Sharing Economy – A Hoteliers Comprehensive Review

Should we be Scared of the Sharing Economy?

(updated May 2016)

The challenges of increased health care costs, minimum wage increase impacts and new supply are not yet critical for the hotel industry but they will become very important when an economic downturn occurs. Further, Airbnb, the big gorilla of the Sharing Economy along with ride share service Uber, has become a lightning rod for debate and could become one of those aforementioned factors that pushes hotel industry revenue and net income growth into negative territory. So what can the hotel industry do?

Let’s understand how this all began. Airbnb was founded in August of 2008 in San Francisco as a community marketplace for people to list and book unique accommodations around the world. As of the end of 2015, Airbnb had sixty million users providing access to locations in 34,000 cities in over 190 countries, averaging half a million stays per night, according to CBRE.

With a $25.5B valuation, Airbnb and other short-term rental companies are avoiding taxes and regulations. In addition, Airbnb is big business. According to a recent study by Penn State University, in New York City, 72 percent of the rental units are illegal and in San Francisco, 18 percent of their revenues are derived from “superhosts” who have multiple units. To date, it appears the major cities with significant Airbnb impact are New York, Miami, Boston, DC, Chicago, Austin, Los Angeles and San Francisco.

Airbnb’s share of accommodated demand has grown significantly and this share becomes more impactful to hotels depending upon the time of the year. December looks to be a strong month for Airbnb while hotels struggle to fill due to the holidays. The average level of demand growth in the lodging industry is approximately 2 percent per year. The Airbnb demand in the U.S. is approaching the level of growth for the hotel industry. According to CBRE, “the implications on the volume of traditional hotel new development going forward are clear.”

In these and in other cities, Airbnb also impacts the housing industry, creating both a shortage of housing units and potentially an increase in rents from those units remaining in the normal apartment rental pool. Further, as the economy softens a bit in 2017 after an election year, will Airbnb’s supply increase, coupled with the hotel supply pipeline, have a more material impact on occupancy and hence rate? Will corporate users find their way to Airbnb in abundance next year? As a large company, the question is, should we in the hotel industry insist on Airbnb paying taxes and managing their “hosts” to avoid illegal hotels?

Rauch’s Airbnb Review

On a trial basis, I decided to book an Airbnb rental unit. After booking, I was asked to please not tell any of the other apartment dwellers that I was an Airbnb guest. It is clear that many buildings have a minimum stay of 30 days so my 1-night Los Angeles stay would be either illegal or at the minimum, frowned upon. I received a clean apartment but had no way of knowing whether or not the sheets or towels were freshly cleaned for me as they were not folded neatly as we do for our hotel guests. The arrival and departure process was strange as I never met my host though she was readily available via text/phone. I had access to reviews about the host but not necessarily about that apartment per se.

Further, and perhaps most importantly, I was asked by the host to enter the apartment building by following a resident in and following them on to the elevator so that the resident would inadvertently allow me access to the floors. Then the unit I was staying in was unlocked and I was able to access the unit key, access the FOB and parking pass if needed.

The truth is, after having heard from Troy Flanigan of the American Hotel & Lodging Association (AH&LA), I am convinced that Airbnb is a big business that in essence avoids the responsibilities of being in business and puts consumers at risk be it in regards to safety, background checks, health or fire standards. Further, while I think we should embrace Airbnb as a legitimate competitor, we are not to be compared to the taxi industry, a group that attacked their new competitor, Uber, at every turn. We should work with Airbnb on solutions for leveling the playing field without antagonizing them. Think of them more as an online travel agency, a combination competitor and ally. The hotel industry is an organized, highly regulated industry with high quality standards and an easy way to determine bad products–poor reviews and franchise removals for a couple of ways along with the highly regarded AH&LA as our main association.

Taxis, Uber and Lyft

The taxi industry is a disaster so Uber trounced them on arrival. In my quest to understand how bad it is, I took two taxi rides, one in Phoenix and the other in San Diego. Neither driver was pleasant and there is no way to review your experience unless you want to send a comment card via mail to the Airport Authority. Further, both drivers asked for cash saying the credit card machine did not work. Really? For those who use Uber and Lyft, we know there are problems (first time drivers who are either lost, not tech-savvy or worse yet, both) but generally, notwithstanding surge pricing, it is a good experience.

