An inside view of Airbnb in New York City
29 AUGUST 2014 10:17 AM
Airbnb is succeeding in attracting customers, but it is not yet taking much revenue from New York City hoteliers.
NEW YORK CITY—Over the past year, Airbnb has become increasingly visible in the media. Much has been written about Airbnb in New York City, one of its largest markets. While the service has enjoyed grassroots success with hosts and users, hotel owners and affordable housing advocates have expressed concern over the impact of the service and its compliance with local laws and regulations. The future growth of Airbnb, in New York City and elsewhere, will evolve as communities address this “sharing-economy” company.
Beginning in the second half of last year, reporters and various stakeholders in the New York tourism industry began asking for information about Airbnb. Scouring the Internet provided some insight, but nothing compared to STR’s hotel data. STR is the parent company of Hotel News Now.
Airbnb offered me an opportunity to analyze its New York City business in depth. The company wanted to be more transparent and open about its business, with the belief that more forthright disclosures would help facilitate a productive dialogue with concerned locals.
My firm decided to undertake the analysis—but only under certain terms. The first requirement was that Airbnb make available any information to me that was directly related to my research. This included supporting detail that enabled me to have a reasonable “audit trail” substantiating the information provided. The only information Airbnb would not share were names and personal data of its hosts. My agreement with Airbnb also included a stipulation that it had no right to limit or otherwise editorially control my findings. Finally, I charged Airbnb for my time, though at a reduced level which amounted to a break-even effort.
The fundamental thrust of my research was to analyze Airbnb’s activity in New York City, as if it were a hotel company. Airbnb is definitely not a hotel company, but my goal was to provide a perspective to hoteliers that had the look and feel of data they are used to seeing.
My research made no attempt to address any legal issues involving the service or its hosts.
Key metrics of the analysis are familiar to any hotel manager: supply, demand, occupancy percentage, average daily rate and total room revenue. The period of analysis was January 2012 through April 2014; prior to 2012, Airbnb’s service in New York City still was becoming established. The analysis defines the New York accommodations industry as hotels and Airbnb as units. Growth in other services such as Craigslist, HomeAway, VRBO and others were not considered (although they appear to have substantial inventory in the market).
My analysis has, to the greatest extent possible, tried to stick with the facts and set judgments aside. In advance of a broader release of the research conclusions in the near future, the following “top 10” list summarizes some of the major findings from this research:
1. Unlike hotel rooms, which are permanently placed into inventory, counting Airbnb rooms requires more judgment. Some hosts sign up for the service but make their units available only occasionally. On average, Airbnb hosts only make the units available for rent about half the time. Therefore, Airbnb’s total effective inventory is much less than its total potential inventory.
Of the inventory that is actually made available through Airbnb, anecdotal evidence suggests that “real” available inventory might be less than posted available inventory. For example, a host every month might make each weekend available for rent but only with the intention of renting for two weekends. Once two weekends are booked, the remaining availability is pulled from the calendar. While this might not be a major effect, it appears that some hosts see the Airbnb service as a free option, which can be exercised with great flexibility.
2. While Airbnb has grown quickly in New York City, so has hotel inventory. New York City has been adding hotel rooms at an exceptional rate in recent years. In that regard, it is challenging to separate the impact of new hotels on existing hotels from the impact of new Airbnb units on existing hotels. Of the two, it appears the new hotels are providing a significantly greater competitive threat to existing hoteliers.
3. A significant portion of Airbnb’s guests appear to be unlikely to use hotels and might be more directly competitive with other accommodations providers, such as executive housing.
Two groups of Airbnb customers are notable. Looking solely at Airbnb’s guests by length of stay, 19% rent for 30 days or more, which is highly unusual for hotels.
Second, Airbnb tracks the number of guests in a party. Four percent of Airbnb customers are parties of five or more guests traveling together. Many hotels limit room occupancy to four guests or fewer, suggesting diminished competitive overlap. (While some hotels offer large suites, those units normally serve a different clientele and price point than the typical Airbnb customer.)
Taken together, guests staying for lengthy periods and guests traveling in large parties make up nearly a quarter of Airbnb’s business in New York City.
4. While Airbnb has a material presence in Manhattan, its real center of activity is Brooklyn. It’s interesting to note that Times Square, the city’s most hotel-intense neighborhood, is actually Airbnb’s smallest sub-market.
5. While Airbnb has some pricey options, it’s mostly a competitive threat to economy hotels. There are some nice units pictured on Airbnb, and there is some evidence that the quality of Airbnb’s typical unit is getting better over time. But Airbnb’s sweet spot has so far been nice but not luxury units.
6. A review of Airbnb’s website shows some options for shared rooms with bunk beds. This type of accommodation is not a substantial part of Airbnb’s inventory.
7. Many of Airbnb’s customers in New York City are international visitors, and they tend to book far in advance. Also, it appears Airbnb hosts do not use yield management strategies as aggressively as hoteliers. These two characteristics suggest there might be somewhat less competitive overlap than the raw data shows.
Consider as an example a visitor from France who is willing to spend $250 per night in New York City and who wants to confirm her reservation a month in advance. If a hotel had a room priced at $400 and sold it at the last minute on HotelTonight for $250, it might look like the hotel room was competing with Airbnb when the booking horizon makes clear that’s not the case.
Of the Airbnb stays in New York City, 47% are booked 30 days or more in advance.
8. Because of the nature of Airbnb’s business, it’s not possible to develop a profit-and-loss statement that could be compared to hotels. Nevertheless, it appears Airbnb rooms, together with new hotel rooms, have moderated the amount of compression often felt in peak demand periods. That reduces opportunities for existing hotels to achieve pricing premiums they might have had in the past.
However, it’s too simplistic to say new inventory is hurting room rates. Much of the new inventory is outside Manhattan and designed toward the lower end of the quality spectrum. Both of these attributes affect citywide room rate statistics.
9. Airbnb does not stratify its inventory into anything like chain scales or market class, the groupings STR uses to categorize hotels. Airbnb does use a sophisticated system whereby hosts and guests rate each other. In this way, the system is self-sorting and more like TripAdvisor or other online grading systems. There does not seem to be any momentum to creating an “Airbnb Platinum” or “Airbnb Express.”
10. So far, Airbnb is succeeding in attracting customers, but it is not yet taking much revenue from hoteliers. While Airbnb has accommodated significant traveler demand, it hasn’t affected hotel occupancies in a significant way. For that matter, all of the new hotel rooms have done little to depress hotel occupancy rates in New York City.
Occupancy levels have averaged more than 80% during the past decade, demonstrating that: a) capacity constraints continue to be the major factor limiting the city’s hotel occupancy rate and b) the increase in hotel rooms and Airbnb units in recent years has been met with a comparable growth in demand, demonstrating significant unaccommodated demand still exists.
Sean Hennessey is the founder and chief executive officer of Lodging Advisors LLC, a firm dedicated to providing high-quality counseling services to institutional investors, lenders, and other key players in the hotel industry. Prior to forming his own companies, Sean was a leading consultant and broker for more than 20 years. Sean began his career in daily operations over 30 years ago with companies such as Marriott, Disney World, and numerous restaurants. Sean graduated from Johnson & Wales in 1979 with an Associate of Science degree in Culinary Arts, followed by a Bachelor of Science degree in Hotel Administration from Cornell University in 1983.
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