Airbnb Is a Growing Force in New York, but Just How Many Laws Are Being Broken?
By Gary M. Stern October 12, 2015 12:15 pmreprints
Depending on your viewpoint, Airbnb in New York City is either a blessing, enabling tenants to supplement their income—or a nightmare for angry hoteliers worried that an already oversaturated market is getting even more competition.
The developer Richard LeFrak offered perhaps the best defense in Commercial Observer’s Owners Magazine.
“Does it compete with inventory at the top?” Mr. LeFrak asked. “Not really. It’s not like I’m going to stay at the St. Regis, or somebody’s house.”
But a moment later, Mr. LeFrak offered a biting critique.
“It’s a little crazy that they have a totally unregulated system and that tenants can turn their apartments into profit centers but there’s regulation on landlords.”
And that’s not even taking into account other tenants in these apartment buildings besieged by strangers coming in and out.
Indeed, despite Airbnb’s growing presence in New York City, it’s facing a backlash from legislators who think enforcement should be stepped up and tenant laws should be followed.
Losing affordable housing to landlords and tenants intent on renting via Airbnb to spike profits became so severe that State Assemblywoman Linda Rosenthal instituted her own “sting” operation earlier this year. She found it was as easy to rent an “illegal” Airbnb apartment online as it was to order sneakers from Zappos.
Ms. Rosenthal rented four units: one from a host renting several apartments who told her he didn’t live in the building; another from a large apartment building, where she was told the landlord offered several vacant apartments; another from a rental company and one apartment that had been taken off the rental market so it could only be used by tourists.
Renting to tenants involves complying with a myriad of rules and legal regulations that restrict monthly fees, which is not the case with Airbnb, Ms. Rosenthal said. She sees a rise in units removed from the rent rolls offered on Airbnb so landlords can ramp up profits. Airbnb must comply with the law first before it contributes to diminishing a “vital resource, which is in short supply, which is affordable housing,” she said.
She added: “The city government has to be much more aggressive on violations and I have to question why they’re not.” A number of special enforcement areas are ramping up addressing Airbnb violations, and yet, the violations continue to mount. “Perhaps we need stronger legislation; that’s not off the table,” she said.
Joseph Goldsmith, a New York-based tenant and real estate attorney at Kossoff, noted that the city is responsible for enforcing the law. It established a mayor’s task force to help address these issues. “A big problem is that the city doesn’t have the manpower to oversee and issue wholesale violations of its rules,” he said. More often than not, enforcing the law depends on self-regulation by owners and tenants calling attention to these infractions, he added.
Airbnb is making inroads into the New York City hospitality market, pouring $1.15 billion into the economy. It has attracted 767,000 visitors, generated $301 million for its hosts and spawned $844 million in tourist spending during 2014, according to its April 2105 report. The company launched in San Francisco in August 2008 and entered New York City in 2009.
Airbnb also proved disruptive. It doesn’t need to staff hotels with reservation clerks, waiters, valets and concierges, and can run lean. But experts are questioning whether that growth can continue, since it fails to comply with New York City’s labyrinth of tenant laws.
Bjorn Hanson, a professor and former chairman at New York University’s Center for Hospitality, Tourist and Sports Management, predicts that Airbnb “is about to become the largest hotel brand in the world based on its number of locations.” Nonetheless, it’s often underestimated because of meager service and many of its out-of-the-way locations.
Hotels, however, have ramped up their volume, and despite Airbnb’s encroaching on its market, Airbnb still only registers no more than 3 percent of New York City’s overall hotel occupancy, noted Mr. Hanson. “While it’s brand new, it’s become sufficient in terms of scale to affect pricing and promote itself as an alternative, especially to young travelers who have a propensity to want more neighborhood experiences at a lower price,” he said.
