Alt-accommodation impact felt in San Francisco
29 AUGUST 2014 9:57 AM
San Francisco is one of the most dynamic hotel markets in the country, but metrics indicate the performance is threatened by the growing alternative-accommodations segment.
SAN FRANCISCO—Kemmons Wilson founded Holiday Inn in 1952 because he discovered there were inconsistent hotel facilities along his route between Memphis, Tennessee, and Washington. He had the vision that the traveling public wanted an alternative to the roadside motels of that era.
In the second decade of the 21st century, other visionaries have recognized the traveling public want an alternative to traditional hotels and have developed methods to operate and sell that inventory.
Whether it is the millennial travelers with their different cultural tastes or the traditional traveler with a need for destination authenticity, a different experience or simply a cheap room, there are new vendors of alternative transient accommodations, which are providing for this demand: Airbnb, VRBO, FlipKey, Roomorama, CyberRentals.com and others. The market segment leader is Airbnb, which has established itself strongly among an interested customer base.
While its business model is clearly a winner, Airbnb, along with the other companies in the business space, have overlooked some legal covenants for which they are now being scrutinized, questioned and vilified. Despite the latter, at least in San Francisco, there is evidence this new transient-stay product segment is impacting traditional hotel operations.
Weekday/weekend YTD trends
Although hotel performance in San Francisco is surging and on its third straight year of double-digit revenue-per-available-room growth with no new hotel supply in sight, the market is reporting year-over-year occupancy decline on weekend days in specific price segments. This would not make sense in this booming environment, except for a new competitive influence: alternative accommodations.
According to STR, parent company of Hotel News Now, the occupancy for the San Francisco market, which includes the city and the surrounding airport communities, has grown 3% year to date through May 2014 and 2.9% for the trailing 12 months. Corresponding RevPAR growth has been 14.3% year to date and 13.8% for the trailing 12 months.
A further breakdown for the entire market shows that year-to-date 2014 weekday occupancy growth is 4.2% (+17.9% RevPAR), while weekend growth is trailing at 0.1% (+4.9% RevPAR). This compares to year-to-date 2013 over the same time of 3.5% weekday occupancy (+10.9% RevPAR) growth and 4.1% weekend occupancy (+14.6% RevPAR) growth.
The market shift and contrast between weaker weekend growth than weekday growth becomes more defined when breaking down some of the patterns by location and product segment. San Francisco’s primary geographic locations for hotel inventory are identified by STR as “Nob Hill/Wharf” and “Market St.” The following charts show trends for those geographic regions with comparisons of occupancy and RevPAR change by weekday and weekend in the upscale, upper-upscale and luxury segments:
Dynamic growth in business travel and professional group segments are driving weekday demand and RevPAR. Even though the city and region are benefitting from a booming economy, however, the weekend transient segments are counterintuitively slumping in both the upscale and upper-upscale segments. This would lead to the concern that some unidentified force is influencing an otherwise unexplainable occupancy downturn, when other retail and attraction segments are expanding during the same weekend periods.
Digging deeper into month-by-month trends indicates a more prominent occupancy trend on weekends for this year:
Although the chart above provides a rosy picture of a booming market with monthly double-digit RevPAR gains (except May, when citywide conventions did not materialize), the weekend performance is in steady decline from an occupancy standpoint with a significant RevPAR growth gap between weekday and weekend periods. As a result, it must be considered that another competitive force is creating an impact.
The impact of alternative accommodations on the weekends is logical, as this segment has been initially and primarily targeted at the leisure transient segment, which travels mostly during weekends and holiday periods. As the above May 2014 year-to-date metrics and trends do not include the busy and leisure transient driven June-through-August season, it will be interesting to revisit these trends at the end of the 2014 summer seasonal period, when leisure transient demand plays a stronger role in transient occupancy demand for San Francisco.
There were approximately 34,000 hotel rooms in approximately 240 hotels in San Francisco for tourism occupancy, according to SF Travel. Including the suburbs to the south of San Francisco, which service San Francisco Airport, 2013 occupancy in San Francisco was 82.9%, according to STR, which was the highest occupancy since 2007 and at current supply levels. In 2014, occupancy growth is already trending 3% above 2013 levels, but 4.2% of that growth is on weekdays, while weekend occupancy is flat (+0.1%) to last year.
Through a Web data-harvesting firm called Connotate, the San Francisco Chronicle in May 2014 compiled data from Airbnb’s website, which measured 4,798 listings for transient accommodations in San Francisco, including the use of at least 2,984 entire houses or apartments being rented as transient units without hotel licenses and outside the boundaries of strict rental laws. The remainder of the listings were either private rooms (1,651) or shared rooms (163). If Airbnb is considered to have a market share of 50% within the alternative-accommodations segment versus HomeAway and others, then an estimate of 10,000 existing alternative-accommodation units within San Francisco is reasonable.
The average daily rate for the alternative-accommodation units that Connotate measured for sale through Airbnb was $183, which corresponds with the combined 2013 annual ADRs for the upscale and upper-upscale hotels segments in both the Nob Hill/Wharf and Market Street STR tracts and might explain their corresponding weekend occupancy declines. With the potential of an additional citywide transient hotel inventory of approximately 33%, it is no wonder that impact is now manifesting itself through the metrics of similarly-priced hotels.
