Disney World closes, ski resorts shut down, Hawaii quarantines all visitors , and travel comes to a screeching halt. What happens to the “sharing economy” when people stop sharing? What does this mean for Airbnb and companies like WeWork? For almost 60% of people that utilize short term rentals 75% of their mortgage is paid for by the rental income.
The Real Estate Sharing Economy Background
Here is an interesting statistic by Homeaway: “ Fifty-nine percent of subscribers get at least 75 percent of their mortgage covered by the rental stream.” For almost 60% of people that utilize short term rentals 75% of their mortgage is paid for by the rental income. This paints on ominous picture for thousands of homeowners. How will the lack of income filter through the sharing economy?
The economic shock to short term rentals has become apparent when many cities literally “turned off the lights” banning all short-term rentals instantly at the peak of the spring break rush throughout the country. This scenario played out in cities like Orlando where Disney shut its parks for the longest time in history and Colorado where all the ski resorts were closed.
The owners of the nightly rental properties have seen their income go to zero (actually negative as they had to refund their bookings) overnight. This trend will likely continue for the next 4 months in many areas depending on how quickly the virus gets under control. Cities with large dependence on conventions (like Denver) will feel the pain even longer.
Will Airbnb / VRBO / HomeAway become obsolete?
Paris has 100,000 empty homes and 100,000 second homes, according to the mayor’s office, fueling a sense of social injustice. One study of Airbnb in a Lisbon neighborhood between 2015 and 2017 found it looked less like a sharing economy and more like a buy-to-let craze, with 99% of short-term rentals marketed all year round. “Short-term rentals have had a disastrous impact on cities’ rental markets,” McGill University’s David Wachsmuth told The Intelligencer last month. Will a post-Covid-19 society really want that back?
From Paris to NY and cities of all shapes the sharing economy has morphed into a business as opposed to the original intent which was to allow someone to make something a little extra. The Coronavirus has exposed a major flaw in the business model that running a nightly rental like a business can leave owners severely exposed when the sharing economy stops. Mortgage payments and other expenses add up quickly when their is no revenue!
What happens now?
The sharing economy is in for a rough ride until 2021. International travel will be severely restricted for the foreseeable future. For example to enter China, there are now limited flights and when you arrive there is a 14 day mandatory quarantine. In places like Australia no foreign travel is even permitted. This will force the industry to focus on domestic travel which considerably limits the pool of prospective renters.
The Coronavirus has also exposed another flaw in the model that cities around the globe will address quickly. How many people want to live next to a full time nightly rental that hosts visitors from not only across the globe, but the entire country? After the virus, there will severe restrictions on nightly rentals as full-time residents revolt against the industry. This will include limits on locations, quantity of rentals, and taxes on rentals.
The WeWork model
WeWork also focuses on the sharing economy on the commercial side. The premise is that you don’t need to buy or lease an office, you can rent one for when it is needed. WeWork takes out long term leases and then “sublets” to various office users from a small business that might need a handful of desks to a single entrepreneur that needs a place to work from. The model was already struggling as the cost of entry was low and growth was slowing, then Coronavirus hit and the model blew up. The businesses that rented the desks no longer needed them because everyone was working from home. The model has been proven that an office is not a necessity and the WeWork model will be drastically altered with tepid demand at best when the economy recovers.
The Coronavirus has highlighted that there is a cost for tourism. Take a city like Aspen Colorado, there are 25 hospital beds and yet they have over 1.5 million visitors annually. The only way Aspen could handle the pandemic was to close down the ski mountain, stop all nightly rentals, and force non residents to leave. What happens if the next round of the pandemic happens over the Christmas holidays? How could Aspen handle any health event with 25 beds. To handle the capacity, the hospital would need 200 to 300 hundred times the capacity.
Who pays for the infrastructure needed for the new paradigm we are living in? The residents are not going to step up to the plate; businesses like nightly rentals will be on the hook as they are benefiting from the increased tourism. This is just the beginning of radical changes in the sharing economy; look for cities across the country to move aggressively with new laws and taxes coming down the pipe. Do you think Airbnb and VRBO will survive the virus?
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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