The Airbnb Building

By Jeangagnon (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

There are really two separate businesses on Airbnb and other hosting platforms. Let’s call them “amateur” and “professional”:

  • Amateur: People renting out homes that they live in themselves at least part of the time (either a spare room while they’re home or the whole place while they’re not home)
  • Professional: People renting out homes that they never occupy themselves, for short periods rather than the standard monthly/annual lease

They service much of the same demand, but on the supply side they’ll be governed by different rules and economics in the long run. Let’s look past the current city-by-city political fights and even Airbnb itself (because these businesses will persist whatever happens to one particular company) and think about how the underlying rules and consumer behavior are likely to shake out.

There are two systems of rules in play here, which we might call public and private. The public rules are municipal laws and regulations. The private rules are a matter of contracts – leases, condo/HOA bylaws, insurance policies – and will start to draw more focus once the public rules have been sorted out.

In large US cities, it’s often the case that both types of hosting are technically illegal, but these laws are rarely and inconsistently enforced. Over the next few years, most large cities will settle on a new set of rules with more enforcement behind them, with San Francisco’s recent Prop F debate as one of the first major rounds in this process. I think a reasonable bet is that it shakes out as follows, with one or two cities passing comprehensive legislation and others copying and tweaking it:

  • “Amateur” hosting will be explicitly allowed, with
    • a limit on rental days per year, probably 30-90
    • new transaction taxes (though less than hotel/tourism taxes)
    • new safety requirements (again not as strict as hotels)
    • some type of public registry for hosts, to enforce the above
  • “Professional” hosting will be more or less disallowed, or at least regulated much more harshly

Now, it’s obvious that Airbnb, or any platform that combines both types of host, has an interest in blurring this distinction. Most of their hosts are amateurs, but a professional is worth far more in commissions, because they run higher occupancies and often own multiple units. So they do everything they can to highlight the more sympathetic amateurs, while pushing for regulation that’s friendly to the less sympathetic professionals.

Ultimately, most voters and public officials are smart enough to see the difference, and at that point there’s no real public interest or powerful constituency to stand behind the professionals. And the hotel industry, which lobbies against both businesses, is also smart enough to know that the pros are a far greater threat to them than the amateurs and eventually exploit the same wedge.

We won’t argue about the fate of professional hosts, though. I realize it’s a touchy subject. In any case it’s really a more interesting question for Airbnb investors than the rest of us. If I’m wrong and that business keeps growing, it’s really nothing new, just an update of the European-style “holiday flats” businesses that have been around since long before the internet.

What’s new, and much more of a social change, is the widespread adoption of “amateur” hosting, and what I want to talk about is how those private, contractual problems – the landlord/neighbor problems – will shake out once the regulatory groundwork has been laid.

These problems are particularly annoying for urban apartment dwellers, and will get a lot worse once those public registries are in place. After all, even if your city allows you up to sixty days of short-term sublets, your landlord can still tear up your lease if they catch you – or if you’re a condo or co-op owner, your neighbors can complain (not unreasonably) that they didn’t buy into a hotel and don’t want strangers around, and get the building rules changed.

So here’s my idea: an “Airbnb building” which explicitly allows short-term hosting and manages it through the building itself.

It could work for a rental or condo building. Either way, when you know you’ll be out of town for a night or more, you’d simply tell the doormen or staff, or enter it into a web calendar, and they’d list it on Airbnb for those nights. If someone books it, they’d arrange for the keys, cleaning and so on. And then you split the extra rent – so for a three night booking at $200/night (after Airbnb’s commission), the building would take in $600 and give you $300.

This may sound familiar — it’s more or less how condo hotels and many other vacation properties are managed. Although in those cases the usage is reversed; the owner is typically there only a few weeks a year, and most of the time the unit’s in the rental pool. In our example, the primary resident is still there most of the time.

This approach neatly solves the landlord/neighbor problem, because the landlord’s getting their cut and the neighbors all know what they signed up for. Most people are still not comfortable renting out their homes to strangers, but you’d expect the people who are to self-select into buildings like this as soon as they start to become available. A typical rental building turns over its tenant base in two or three years, so it wouldn’t take long to convert all the leases to allow this; with a condo you might have to sell it that way from construction.

There are obvious time efficiencies and economies of scale in having the building management – who already have photos, floorplans, spare keys, and so on – manage the whole process, as opposed to individual hosts.

And as a traveler, I would hugely prefer to stay in a building like this. I wouldn’t have to worry about whether the neighbors and staff know I’m a paid guest, and the level of trust is far higher. Right now I’d probably never stay somewhere without previous positive ratings, but if I was booking with the building rather than an individual, then just a few positive ratings for any units in the building would make me a lot more willing.

Finally, what if your half of the Airbnb rent was passed on as a reduction or partial rebate of your base rent or condo maintenance fees, rather than additional taxable income? That’s how many amateur hosts think of it already, and the tax savings could be substantial.

It doesn’t solve the insurance problems (liability for theft, damages, injury, etc), and I don’t know enough about that business to speculate, but more professional and centralized management certainly can’t hurt in sorting those out.

Why hasn’t Airbnb set up a building like this themselves, as a kind of prototype to show how well their concept can work? Maybe they don’t want large property management companies to get any ideas. After all, a company with a few thousand units across multiple buildings in a big destination city might get tired of paying those high commissions and just start their own website. In a way, Airbnb benefits from having its hosts operate in an uncomfortable gray area with their landlords and neighbors, because it prevents them from working together openly to gain negotiating power with the platform.

I get the feeling that some newer condo buildings with a high proportion of investment buyers are drifting towards my model already, on the professional side; those buyers had initially planned to rent out their units in standard one-year terms, but they’re realizing they can make much more by listing them on a short-term rental platform and tipping the staff enough to look the other way.

But again, this isn’t meant to be an argument for or against Airbnb, Homeaway or any other particular platform. It’s more about starting from the bottom up: what do hosts and guests want, and what systems and structures can address that in the most efficient way? In the end, the companies that adapt themselves to those structures will succeed. The model I’m describing certainly doesn’t work everywhere, but for serviced buildings in large urban markets (which are already a substantial share of inventory on these sites) it seems like a much better approach. I wonder who’ll be the first to try it.

4 thoughts on “The Airbnb Building”

    1. The main distinction is that each unit has a “full-time” occupant who’s there 80-90% of the time, has their own furniture/decor, pays the utility bills, etc.

      1. Got it. That makes sense. So basically a condo building of 2-3 bedroom units, and each unit has a permanent tenant. You’d have to give them a major break on rent…as a tenant, I wouldn’t want people in my house constantly if I wasn’t vetting the actual people & not making money from it.

        Do you think the property owners could afford to let the tenants live there for free?

        1. Think we’re still not describing quite the same thing. You would be making money from it (half the excess rent) and the building would be explicitly marketed as allowing short-term rentals under this system, so it would only attract residents who were comfortable with them.

          Now, whether the base rent / condo pricing would be higher or lower than market for an equivalent building that bans short-term rentals is an interesting question — I’d guess higher for the first building like this, because there will be pent-up demand from people who are comfortable with short-term rentals and out of town a lot.

Comments are closed.