Airbnb isn’t killing hotels, after all
Much as Uber and Lyft are transforming the taxi industry, Airbnb is transforming the lodging industry. Airbnb connects hosts to guests. Hosts can rent out anything from a couch to an entire house to guests. The company collects a small fee from both sides of the transaction.
Airbnb has been a revenue generator for property owners. It has allowed them to rent out spare rooms they were not using. Landlords also have been able use Airbnb to put second homes into commerce as short-term rentals.
Just as the taxi industry has tried to regulate Uber and Lyft out of existence, the hotel industry has taken steps to do the same to Airbnb. However, some new numbers from the Chilton REIT team show that Airbnb is not the hotel killer the hotels themselves apparently think it is.
Chilton found that Airbnb did not reduce the business of hotels, but actually “grew the pie” and gave travelers more options.
A more qualitative analysis also supports the conclusion drawn from the Boston University study. The existence of Airbnb supply does not dictate that it is directly competitive with hotel supply. Though Airbnb and hotel REITs compete for the same broad travel demand pool, it is more an instance of growing the “pie” rather than taking a bigger piece. Airbnb travelers tend to travel in groups, stay for longer, and be more price sensitive than the typical hotel guest, suggesting they are likely seeking a different experience than they would get during an urban, business-focused hotel stay. This is supported by 30-40 percent of Airbnb travelers reporting they would not have taken their trip if it were not for Airbnb. Additionally, in most cities, existing hotel supply does not overlap with the housing stock geographically, which has led to 76 percent of Airbnb listings located outside of hotel districts . In contrast, most hotel REITs derive a majority of their business from corporate transient demand in urban business districts.
This suggests that cities that want to increase tourism should consider allowing Airbnb to operate. There is a market for budget-conscious travelers that Airbnb allows cities to capture. This results in higher earnings for businesses and higher tax revenue for cities. Finally, given the fact that most Airbnb listings are outside of hotel districts, this could bring tourist dollars to other parts of a city, rather than concentrating them downtown.
Where Chilton found that Airbnb did have an impact on hotels is in the industry’s ability to enact peak pricing when rooms fill up. The hotel industry calls it “compression nights.” The availability of Airbnb options have reduced the number of compression nights, though the long-run effect on the hotel industry should be limited.
According to Wells Fargo research, compression nights tend to make up about 5-10 percent of nights, but account for 7-13 percent of annual room revenue. […] However, the complete erosion of compression nights is not a near-term threat. Using nights when market occupancy exceeds 95 percent as a proxy, total compression nights have continued to grow in the top 25 U.S. hotel markets despite the growth in alternative supply. By the end of 2014, there were almost 95 percent more compression nights than during the prior cycle peak in 2007. Even in a worst case scenario when all compression nights are reduced to “normal nights” due to Airbnb’s competition, the damage would be limited to only 2-3 percent of revenue.
This is a clear win for travelers. Just as competition results in better service and lower prices in almost every other industry, Airbnb is creating it for the lodging industry.
Airbnb now is planning to roll out services for business travelers, which will allow employees to expense their Airbnb bookings directly to employers. The early indications are that businesses are using it more for longer-term travel and temporary housing, rather than for short conference and meeting trips.
The hotel industry was able to adapt to bed and breakfasts. This study proves that the hotel industry should be able to adapt to Airbnb, as well, which will be a win-win for property owners, hotels and travelers. Cities looking to increase their revenue from tourism should embrace Airbnb.
