Room at the Inn for Airbnb?

There has been a lot of media coverage lately concerning the new "sharing economy", which encompasses everything from Uber, Relayrides, Airbnb, and beyond. It has allowed people to become freelancers, to either provide a service in the short-term, such as a cab ride via Uber, or to rent out spare capacity such as your car when it is not in use via Relayrides, or a spare room via Airbnb.

These new businesses have been very disruptive to established businesses, and have caught them and their regulators off-guard. Uber has perhaps been the most obvious example of upsetting an established business group. Taxicab owners have had to make a significant investment in acquiring their medallions, or licenses, to act as a taxi cab. The technology Uber uses has allowed them to bypass requiring a license.

Another potentially very disruptive new business is Airbnb. It has risen to prominence very quickly and achieved brand recognition exceptionally fast, and become the main player in this space. However you are unlikely to hear the same level of fear & hysteria from the hotel industry as you do from the taxi lobby, that's because the hotel industry does not feel threatened. You will hear about opposition to Airbnb in certain locations, but this mainly comes from local Government anxious about losing tax revenues, or local residents worried about their apartment building becoming a transient pit stop for visiting tourists.

The truth is, most people prefer to stay in traditional hotels while on vacation or business. Airbnb is very popular when hotels are booked out, or when room rates escalate due to an event or conference being in town. Airbnb does offer an economical alternative to traditional hotels, but the segment they are really competing with is the budget hotel space. Higher quality hotels do feel an impact from Airbnb during periods when their rooms traditionally sellout, or when room rates increase, such as during conferences. However the competition from Airbnb has had a negligible impact on the hotel industry performance overall.

There are a few reasons for the minimal impact from Airbnb thus far. There is a lack of supply of hotel rooms in the top performing markets due to a slowdown in building of new hotels during the credit crisis. Once credit became available again it returned to hotel construction last, it being seen as a riskier lending proposition. Also, Airbnb has actually encouraged some people to travel that would not have contemplated taking a trip prior to the service being in place. It is in effect creating new travelers. There is now an alternative to staying in a budget accommodation with minimal facilities and dated décor. People can now stay in modern apartments, often located centrally and close to amenities, while paying a budget rate.

The major opposition to Airbnb to date has been coming from local Governments. New York, Santa Monica, Paris, Barcelona and Berlin have been particularly inhospitable to the room rental website. Some of this opposition stems from the lost tax revenue, but it also comes from the fact that cities like Paris are seeing locals being pushed further out of the city due to rental accommodation being diverted to Airbnb. Today almost 3% of the Paris residential housing stock is now listed on Airbnb. Paris is the website's largest market of listed units, currently standing at over 40,000 units. To addresses these concerns Airbnb has offered to work with Governments in the collection of taxes and monitoring of units. London for example has changed old laws that could have prohibited Airbnb from operating legally.

Interestingly, in some of Airbnb's earliest markets, such as New York, Los Angeles, and San Francisco, the rate of growth in numbers using their services in these cities has slowed down. It is still growing, but at a much slower pace then when the service first arrived. This suggests that we could be seeing these markets reach maturity, or capacity. In other words, at some point they will reach a capacity where they can't find additional property owners willing to share their private residences.

Airbnb, which owns and manages no real estate, is now valued at $24 Billion, based off their most recent round of funding. They are projected to generate $900 Million in revenue this year, and make a loss of $150 Million. It is projected that their revenue will grow to $10 Billion by 2020, with income of $3 Billion. To put that in perspective, Marriott manages over 4,000 hotels, has $14 Billion in revenue, and is valued at $21 billion.

For the moment there appears to be plenty of room at the Inn for a service like Airbnb, and it is questionable whether they could ever take the place of the bricks & mortar hotel operators.

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