New York has an illegal hotel market
Renting space outside of the law has become a normal thing in New York, where demand for short-term accommodations is soaring. The city draws over 65 million visitors annually.
There is homesharing, and then there are those that set up larger-scale commercial ops, involving multiple rooms in buildings sometimes ill-suited for living quarters. These include office space conversions that do not meet basic safety code requirements.
The term ‘illegal hotel’ is used to describe all manner of unauthorized rentals; the full scale of the issue had been shrouded in mystery due to a lack of transparency in data. Airbnb now shares data with the city to crack down on illegal rentals; these recent changes may have helped to identify violators.
Renting apartments for less than 30 days is technically illegal in the state of New York, but platforms like Airbnb, Booking.com, and Expedia publish the inventory anyway.
From the New York Times: “New York City is Airbnb's largest domestic market, with more than 50,000 apartment rental listings. But under state law, it is illegal in most buildings for an apartment to be rented out for less than 30 days unless the permanent tenant is residing in the apartment at the same time”.
Scope and Scale
This analysis uses a literal working definition for illegal hotels to approximate the size of the market in the New York area, based on third-party data and a series of assumptions. By illegal hotel we mean the stacked kind, all in one building resembling a traditional hotel - but unauthorized.
Working Definition: Illegal hotels are defined as buildings that are operating six or more short-term rental units under single management, with any manner of code and authorization violations.
Best estimates show that illegal hotels in NYC generated somewhere between $29 and $56 million in 2019 operator revenues - or 3-5% of the total short-term rental revenue. That calculates out to less than one percent of total room nights generated by traditional hotels.
Another operator sued for running an illegal hotel
The Commercial Observer recently reported that another New York operator is being sued by the city for running an illegal hotel in converted commercial space in Midtown, Manhattan. The group accused is Git Group, which has been operating the Git Hotel for at least three years. During this time, the venture pulled in over $1.7 million in revenue from the 21 listings available on Airbnb, and an additional seven on booking.com. The suit claimed that the accused converted showrooms, factory spaces, offices, and a photo studio into guest quarters without proper permitting or following “fire safety protocols”.
A total of 9,400 guests stayed in those units.
The number of illegal hotels in New York is unknown and depends on how one defines ‘hotel’, and what is considered ‘illegal’. For this analysis, ‘illegal hotel’ includes buildings that are operating six or more units under single management, with any manner of code and authorization violations.
For financial reporting, the online travel industry uses a metric called gross bookings, which effectively amounts to the total amount of money that users spend on platforms like Expedia, Booking.com, and Airbnb. The WSJ and Reuters recently reported that Airbnb’s first-quarter gross bookings reached $9.4 billion. Multiplied by four, and we get a rough estimate of how much the world will spend on accommodations via the platform in 2019: About $36 billion. A good gut check and starting point to approximate illegal hotel operator revenues.
Illegal but different
There are varying degrees of violations when it comes to short-term rentals. The scheme engineered by the Git Group appears to have put the lives and safety of guests at risk by not complying with fire code regulations. The large majority of property listings operating outside of the law likely comply with basic safety and fire codes - but are still deemed illegal because they are unauthorized based on zoning laws and other bylaws serving the needs and wishes of local officials and communities.
One useful ballpark metric we can use is short-term rental revenues generated from multi-unit hosts or operators. A 2018 report by the American Hotel & Lodging Association claims that over 37 percent of 2017 Airbnb U.S. revenue (note: the report uses revenue which refers to operator revenue. Gross bookings looks at it from the side of Airbnb) came from listings managed by operators with 6+ units under management. Other metrics in the report suggest that 35 percent is a good approximation for New York area Airbnb revenues originating from properties tied to operators with six or more units under management.
According to the AHLA report, total 2017 revenues generated via Airbnb in the New York area totaled $635 million. Thirty-five percent of that (revenue generated by multi-unit operators with six or more units) calculates out to $222 million.
Multi-unit operators running illegal hotels
Let’s further assume that on the high end, 50 percent of these revenues came from buildings where multi-unit operators have six or more units. Twenty-five percent on the low end. So, between $111-$55 million in Airbnb 2017 revenues generated from New York listings in buildings with single operators managing six or more units. The midpoint here is $83 million.
Now the illegal part. Let’s further assume that anywhere between 20-40 percent of that revenue ($83 million generated from buildings where multi-unit operators have six or more units) comes from buildings breaking some sort of code or compliance regulation. Here, we estimate the 2017 New York area illegal hotel market to be anywhere between $17 million and $33 million.
Factoring 30 percent year over year growth in Airbnb gross bookings (same as operator revenue), New York’s illegal hotel industry generated anywhere between $29 million and $56 million in 2019. Assuming an average daily rate of $120, that calculates to 242K-466K room nights.
In 2015, New York City had more than 107,000 traditional hotel rooms, according to the Office of The New York State Comptroller. Estimates for 2018 put that number at about 120,000. This calculates out to 43 million room nights (120,000 x 365). New York’s ‘illegal hotel’ market (as defined here) is therefore less than one percent of the the size of the traditional hotel market.
These are approximations based on a series definitions and of best assumptions. They only include short-term rental revenue generated via Airbnb. Other platforms including Expedia and Booking.com list inventory that does not fully comply with local law.
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