Airbnb isn’t complying with current regulations and if enforcement is stepped up, or if legislators introduce additional regulations, it could derail its rise, Mr. Hanson said. “That’s why I’m tentative [about its eventual growth],” he explained. “If regulatory authorities in New York, San Francisco, Miami and Chicago get aggressive, it’s at risk,” he said.
The problems were spelled out in Attorney General Eric Schneiderman’s “Airbnb in the City” report issued in October 2014. As previously reported in CO, its research uncovered that 72 percent of Airbnb’s rental units violated the city’s Multiple Dwelling Act.
Renting out one’s apartment for fewer than 30 days isn’t permitted. The offense is considered a misdemeanor and carries a maximum jail sentence of 30 days and a $500 fine for a first infraction, and a maximum six-month sentence and $1,000 fine for the second incident.
According to the report, 40 percent of Airbnb’s rentals were concentrated in six major neighborhoods: the Lower East Side, Chinatown, Chelsea, Hell’s Kitchen, Greenwich Village and Soho.
When Mr. Goldsmith was asked who could legally rent out their apartment via Airbnb, he quipped, “I haven’t come across that person yet.”
Most people live in multiple dwelling apartment houses, and guests of fewer than 30 days are considered transients and prohibited.
“Apartment houses don’t fit into the rules and regulations for housing transients the way hotels do,” he asserted. Hotels must meet fire and safety standards, including possessing sprinkler systems and including maps for emergency egress.
Moreover, what people are charging for Airbnb rentals violates rent regulations and could lead to eviction. If tenants can charge whatever the market will bear, why can’t landlords?
Nonetheless, most landlords see eviction as the last resort but are notifying tenants that they’re breaking the law by renting through Airbnb and this action must stop or eviction proceedings will begin.
When the managing agent for landlord Michael Taub saw photos of its East Village apartments on the Airbnb website, he sent the tenants a legal notification asking them to vacate their apartments. So far, those actions have led to one tenant vacating, one tenant stopping his Airbnb affiliation and the final one having 60 days to respond.
Mr. Goldsmith said that the city is doing what it can to enforce these laws. The mayor established a special task force to address them, “but the city doesn’t have the manpower to oversee these wholesale violations,” he said.
Realistically, much of the enforcement depends on self-regulation, where a landlord discovers that a tenant is renting out an apartment or a neighbor complains about loud noise, parties or smoking in the hallways to the landlord. Tenants who are found to rent out their apartments to Airbnb guests can be evicted.
But Robert Toshi Chan, owner of the 64-room boutique Flatiron Hotel, disputes the fact that Airbnb is eroding its business or cutting into its profits. He blames the glut of hotel construction as having a greater effect on lowering the Flatiron Hotel’s occupancy rate from the low 90s in 2014 to low 80s thus far in 2015.
Guests opt for the Flatiron Hotel because “hotels offer the proper fire and safety protection and 24-hour on-site service, which is something no apartment owner can offer,” he said. In fact, Mr. Chan said his entire philosophy is to “welcome people into the hotel as if we were inviting them into our home. We provide drinks and snacks and don’t have a check-in.”
Jeffrey Reich-Hale, the director of sales and marketing at the 128-room Wyndham Gardens in Long Island City, said the Airbnb traveler differs from the typical hotel guest. “Airbnb customers want to do things on their own like cook themselves breakfast; they’re not looking at the amenities that a hotel can provide,” he said. He said he believes that most Airbnb guests are millennials who are attracted to lower prices, while hotel guests are more mature and include families with children, though in reality Airbnb attracts a wide swath of guests of all age brackets.
Mr. Reich-Hale sees the competition from Airbnb as forcing hotels to improve their services. “If you’re a good hotel, it’s all about personal service. Hotels can offer what a tenant who owns the place may not be able to,” he said. Amenities like concierge service can’t be easily matched.