The tourism occupancy tax in San Francisco is 14% of the nightly cost of a hotel room. The TOT is utilized completely for City of San Francisco services, programs and cultural arts programs. Simply speaking, when visitors pay their hotel tax, they also are paying for clean and safe streets; security services through fire, police, ambulance and hospital service; parks and recreational attractions; and the city’s cultural institutions of theater, opera, symphony, library and museums. Therefore, TOT should be in some ways considered an entry or use fee by visitors to San Francisco.
There is also a tourism improvement district fee in San Francisco. The fee is 2.25% of the nightly cost of a hotel room (1.3% in districts not impacted by Moscone Center conventions). One percent of the 2.25% fee underwrites the cost of marketing San Francisco through San Francisco Travel, which is the tourism marketing company for the city. The remainder is dedicated to underwriting the expansion of the Moscone Center.
The mission of San Francisco Travel is to market San Francisco as the world’s premier tourist destination and stimulate demand for overnight visitor stays and related spending. The funding of the Moscone Center expansion will continue to allow San Francisco to host some of the largest conferences in the country and enjoy the benefits of related overnight stay demand.
It is the law that sellers of transient lodging must charge their guests both the TOT and the TID and pay the proceeds to the San Francisco Tax Collector for proper distribution. In fiscal year 2013-2014, the tax collector estimated that TOT collections would approach $273 million in San Francisco, while TID collections without the Moscone supplement would enable more than $20 million to be spent on marketing San Francisco to sustain and expand visitation and overnight stays.
None of the sellers of alternative accommodations are charging and remitting either TOT or TID. Although actual consumption of alternative accommodations cannot be measured, as companies in the segment do not report their productivity, even at 50% occupancy of 2,984 units of Airbnb inventory at the measured potential ADR of $183, lost TOT to the city would approximate $35 million annually, while TID fees for marketing San Francisco would approximate $2.5 million. In consideration of further available inventory for sale it would not be unreasonable for these numbers to double.
As a result of non-payment of legislated taxes and fees for overnight stays, customers in the alternative-accommodations segment are not paying their fair share of what it takes for the City of San Francisco to provide them with services, while the non-payment of TOT basically provides free destination marketing to the sellers of those lodging products.
The “shared-economy” philosophy has influenced new business segments in addition to accommodations. The most prevalent are in transportation, such as Uber, Lyft and other car services, which have had an impact on the licensed transportation segments of taxis and traditional car services.
In the case of these transportation businesses, there are concerns for lack of adequate licensing, payment of taxes and fees, and inadequate insurance coverage among other items. In the alternative-accommodations segment, the traditional hotel business operators are focused on non-payment of the aforementioned TOT and TID and lack of licensing for transient lodging use.
Other macro impacts exist, which include: concerns of city zoning infractions; the potential for abuse of low-income and rent-stabilized mandates; the reduction of workforce housing in cities with housing shortages; and the potential abuse of tenants and homeowner rights within the context neighborhoods in general, individual condominium projects and rental apartment buildings, where alternative accommodations are causing disruption and/or concerns.
San Francisco has clear statutes on the rental of housing. Designated permanent housing cannot be rented for less than 30-day periods. The Connotate data indicated there were 3,785 “hosts” of Airbnb units for sale in May 2014, 513 of whom controlled multiple properties. This would indicate that a significant portion of the inventory was not meant to be “shared” as part of the owner/resident’s excess space or bedrooms, but rather it has become a normalized business of selling residences as short-term transient housing.
Whether in the context of the city’s laws for transient housing and zoning restrictions or other private condominium or apartment owners/association restrictions, it would seem the sellers of alternative accommodations are or at risk of breaking many laws and covenants.
In San Francisco, the reaction to disregard for legal statutes has stimulated both a need for further legislation and a separate ballot measure to clarify use of residences for short-term transient housing. The potential city legislation aims to end the “hotelization” of apartments by allowing only primary residents who live in their dwellings at least three-quarters of the year to rent housing, but it basically re-zones residential neighborhoods to allow transient overnight stays to achieve its goals. The proposed ballot initiative seeks comprehensive and enforceable legislation, which would include local registration of all affected units and address the loss of permanent housing, speculation resulting in steeply rising housing prices, evictions and neighborhood disruptions caused both directly and as a result of the unregulated short-term rentals of thousands of residences. Both proposals would require transient lodging sellers to register and license their units with the city.
In the case of payment of TOT and TID, there is a law on the books that makes those requirements clear. But the City’s Tax Collector has been slow to find a method to hold sellers of alternative accommodations accountable for payment, even as Airbnb had pledged to pay all appropriate taxes by August of this year.
In conclusion, even as San Francisco continues as one of the most frothy and dynamic hotel markets in the country, metrics indicate the city’s hoteliers are being threatened with impact from the alternative-accommodations segment.
Furthermore, there is ongoing frustration with an uneven playing field, where new entries into the transient lodging segment are not being held accountable to the same laws by which traditional hotel practitioners must abide. This story is clearly in its early chapters.
Rick Swig operates RSBA & Associates, which was founded in 1986. Since that time, Mr. Swig has provided advisory services to both major hotel management and operating companies, as well as owners of individual hotels and portfolios. Along with his asset management and consultancy work associated with RSBA & Associates, he has also been an investor in hotels since 1989, including currently the Napa Winery Inn in Napa, California. His past background also includes a career with Fairmont Hotels, where he rose to be the Vice-President and Managing Director of the Fairmont Hotel Management Company.
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