More Debate on Short-Term Vacation Rentals in San Diego

Editor: In the spirit of continuing the public discussion on short term vacation rentals here in San Diego and at the beach, we offer the following by our friend, John P Anderson, a proponent of short term rentals – whose views on this issue clearly depart from ours.

 Some Market Thoughts on Short-Term Rentals in San Diego

By John P Anderson

The topic of short-term rentals in San Diego continues to be debated and potential rules / changes to rules will be a hot topic in 2016.

After ending 2015 with a well attended Planning Commission meeting in December it looks like the next official meeting / hearing will be in late February or March at the City Council.  It is sure to be a long hearing, with hundreds of San Diegans attending and providing commentary both for and against short-term accommodations in San Diego neighborhoods.

In the meantime, I wanted to jot down some thoughts about short-term rentals in San Diego from a market economy perspective.

Serving unmet demand

Short-term rentals in San Diego (and many places globally) have grown briskly in the past 5 years.  Airbnb was founded in August 2008 and is the largest short-term rental platform today although it was preceded by Craigslist, Vacation Rental by Owner, and many other “more traditional” short-term rental uses like bed and breakfasts, room-letting, and others.

Today Airbnb has more than 2 million listings worldwide in more than 190 countries and 34,000 cities.  On New Year’s Eve 2015 the site was expected to host more than 1 million guests in a single night, up from 550,000 a year previous – nearly 100% growth in a year.

In San Diego the total number of short-term rental units in the city was estimated at 6,116 in a National University System Institute for Policy Research (NUSIPR) study released in October 2015.

This report was paid for by Airbnb and the San Diego Vacation Rental Managers Alliance which has lead some to believe it is biased. (The Union-Tribune article linked to states that the Short-Term Rental Alliance of San Diego (STRASD) paid for the study as well – I am part of STRASD and our organization paid not a cent for the study, just to clarify.)

With vested parties paying for the study this may be true although NUSIPR does studies on a number of topics in San Diego and is a credible research organization.  Regardless of intent or paying party, this study remains the most comprehensive, and I believe only, one on the subject in San Diego.

In the study a few figures stick out:

• Hotels have increased their occupancy rate and nightly room rate consistently over the past 5 years despite the growth in short-term rentals.  Occupancy increased from 68.4% in 2010 to 76.7% in 2015. Over the same period revenue per available room, a figure that measures both occupancy rates and average room rates, increased from $84.72 in 2010 to $103.52 in 2014.  It would seem short-term rentals are not hurting hotel business and are a complementary offering, at least to date.

• Total short-term rentals now comprise a maximum of approx. 1.1% of total housing stock in San Diego.  This is based on a total of 6,116 short-term rentals per the NUSIPR study and a total housing stock of 518,300 per the American Community Survey 5-year estimate (2010-2014) .  This estimate treats all short-term rentals as whole unit rentals although many are a room in a unit or the use of a primary home on a part-time basis.  I’ m using the total number to be conservative and over-estimate the total impact on housing stock.  6,000 units is not a small number, although it is much smaller than the number of vacant units in San Diego.  Per the same ACS study there are 39,221 vacant units in San Diego – approx. 1.6% of homeowner occupied units and 4.2% of rental units.  A similar question could be posed regarding vacation homes or second homes owned in San Diego, I do not know the figure for such property holdings here.

• Short-term rentals are blunting the ability of hotels to increase room rates during high-demand special events.  The Economist recently wrote about the impact of increased short-term rental supply around large special events like the Olympics or the annual Berkshire Hathaway shareholder meeting.   Traditionally, hotels have been able to greatly increase rates during high-demand events but more recently the higher prices have incentivized property owners to add to the existing short-term rental stock.  In San Diego this can be seen in the increase of short-term rentals around Comic-Con.  Interestingly, as reported by Voice of San Diego, “It turns out getting Comic-Con to stay in town for 2017 and 2018 is more about discounted hotel rooms than the size of San Diego’s Convention Center.”  Spending millions of dollars to expand or renovate the Convention Center gets much press and attention when perhaps we could secure the future of Comic-Con by simply encouraging local homeowners to house attendees or take a full paid vacation to Hawaii for the weekend.

