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'Almost Like A Drug Dealer': Short-Term Rentals Still Weighing Down NYC Hotel Market Despite New Laws

Amid an environment of sluggish rates and swelling supply, New York City’s hospitality industry continues to be vexed by shadow inventory from short-term rental platforms — a challenge that shows no signs of abating.

A room at the Ace Hotel New York City.

Although scores of tourists flock to the city each year, and occupancy in NYC hotels remains high compared to the U.S. average, the rate hoteliers reel in for rooms has been sliding for years. In 2019, New York City’s hotel occupancy rate dropped 1.2% from the year before, The New York Post reports, citing figures from hospitality data firm STR. Meanwhile, the industry's leading performance metric, revenue per available room — known as RevPAR — dropped by 3.6%.

Still, tens of thousands of rooms are set to be added to the city’s supply in the next two years, and shadow inventory from short-term rental platforms is another wet blanket on a bloated market.

Despite recent laws passed to restrict and regulate short-term rental platforms like Airbnb and VRBO, lobbied for by the hotel industry, owners say they haven't done enough to curb the threat.

“It's a huge concern, and despite a lot of enforcement, it's really not where it should be because it's very hard to figure out where they are … it's almost like a neighborhood drug dealer. You arrest one, and somebody else replaces them because there's a market for it,” Hotel Association of New York City CEO Vijay Dandapani said of illegal short-term rentals. “It is definitely depressant of RevPAR.”

Dandapani is speaking at Bisnow’s Hospitality Investment, Development & Management Summit later this month, where the impact of offerings like Airbnb, regulations and the hotel development landscape will all be topics of discussion.

A rendering of HFZ's XI

Under New York state law, renting out a full home for fewer than 30 days is illegal, and Dandapani says that type of listing takes up the lion’s share of offerings on Airbnb — which is planning to go public this year. Like many places around the world, Airbnb’s relationship with the city has been fractious, to say the least.

In 2018, the city council passed a bill that would force short-term operators to hand over host listing data to authorities. But by this time last year, the law was stopped by an injunction from the U.S. District Court in Manhattan, on the grounds it could violate the Fourth Amendment.

An effort to find a resolution to the litigation over the bill is ongoing, Dandapani said, and the issue may not be resolved for months yet. Airbnb did, however, provide data for some 17,500 listings following a subpoena from the Mayor’s Office of Special Enforcement back in May.

Meanwhile, the city has increased its budget for enforcement on illegal rentals to around $8M, a tenfold increase over 2016, according to Bloomberg.

“The shadow inventory is not factored in any development cycle process … So that's resulted in more supply than there otherwise might have been,” Dandapani said. The Hotel Association of New York City, using data from data-tracking website Inside Airbnb, pegs the number of city listings on Airbnb to be at almost 50,000.

The development site at 150 West 48th St. in Midtown Manhattan.

Some predict that number will stay elevated. Rosenberg & Estis attorney Michael Pensabene — who has defended landlords hit with violations because of short-term rentals run by tenants in their buildings — believes there will be more illegal short-term rentals unchecked because of the state’s tighter rent regulation rules introduced last year.

“There's nothing really pushing back on that business right now,” he said. "This movement in Albany to stop evictions is going to work to Airbnb's advantage."

Landlords’ incentive to sue tenants running illegal short-term rentals in order to destabilize their apartments is gone, thanks to the Housing Stability and Tenant Protection Act of 2019, Pensabene pointed out.

Efforts to eliminate illegal rentals will need to come from the city, he said, and the legislative climate right now is unlikely to support the drafting of any laws to clamp down on operators like Airbnb.

“It's not the best political time, perhaps, to work on that kind of a law,” he said. “The perception would be giving something back to the landlords, giving some reason for them to go after tenants.”

Even without the added complexity of short-term rentals, the city’s hotel supply is billowing. There are some 144,000 rooms expected to be available by 2021, per NYC & Co. That’s up from the nearly 87,000 open in the city a decade ago.

Brookfield is bringing New York's first Pendry Hotel to its Manhattan West complex, for example, and HFZ Capital is creating the first Six Senses Hotel in the U.S. at its luxury West Chelsea condominium, XI.

At the Waldorf Astoria, more than 1,000 hotel rooms have been taken offline as they are converted into about 350 rooms and 375 condos. In Times Square, Tribeach Holdings is building the Riu Hotel on West 47th Street, and prolific hotel developer Sam Chang spent $140M in October buying 150 West 48th St., where he is planning a hotel as big as 276K SF.

Goulston & Storrs' Corey Wilk, Pod Hotels' Rani Gharbie, Greenworks Lending's Jessica Bailey and Hidrock Properties' Abie Hidary.

Pod Hotels Head of Acquisitions & Development Rani Gharbie, whose company is planning to set up as many as 50 microhotels in North America in the next decade, said while there are a number of things that the hotel industry has learned from Airbnb’s rise, traditional hotels still have a leg up when it comes to safety and booking security.

Pod Hotels is now considering listing on Airbnb, as it already advertises on HotelTonight, which Airbnb acquired last year. 

"Airbnb is morphing into an online travel agency, and they're actually becoming just another distribution channel," Gharbie said. “From that perspective ... we embrace their business model. It adds competitiveness in the market of OTAs and helps temper down some of the commission pricings — so all of these are positive things and healthy things for the industry.”

While he noted that sluggish rates in the city are hurting the hotel industry, microhotel concepts like Pod Hotels will be better able to weather the storm because they are able to cram more rooms into a buildable area, he said. The economic uncertainty ahead in the coming months and years could mean some hotels will run into trouble, potentially providing acquisition opportunities.

“When the economic adjustment happens, you'll see a lot of hotels going underwater or being challenged,” he said. “We think a lot of our future hotels over the next few years — or deals that we will sign — may be conversions as opposed to ground up, because we will probably be picking up some of those deals that were overvalued or not underwritten in the right way.”

Hear Rani Gharbie and Vijay Dandapani speak at Bisnow’s Hospitality Investment, Development & Management Summit Jan. 9.