In San Diego, Uber is allowed at the airport. In Phoenix, it has been approved as of March, 2016 but is not yet in service as airport officials claim Uber does not provide background checks on drivers to the airport authority. Uber, along with its main competitor Lyft, is part of the new job creation of “independent worker.” Airbnb frankly is in the same boat. Is it a full-time job to be an Airbnb host? Yes, in some instances, no in most. How about working for the larger companies that actually run illegal hotels by having say 10 rooms in an apartment? So will Airbnb end up as more of an online travel agency (OTA) or a direct hotel competitor or both?

We probably need new rules for this sharing economy. Labor laws have not kept up with the needs of businesses and employees. In America, you are either an employee or not. With contingent employees from temp firms, part-time employees and sharing economy employees like Uber and Lyft, what we need is a new category of independent worker. According to a study by Harries, Krueger and Cramer highlighted in the Wall Street Journal in December 2015, the “Uberization” of work creates an imbalance of hours worked from week to week. This creates real challenges for everything from health care to minimum wages earned (does a driver get paid for waiting?) and more.


The large OTAs (think Expedia and Priceline) are able to exert significant influence over hotel choices that are available to the customer. Customer ratings can be impacted by our “walk” policies, commission structures and other subjective factors. Airbnb offers a much lower commission rate than either of these two main OTAs. This might get independent hotels and B&Bs to list their properties with Airbnb.

Hotel companies currently need OTAs as they represent 15 percent of the market and that will increase as the economy softens a bit in 2017 after election year economics plays out. The big brands have clout in competing for market share. The Marriott/Starwood merger of 2016 produced another monster entity and we might see additional mergers of epic proportions sooner rather than later. This leaves independent hotels struggling to fight to attract users to their own websites. After all, relying on OTAs increases operating expenses at a time when average rate growth will begin to slow and new supply will enter the equation. Franchise fees are now double digit costs which gives independents that slight advantage but they will have to spend those “saved” dollars on marketing.

As the hosts on home-sharing websites can gain many unfair advantages over those operators of traditional lodging products in the market, full-time operators on Airbnb can become a real threat to the traditional lodging industry. Based on an analysis by CBRE, Airbnb has and will continue to encroach on the business of the traditional lodging industry. HomeAway, VRBO, FlipKey, One Fine Stay, Couchsurfing, etc. were not a part of the analyses done by CBRE. In the future, other OTAs or alternatives might pop up.

The Bottom Line

It seems reasonable that Airbnb will impact hotels in two ways. For existing hotels, the growth of ADRs will most likely be curtailed. The fluid nature of Airbnb supply suggests that historic price premiums realized during peak demand periods will be mitigated. Airbnb is here to stay. It is more relevant in some markets than others; there are only 15 markets where Airbnb generates 2 percent or more of hotel revenue. Even in the markets where Airbnb earned more than 2 percent of revenue, the vast percentage of that revenue was usually generated in the downtown submarkets. Fortune reported in February 2016 that only 40 percent of travelers who reported they had used Airbnb preferred traditional hotels versus 79 percent of travelers who had not used Airbnb or similar peer-to-peer lodging.

The truth is, while we should continue to be diligent in raising awareness about issues brought about by Airbnb’s arrival, OTAs are likely more concerned about Airbnb than we are—think about the 3 percent commission model Airbnb has vs. OTA percent commissions of 10, 15, 18, 20 and more. Having said that, the combination of Airbnb, new hotel supply, an economic slowdown and potential global economic decline put us in jeopardy at the first signs of an event of any magnitude. As individual hoteliers, we must protect ourselves with a powerful digital presence combined with excellent reviews to compete.

As an industry, we must strive for a balanced approach to the new realities of mega-companies in our industry. Unless we are Marriott, Hilton, IHG, Airbnb, Expedia or Priceline, we are the little guy. I like our chances of survival and success but it will not come without continued hard work and awareness that this industry is not the art it was but rather the science it has become. Current analysis suggests that listings on Airbnb tend to be more successful in attracting leisure travelers over business travelers, however, the company is making big strides in developing new products that tailor to business travelers’ needs, increasing the threat to the lodging industry.

Hosts on home-sharing websites have the advantages of running their business with low costs. Competing with Airbnb on price will be difficult for the traditional hotel. Differentiation is the key to success!


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