visitors. We also expect more investment activity by branded hotel chains into technology particularly for guest reservation and property management systems.

As Airbnb represents less than 0.0003% of the residential housing market the impact is insignificant except in major metro markets, where Airbnb listings’ are concentrated in specific neighborhoods, such as New York where vacancy rates are less than 5%. Despite increasing regulations and taxations, Airbnb is expected to continue to grow. However it is uncertain if the company can sustain its aggressive growth rate or level off. Additionally, studies indicate that as the awareness of Airbnb reaches an all time high it will be harder for the company to find new markets for growth.⁵⁰ As a result, Airbnb started to expand their offerings to more regulated listings by inviting bed-and-breakfasts and independent boutique hotels to post their rooms on the platform. Flexibility, customizable service, and operations have become invaluable for current travelers, and in order to attend to this customer segment, hotels need to continue adapting accordingly. Finally, since Airbnb started offering experience packages independent hotels are increasingly conscious about creating a lasting and valuable customer experience and as result offer additional activities such as social events or amenity spaces to enhance a guests’ time spend at the property and beyond.⁵¹