There’s been an interesting development on the STR/Airbnb front. Remember how there was supposed to be a lottery for the Airbnbs? Well, apparently one of the lotteries has been cancelled as there were fewer applicants than licenses.
Why did this happen?
A little background. There are multiple tiers of short term rentals in San Diego. Only whole home Airbnbs needing Tier 3 or 4 permits will be capped. Tier 3 permits are for those being rented out for more than 90 days in the year but no more than 30 days at a time, in San Diego city, but not Mission Beach. Tier 4 permits are for those that are similar to Tier 3, but located in Mission Beach.
Additionally, each host must be a person (not LLC), can hold only one license and operate only one STRO at a time within the City of San Diego.
Earlier in the year, a slew of articles said that this lottery process would cause a large reduction in licenses.
Altogether, about 6,500 licenses will be available in the city, which would represent a reduction of 48 percent compared to the current estimate of 12,300 vacation rentals, according to the Coastal Commission.– San Diego Union Tribune
I also wrote an article about the possibility for this large number of units to either be LTR’ed or sold.
But on Nov 30th, the city had to abandon the Tier 3 lottery because there were less applicants than the cap allows.
Why did this happen?
This was quite a surprise to me, and perhaps to the city as well. What gives?
Well there are a few possibilities, that would add up to all those missing entries.
- The Big Miscount – Maybe the Coastal Commission just miscounted the number of Airbnbs that would fall under the new regulations.
- The Converters – Maybe owners switched to long term rentals ahead of the lottery.
- The Shirkers – Maybe owners just don’t care and didn’t bother applying? Or couldn’t because they have more than one property?
Truth is, I’ve no way to tell which it is. It may even be a combination of all. Let’s look at each.
The Big Miscount
It’s possible that the Coastal Commission simply miscounted the number of whole home airbnbs. The Tier 3 cap only applies if you are renting more than 90 days a year – this would be the case for people who live in their homes, and occasionally rent them out.
If that’s the case, the ordinance had minimal impact, we’re SOL for increasing housing, and STRs weren’t that big of a deal if the majority of people also live in the home. But I find that hard to believe given how many Airbnb businesses operate in San Diego and how few listings actually look like the owners live there permanently.
Some Airbnb owners might have decided to just switch their rentals to LTR or rentals longer than one month. I’ve definitely started noticing more long term rentals popping up that are fully furnished, so pretty sure they are STRs that are transitioning to LTR. It’s one path that owners are trying to take.
Here are some examples:
There are a lot of these popping up and it points to some Airbnb owners abandoning STR for LTR ahead of the lottery. This is a good thing – it’s what we expected, that the homes would show up in either rental or purchase supply. They are definitely showing up in rental supply, I guess I just didn’t expect it to happen before the lottery.
As for numbers, it’s hard to say, but we do know rental vacancy is climbing fast and already putting downward pressure on rents. This is a win for San Diegans.
Some might decide to do 30+ day rentals, still at the vacation rate, out of the reach of regular residents. They might be hoping to get tourists taking a month long vacation. But not that many people can casually vacation for a month while covering their mortgage back home as well.
In the end, I think the demand for 30+ days is a fraction of the demand for weekend or weeklong rentals and these owners will convert to a normal rental eventually.
Maybe some percentage of Airbnb owners could not or did not apply for the lottery in time.
I’ve no idea how savvy all Airbnb owners are and how on top of city regulations they are staying. In other cities, many report a lot of unlicensed airbnbs so it’s possible that many just didn’t apply. That’s okay they’re now unlicensed and illegal.
But perhaps some couldn’t apply.
This is a factor I really suspect might have led to the disappeared Airbnbs – and that is the single host, single permit requirement. The host doesn’t have to be the owner but if you own 5 units, you would need to delegate host to 4 other people.
What that means is, businesses that hold large numbers of Airbnbs can’t apply for all their properties without finding warm bodies to “host” each property. From insideairbnb.com, there are a lot of these – here are some of the top hosts in San Diego.
For both these cases, owners that didn’t or couldn’t apply, they’re going to have to figure out what to do. One option is to convert or sell, the other is to workaround or continue to operate illegally.
If they choose to convert to LTR or sell, yay, that’s what we want.
If they choose to workaround, they’ll have to find a lot of warm bodies to “host”. If they choose to operate illegally, detection and enforcement becomes very important.
Detection and Enforcement
Detection is hard because Airbnb does not share addresses publicly, however the city shares data on the permitted Airbnbs, so residents can check if a local known Airbnb is permitted. However, there are mechanisms for Airbnb to share data with the city to track occupancy rates, that’s one way the city could detect a rental operating illegally.
In other cities, Airbnb has agreed to delist rentals that are reported to them by the city. To my knowledge, this is under negotiations and has not been agreed to in San Diego. This is the only enforcement mechanism that has a good chance of working.
In cities where the Airbnb owners are simply fined, they often just keep on operating, because the cost of the fine barely affects the profitability of the Airbnb.
I was hoping the lottery would lead to everyone applying and then 50% getting denied. However, less than the expected amount applied. I was originally disappointed but after some thought, this is not actually a bad outcome.
Hosts had to get a license before applying for the lottery, and it seems not enough Airbnb hosts found a legal way to get licensed. That means that they are not legal to operate now and we need to enforce this.
Is it possible that it was no impact really and there just weren’t that many whole home airbnbs? Perhaps, but the industry group San Diego Short Term Rental Alliance (SD STRA) has just sued the City of San Diego over the ordinance.
They would not be suing, if there was no impact. In their ordinance, they bring up the issue of requiring a person, not an LLC to host each property, which points to this being the regulation that affected them the most.
There were also other ridiculous things stated in the suit, such as the claim, and I shit you not, that low income people of color are losing beach access because they can’t come to these insanely expensive coastal Airbnbs. So I honestly wonder how far it will go, but they are a powerful group with industry backing so my guess is they know what they are doing.
So what’s next? Well, I’m going to watch a few things in the new year:
- The total number of airbnbs listed on InsideAirbnb to see if they are dropping.
- The outcome of the lawsuit STRA filed against the City of San Diego.
- The plans for enforcement that City of San Diego puts into place.
All is not lost since fewer applicants to the lottery still means fewer whole home Airbnbs licensed to operate in San Diego. In fact, even fewer are licensed to operate than we expected, since they have not maxed out the available licenses. As long as appropriate enforcement takes place, this means more homes for San Diegans to live in.
Disclaimer: I’m an idiot first time home buyer. I’ve never taken an econ class in my life. I’m just sharing what I see and learn as it happens. I am 100% certain I will get things wrong, so don’t take any of this as the golden truth.