The city that never sleeps is becoming the city where you can't sleep in an Airbnb (ABNB +3.08%).
New York City passed strict regulations on Airbnbs and short-term rentals last fall, effectively banning them. According to the new rules, short-term rental hosts must be present during the stay, and cannot rent full units. They can also only have two guests maximum, and the hosts must register with the city.
Regulation has long been seen as the biggest peril Airbnb faced, and the NYC ban may be the most significant case yet as the city was one of the company's biggest rental markets. Airbnb fought the regulations in court, but ultimately did not prevail.
However, nearly five months after they went into effect, the changes they've wrought might be surprising to some. Let's see why.
Image source: Airbnb.
You can't stop Airbnb -- you can only hope to contain it
As you might expect, Airbnb rentals in New York City have gone down substantially since the ban began to be enforced. According to data analytics company AirDNA, demand for short-term rentals in New York City fell 46.1% in December.
That might have been predictable, but that demand didn't just disappear. Like water, it flowed to the closest available location -- across the river to New Jersey. Of the top 50 short-term rental markets in the U.S., the Jersey City/Newark market was far and away the biggest gainer in December, with demand jumping 53.7%. AirDNA described the effect of the NYC ban as "staggering."
It's important to note that the New York City market is significantly bigger than the Jersey City/Newark market, but the transfer of demand from New York to New Jersey shows that the regulations have had less of an impact on Airbnb's business than expected. Airbnb guests are willing to put up with the hassle of staying just across the river in New Jersey to visit New York, a sign that many NYC visitors still aren't willing to just stay in a hotel if there aren't any Airbnbs available.
Another way Airbnb is winning
The short-term rental boom across the Hudson isn't the only economic effect the NYC ban has had. Hotel room prices have also spiked in New York.
According to data from Trivago, hotel prices have risen roughly 10% on a year-over-year basis since the ban was implemented. While that isn't an exorbitant price increase, the decreased supply of short-term rentals is likely to push prices higher -- especially when hotels might be at capacity -- or move some visitors to look elsewhere, like New Jersey.
Additionally, there's evidence that some short-term rentals have moved underground to sites like Craigslist, essentially operating as a black market, putting guests and hosts more at risk of losing money or being the victims of crimes.
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Key Data Points
What it means for Airbnb investors
Airbnb has reminded investors in the past that no single market is material to its business, as the company has millions of listings in locales all around the world.
Even at its absolute worst, the NYC ban wasn't going to be much more than a speed bump for the company, but the flight to New Jersey and the trend of listings going underground shows that demand for Airbnbs remains strong regardless of the local laws.
Notably, the New York ban is also unique on the regulatory front. Short-term rental regulations have evolved since Airbnb essentially created the industry in 2008. On the company's Q3 earnings call in November, CEO Brian Chesky -- answering a question about regulations -- asserted that 80% of the company's top 200 markets have regulations that are generally workable and allow Airbnb "to continue to grow and thrive."
New York is now an exception to that rule, but the point is that regulation isn't as big of a threat to Airbnb as it might seem, and guests are willing to make alternate solutions work when their first choice is no longer available.
Airbnb bears like to point to headlines about an "Airbnbust" or the NYC ban, but the reality is that the business is on solid ground, and it isn't going to experience a dramatic collapse.
The shares hit their highest point since July on Friday, and there's still upside for the stock as the travel market expands and Airbnb continues to add new listings. The controversies around it are likely to continue, but don't mistake negative headlines for the failure of the business.
