Local Law 18 could change the business model of Airbnb, Booking and Vrbo

The sharing economy has changed the world and all of us, replacing ownership of an object with renting. Being able to have accommodation or a car when needed is more important than buying the same accommodation or car. Along with Uber, the symbol of the sharing economy is Airbnb, with its intuition to rent flats or single rooms on a short-term basis as an alternative to hotels.

The idea launched online in 2008 by Brian Chesky, Joe Gebbia and Nathan Blecharczyk (who initially chose the name AirBed & Breakfast) was born after they put an air mattress in the living room of the flat they lived in in San Francisco to take advantage of the difficulties tourists had in finding accommodation in the city. In a short time, that attempt became a new way of making money for all those who had a piece of home to put on the market, coming over the years to transform the face of many cities.

The speculation of real estate companies and wealthy families who hoarded property in the most popular areas of the cities generated desertification and squatting, eventually expanding over-tourism and driving up housing prices to the detriment of residents looking for a home. But also penalising those who have remained faithful to the original spirit of Airbnb: making part of a house or the whole property available to guests when going out of town in order to pay the mortgage and supplement their salary.

To get a sense of how high Airbnb’s business is going, in the second quarter of 2023, the company had revenues of $2.5 billion, an increase of 18 per cent compared to the same period in 2022, and the number of bookings grew by 11 per cent year-on-year. An avalanche of money thanks to short rentals, which in New York alone brought in $85 million in revenue in 2022.

A law to stop the problems

We mention the Big Apple because it is the latest city to have introduced new regulations to quell the spread of short-term rentals. On 5 September, Local Law 18 (also known as the Short-Term Rental Registration Law) came into force and is a game changer. According to the decision of the New York authorities, all persons who want to make money by exploiting short-term rentals in the city must now register with the municipality in accordance with three requirements: the person must live in the rented property, must be present during the guests’ stay and there can be no more than two guests.

These dictates apply to tenants of someone else’s property as well as to the owner of the flat. Airbnb, Vrbo and Booking are the main recipients of the new regulation, which also applies to those who take advantage of other types of platforms that enable them to earn income from a property through short-term rentals. It is not a measure that has come out of the blue, as New Yorkers have repeatedly shown their displeasure at the spread of problems related to parties organised in flats by strangers, who have often created accidents and disturbing noise or left rubbish in the common areas of buildings. From 2017 to 2021, the authorities received almost 12,000 complaints from residents about more or less serious problems arising from this form of renting.

Ads halved in 4 weeks

Airbnb described the law as a ‘de facto ban‘ on the use of its services, with global policy director Theo Yedinsky arguing that ‘the new law is a blow to the tourism economy and the thousands of New Yorkers and small businesses that rely on home-sharing and tourism dollars to make ends meet’. He added: ‘The city is sending a clear message to millions of potential visitors who will now have fewer accommodation options when they visit New York, showing them that they are not welcome.

Yedinsky is paid to defend Airbnb, so his words are unsurprising, in contrast to the reduction in listings recorded from the beginning of August to 5 September, when the new regulations were triggered. Nearly 15,000 listings for short-term accommodation disappeared from the platform (they were 22,000 before, then became less than 7,000). This was an inevitable turnaround, considering that the penalty for non-compliant hosts includes fines of $5,000 and $1,500 for platforms that transact on unregistered properties.

Many of these listings have turned into long-term rentals beyond 30 days, with owners opting for lower rates, counting on the certainty that very few tourists will occupy the property for the entire month booked. Airbnb itself said that more than 4,000 listings were no longer online after 5 September, adding that since 14 August, it had blocked bookings in unregistered accommodations without cancelling those until 1 December to avoid creating problems for hosts and guests. All bookings after 2 December, however, will be cancelled.    

End of Airbnb model?

Although New York represents a small slice of Airbnb’s global business, the effect of Local Law 18 shows that local governments can find a way to curb the spread of short-term rentals. Not least because the company sued the city of New York in June, but a judge recently ruled that the measure restricting the terrain for short-term rentals is rational. According to several analysts, the new regulation could gradually lead to the disappearance of the current Airbnb model. At the same time, the New York case is very important for the Wall Street Journal as it sets a precedent that several big cities want to imitate. 

The problem is not new and concerns major European tourist destinations as well as large US metropolises. In Dallas, the neighbourhoods in which properties can be rented for a few days have been restricted, while in Memphis, the municipality has created licences for people who want to rent their homes for a short time. San Francisco has imposed 90 days per year as the maximum threshold for renting out one’s flat, Paris goes up to 120 days and Amsterdam up to 30 days, although in July, the Dutch Council of State ruled that the municipality of Amsterdam cannot prohibit residents of central districts from renting out their homes to tourists.

Finding the balance between the intentions of local administrations and the courts will be crucial junctures in understanding how the situation regarding the regulatory framework for short-term rentals will evolve. I do not rule out the possibility that Airbnb may take advantage of the opportunity to find alternatives that can keep interest and company accounts high, as they will inevitably be affected by a regulation that will most likely spread from New York to other cities and countries.