Other hoteliers are less philosophical on the matter: “I think it is very dangerous for the hotel industry, because Airbnb units are not legal,” said Tyler Morse, the chief executive officer of MCR, which built the High Line Hotel (see Sit-Down on page 60). “It’s very dangerous to the guests and the customers from a safety standpoint. No one has inspected or audited the place where you are going to, whereas, you check into a hotel and that’s part of the service that we are providing—safety and security.”
A spokesperson for the New York Hotel Trades Council acknowledges that Airbnb is shaking up the hospitality industry. He noted that Airbnb has added about 10,000 rooms to the city or about 10 percent of the 100,000-hotel-room inventory. Adding 10 percent of new supply will diminish room rates in the long run.
He said the mayor’s budget inserted an extra $1 million to address these infractions and that the Office of Special Enforcement is collaborating with the Fire Department of New York City to address violations.
“We have an affordable housing crisis, but we don’t have a crisis about too many hotel rooms. It’s unfortunate that these landlords are taking units off the market that could be used to house New Yorkers,” said a spokesman for the New York Hotel Trades Council. “If you increase the supply without increasing the demand the same way, then you have an unsustainable situation.”
Despite the surge in violations, Mr. Hanson is still sanguine about Airbnb’s future in New York City. He said there are several activities taking place that transgress the law “but don’t face scrutiny.” Airbnb, like Uber, has the resources to win a PR war and show that many poor and working-class people are boosting their income by renting space to Airbnb guests.
‘The city government has to be much more aggressive on violations and I have to question why they’re not. Perhaps we need stronger legislation.’—Assemblywoman Linda Rosenthal
Mr. Hanson said Airbnb has two lines of business: one involves tenants or owners who rent their spare bedroom or entire apartment when they’re away, and the second entails hotel owners who don’t want to affiliate with established brands. If Airbnb adjusted its business model and concentrated more on affiliating with independent hotels, rather than having tenants rent out their personal apartments, it could help legitimize the business and restrict the violations of city ordinances. If not, Airbnb is continually going to face inspections and resistance from city government.
He expects to see Airbnb make some modifications and alter its practices to try and better comply with New York City dwelling regulations. Yet he wonders why it’s been so slow to adapt and diversify its business model in New York.
A spokesman for Airbnb said that the company provides many benefits for the city and its residents. “The most important,” he said, “is the ability to explore parts of the city that you wouldn’t otherwise.” Visitors can stay in people’s apartments, share their homes and see what life is like in Williamsburg or Flushing. “They live with the amenities of a kitchen and living room,” he added. Many hosts provide a list of their favorite local eateries and bars.
When a host enrolls at Airbnb, they are asked to comply with all local laws. Asked how Airbnb can run a business where 72 percent of its hosts are violating the law, Max Pomeranc, Airbnb’s regional head of public policy, said: “It’s a regulatory gray area. Laws that were designed for one purpose are now being enforced for another.”
New York, Mr. Pomeranc suggested, could learn to become more adaptive, like other cities. Philadelphia passed a law that allows residents to rent out their apartment for no more than 180 days per year. San Francisco, Paris and Portland, Ore., have also passed variations of these laws, enabling residents to rent their domicile.
Mr. Pomeranc noted that the attorney general’s report said that 94 percent of Airbnb users aren’t commercial landlords, but tenants seeking to supplement their income.
Airbnb distributed a letter to New York State legislators, which stated that “78 percent of Airbnb hosts in New York are low- to middle-income and 72 percent say hosting helps them stay in their homes.” It noted that “governments are striving to strike the right balance between the benefits home sharing provides and smart, fair regulations that prevent abuse.”
But Ms. Rosenthal isn’t convinced. “The temerity of Airbnb,” she exclaimed. “They want us to change the law to accommodate them? That’s not how things work here.”
As Mr. Goldsmith sees it, because of the widespread transgression of safety and rental laws, “the city will end up having to come and regulate it in a way that the city and the residents are comfortable with.” It will need to balance the needs of citizens with those of Airbnb and the hotel industry, “which feels that Airbnb is taking a bite out of its profit margin.”