Student Corner: Regulating Short-term rentals in the Staycation Future?

Community and Economic Development – Blog by UNC School of Government

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Student Corner: Regulating Short-term rentals in the Staycation Future?

By CED Program Interns & Students

Published July 17, 2020

While COVID-19 is changing many facets of our world, one thing that seems unlikely to change is the proliferation of short-term rentals (e.g. Airbnb, VRBO, etc). With current interest in local travel outstripping 2019, pre-existing questions around if and how to regulate these businesses are only going to be more urgent. This post examines the current state of the short-term rental market and note the ways that COVID-19 and the economic downturn may, and may not, influence the conversations around short-term rentals for local governments.

Short-term rentals (or STR) have proven a force to be reckoned with in the hospitality sector, upending the traditional hotel/motel product with an explosion in STRs. And while that upending has been a welcome phenomenon for travelers facing an ever-widening selection of vacation housing options at reduced prices[1], there has been an opposite reaction from housing advocates, economists, and local governments.

The effects of short-term rentals on local housing markets have become a topic of significant study; studies have identified an increase in Airbnb listings as a causal mechanism driving long-term rents upwards, and that landlords are shifting their units away from long-term rental to short-term rentals. Concerns around the negative externalities of transient residents in more traditional residential neighborhoods have been widely cited. Many major cities have begun to regulate Airbnb type rentals, limiting STR to primary residences only, and requiring that these properties be registered and licensed. These concerns have begun to crop up in smaller communities as well, as evidenced by Asheville’s widely publicized struggles to regulate STR, or New Bern’s discussion of restricting STR locations[2].

In the initial onset of COVID-19 shutdowns and stay-at-home guidance, the hospitality industry as a whole effectively ground to a halt. Virtually all hotel bookings were cancelled and occupancy dropped to 26% and lower; and in many cases state governments placed moratoriums on short-term rentals. The outlook seemed bleak. But as states have begun to open up and ease stay-at-home restrictions, Airbnb and other short-term rental outlets are seeing a significant surge in bookings, to the point where interest in trips is now outpacing 2019. And while traditional hotels have also seen an uptick in demand, their occupancy and booking activity remains well below historic rates.

Industry representatives from STR companies all point to the same set of factors in STR’s remarkably quick recovery: An increased desire to vacation within driving range of their homes – which favors smaller destinations as opposed to more traditional vacation markets such as New York, Miami, etc. – and public perception of STR offering as ‘safer’ and ‘cleaner’ compared to traditional lodging options. In essence, short-term rentals are recovering rapidly because STR offerings are present in the smaller destinations that are being favored by travelers in the COVID era, and STR’s service model is perceived as ‘safer’ for travelers over traditional lodging products.

This resurgence in demand for short-term rentals is occurring against a backdrop of significant economic challenges for local governments and for communities, particularly those employed in high-contact and lower-wage industries. These economic challenges increase the urgency and significance of discussions around STR regulation, for a number of reasons:

• The conversion of long-term rental properties to short-term rentals was already placing upward pressure on rents; the increasing demand for STR products in smaller communities may further impact vulnerable communities and exacerbate concerns around access to affordable rental housing and abilities to pay rent.
• Many communities rely on tourism revenue that has been severely curtailed due to COVID-19. With hotels slower to recover, promoting the growth of STR offerings may help generate much-needed tourism traffic (and thus revenue flow) for smaller communities.[3]
• As the nation walks the fine line of a major recession, many homeowners (especially those who are housing-cost burdened) will face challenges making their home payments. Airbnb and other products have (since their inception) emphasized their value in providing supplemental income to homeowners. Some have suggested that STR companies are positioned to actually grow in a recession, as consumers seek out lower-cost travel lodgings and hosts look to secure additional income.
• In areas where occupancy taxes represent a significant portion of revenues for local governments, formalizing the tax regime for short-term rentals may be an increasingly important step in ensuring revenue flows[4], especially as traditional hotels fall behind Short-term rental companies in public perception.

These are not new considerations, and local governments will be familiar with them. What is ‘new’ is that these issues may be increasingly common in areas not traditionally considered ‘tourist destinations,’ as consumer preferences seem to be trending towards destinations closer to home and distanced from major centers. This is a rapidly changing time, and it is uncertain to what degree these travel preference changes will be permanent, or what the economic outlook will be like in a month (much less in a year). However, as local governments tackle the challenge of managing the effects of COVID-19, it is worth remembering that an ‘old issue’ like Airbnb has not gone away with the arrival of ‘new issues,’ and may be deeply tied to the future of some communities.

For information on the regulation and taxation of STRs, check out this book authored by the School of Government’s Rebecca Badgett and Christopher McLaughlin, which provides an analysis of the legal and practical aspects of local government regulation and taxation of short-term rentals and by offers advice on best practices.

Ethan Sleeman is a second-year Master’s Student in the UNC Department for City and Regional Planning, and a Community Revitalization Fellow at the Development Finance Initiative (DFI). His research focuses on affordable housing and neighborhood opportunity issues.

[1] Bivens, J. The economic costs and benefits of Airbnb. Economic Policy Institute. Washington DC. 2019. Page 9.

[2] North Carolina’s legal framework for regulating short-term rentals is complex and could be the subject of multiple blog posts alone. This blog post does not discuss the particular processes and options for regulating STR in North Carolina; instead, it focuses on the considerations local governments may make when discussing potential regulations. See NC General Statute 42A-3, and commentary here.

[3] The degree to which tourist spending patterns will change in the wake of COVID is uncertain, but may be impacted.

[4] North Carolina occupancy taxes are collected and remain at the county level, and are individually legislated. Occupancy taxes are assessed on Airbnb listings in North Carolina. In North Carolina, with few exceptions, occupancy taxes are administered by a local tourism development authority, rather than as general revenue. For more, see here. As such, this specific point is less salient in North Carolina than in other communities; however, the loss of occupancy tax revenue does have an effect on tourism support, which will affect many communities in North Carolina dependent upon tourism for economic stability.