• Short-term rentals keep more money in local pockets. Per the same Economist article, “more room rentals should also mean that more money flows directly to residents every time small cities stage a tourist-magnet event. (Airbnb passes on around 85% of guests’ total payments to hosts, whereas hotels spend just 30-35% on labour.)”  The NUSIPR study put the total rental revenue to property owners at $110M and the total economic impact, including government tax receipts, restaurant spending, etc. at $285M.  If spread evenly across the total number of short-term rentals that means an economic impact of $46,599 per short-term rental property in San Diego, with $17,985 going to the property owner in direct rental payments.

• San Diego is an expensive place to live. This is due to many factors and not a new phenomenon.  For example, in the Morena Boulevard area a recent plan to add units (read: increase population density in a manner consistent with housing patterns in an urban portion of a major city rather than suburban land use) would have added 4,800 units to a blighted area near I-5.  It was widely panned by local residents and scrapped.  San Diego does not have to build more housing at all, but if we do not it is not logical or reasonable to think that housing prices will not increase.  San Diego is a very desirable place to live and priced at a discount to other California hubs like San Francisco.  Static housing stock and increased demand and/or population will yield increasing housing prices and rent costs.  Short-term rentals with a total of 6,116 units in the city pale in comparison to the anti-build / anti-growth / anti-height / anti-density sentiment common in many areas of the city.

• Relative to income levels, the costs of rent in San Diego have fluctuated both up and down in recent years.  Per an October 2015 article in the Union-Tribune 55% of San Diego renters are “cost-burdened”, spending a third or more of income on rent.  As shown in the image below, this ratio is about the same as in 2007 – before Airbnb existed and prior to the rapid growth in the number of short-term rentals. The ratio has been both higher and lower than the 2015 figure in recent years.  Interesting sidenote from the article: “In Miami, 66 percent of residents are paying a third or more on rent. In Detroit, because of low incomes, more than 65 percent of renters are cost-burdened”.  Both low income levels and high housing prices can result in a high percentage of income going to rent. Data and image from Union-Tribune (click for full article)

• There is a finite demand for short-term rentals.  Although short-term rentals are not new in San Diego and have existed for many decades in some areas of the city – particularly beach areas like Mission Beach – the recent growth has been fueled by new techonology and trends.  Ubiquitous smart phones, social media and the internet connecting the world market, and increasing global travel are all major causes.  At the onset of a new trend growth can be explosive but will decline over time.  At some point the supply will meet, or exceed, demand.  It is hard to predict what the total demand for short-term rentals is.  Per the NUSIPR study, short-term rental room nights totaled 456,000 in 2014-15 compared to 11,300,000 total room nights for hotels and motels.  Short-term rentals were an estimated 4% of the hotel total night stays.  Perhaps this ratio could reach 10%, maybe even 25% – it’s hard to predict but seems unlikely that short-term rentals would entirely replace hotels, or even rise to an equivalent level.  My best estimate is we are relatively close to meeting demand – 5% or perhaps 10% of total hotel nights would be my estimate.  This is based on discussions with other short-term rental owners / hosts and I have not found a study or formal estimate of this.  Especially over the past few months I’ve spoken to many hosts / owners that have seen a large drop in occupancy and/or reduced nightly rates.  This is partly due to the slower winter season but likely also due to increased competition as the number of short-term rental units have increased.  Given the low vacancy rate and rising rent levels for rental units in San Diego and the reduced labor hours, taxes, and hassle to operate a long-term rental vs. a short-term rental I would not be surprised to see some short-term rentals being converted to long-term rentals.  It may not be a trend today, but whenever the demand is met (or approached) each unit entering the short-term rental pool will reduce the revenue per unit for the short-term rental market.

The future for short-term rentals in San Diego is cloudy and could go any number of ways – we’ll have to wait and see.  To date, short-term rentals have provided a meaningful economic opportunity for many property owners in San Diego.  For the reasons above and many others, I hope to see this opportunity continued.

At the same time, non-economic factors remain important and seem the cause of the bulk of the disagreements between those supporting and opposing short-term rentals.  The OB Rag has written most about this topic and I think best presents the major issue dividing people – that of community character.  Community character is hard to define and it is difficult to measure social impacts or make comparative examples.  That doesn’t make it unimportant – the “feel”, personality, or culture of a place is often the most enduring and compelling attribute it can possess.  I’m sure that qualitative factors will continue to play an important role and I hope the prominent one.  Economically and quantitively I see short-term rentals as very much to the good of individuals (hosts and guests / owners and customers) and the region at large.

The impact of short-term rentals on our communities is less clear and should be well considered.