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Leveraging Airbnb: San Diego Tries to Balance Tourism and Living Spaces

Tensions have erupted in urban neighborhoods where homeowners complain about Airbnb rentals being used for parties.

by Lori Weisberg, The San Diego Union-Tribune / June 15, 2016
Airbnb listings in San Diego Screenshot taken from Airbnb

(TNS) — As Ryan Scott maneuvered his Infiniti through Ocean Beach to check in on one of his multiple vacation rentals, a “For Rent” sign caught his attention. He slowed the car and hungrily eyed the nondescript home.

“I’m looking at that sign and I’m thinking, that’s an opportunity that would do great as a short-term rental,” he said, grinning.

With a dozen San Diego dwellings he either owns or sublets, plus 10 more that he manages, Scott confesses that he has become addicted to the intoxicating short-term rental revenues he says his properties have been generating over the last few years. He’s become so enamored with the vacation rental market that he has even thought about one day quitting his lucrative day job at IBM to grow what is now a side business.

Like thousands of others, he’s capitalizing on e-commerce to monetize homes, apartments and condos for brief stays by travelers instead of catering to traditional renters on month-to-month or year-long leases.

“The reality is you’re leaving money on the table if you’re renting to a long-term tenant,” he said.

Scott, 33, represents the extreme end of the continuum of short-term rental operators who are redefining the vacation rental industry via the home sharing economy popularized by HomeAway and online behemoth Airbnb, valued at $25 billion.

Owners of principal residences and second homes are using the platforms to help cover mortgage payments while still being able to house the occasional visiting relative. Retirees with wanderlust are making extra cash by filling their unoccupied properties while traveling the globe. Entrepreneurial renters have found a way to supplement their incomes with part-time tenants — with or without their landlords’ permission.

While tourist destinations like San Diego have for decades been a magnet for conventional vacation rentals, the enthusiastic embrace of 8-year-old Airbnb and the ease of using it and other online venues have led to unintended consequences.

Tensions have erupted in urban neighborhoods, most notably in beach areas, where homeowners complain about raucous parties that interrupt their sleep and strangers invading their communities week in and week out. Critics contend that short-term rentals — homes, apartments or granny flats — are eating into an already tight rental market. And the hotel industry at the national level has lobbied for heavier regulation of an industry that it believes is cutting into its market share.

In San Diego County, listings on Airbnb have grown at least 60 percent annually over the last several years, according to a Union-Tribune analysis of data provided by Airdna, a Santa Monica research firm that tracks activity on the rental platform. HomeAway, which also operates VRBO.com, said it saw listings in the county increase 24 percent from 2013 to 2014 and 17 percent the following year.

In just the last year, some 3,900 Airbnb hosts in the city of San Diego welcomed 185,000 guests, the company said in a recently prepared report. Worldwide, the number of homes listed for rent on Airbnb has mushroomed to 2 million in more than 190 countries.

It’s a meteoric ascent from an idea that germinated in 2007 when two of the company’s founders rented out air mattresses in their San Francisco apartment during a design conference to help make the rent.

Airbnb executive David Owen rejects the notion that the company’s home sharing business is increasingly dominated by commercial landlords who are upending San Diego’s rental market and altering the character of residential communities.

“Since we have grown and matured, it’s safe to say an overwhelming majority of activity on our platform doesn’t fall into the category of the traditional vacation rental market, meaning second homes and investment properties operated for a substantial portion of the year,” said Owen, the company’s head of policy strategy. “Almost 70 percent of listings in the city of San Diego are rented fewer than 90 days per year.

“What’s been a problem for San Diego is that the law is unclear. Just adopting clear rules does have a significant effect on clearing up misconceptions but also change the behavior of the outliers, those problem cases. ... You can still have jerk neighbors who aren’t short-term rental users.”

While cities throughout San Diego County have adopted varying regulations governing such rentals, the city of San Diego still has nothing in its municipal code that clearly defines a short-term rental, although there are regulations that govern more traditional bed-and-breakfasts, board-and-lodging dwellings and rooming houses.

Some cities, like Santa Monica, New York and Berlin, have responded to the concerns by imposing sharp limitations on whole-home rentals, while many others are much more permissive.

More than a year after launching multiple public hearings in hopes of adopting specific rules, San Diego expects to formally revisit the matter this summer, which will no doubt once again draw standing-room-only crowds of vacation hosts squaring off against their critics.

In the meantime, homeowners in more heavily impacted neighborhoods say they have reached the boiling point, calling on the city to outlaw what they call “mini hotels” operating illegally in the city’s single-family neighborhoods.

“If I could convince my wife to move, I’d move in a heartbeat, and this is a home I worked for years to pay for,” said Pacific Beach resident Tom Coat, whose three-bedroom Craftsman home sits next door to a house that he says is rented much of the year to short-term visitors. He also helps lead a coalition of homeowners calling themselves Save San Diego Neighborhoods.

“The owner tries to screen his renters and work with me, but people are on vacation, they put the kids to bed, and crank up the hot tub. Our night sleep is gone. I never had this problem with long-term renters.”

High-Stakes Investment

“The units are located in one of the best areas in Mission Beach and have their own patio that has a BBQ and seating area. You will be a three-minute walk to the beach/ocean, where you can relax in the sand, surf, or just enjoy the gorgeous sunset every night on the boardwalk.”

A block from Mission Bay, the triplex on Island Court is, as Ryan Scott puts it, “the one that started it all.”

His foray into short-term rentals started modestly about six years ago when he was frequently traveling internationally for his technology consulting job at IBM and decided to rent out his leased one-bedroom condo in downtown San Diego when he was away (“It wasn’t 100 percent in line with the HOA rules.”) He quickly discovered that he could equal, if not exceed, his $1,500 monthly rent.

Eager to purchase a home in San Diego that they could still rent to a long-term tenant in case they had to move, Scott and his then girlfriend initially looked at inland properties. Ultimately they settled on the beach because “surprisingly, it was a better idea to buy a million-dollar triplex close to the beach than a $400,000 duplex in North Park.”

While he initially used what he calls an “old-school” property manager, Scott eventually took over managing the triplex via Airbnb, bringing in $8,000 a month for the two larger units that easily covered his $6,500 monthly mortgage while he and his girlfriend lived in the one-bedroom unit in the back.

That was four years ago. He later purchased another triplex in Mission Beach, a community with a long history of vacation rentals, although the three units he acquired were occupied by long-term renters.

Little by little, his business as a serial short-term host expanded as word-of-mouth spread. He cut a deal with one neighbor to rent the owner’s fourplex at an agreed-upon monthly rate and he’d be allowed to sublet it to short-term renters, capturing any revenue over and above his monthly rent.

“I focus more on owners who have been renting their properties long term and may not realize the capability of making more money as a short-term. They’re nervous about who’s coming to their house, but Airbnb has fixed much of that,” said Scott, who rents in Little Italy and also operates Surfcomber Vacation Rentals. “They get what they want and I get what I want and the tourist or the traveling nurse gets what they want.”

He still has a voracious appetite for properties he can convert to short-term vacation rentals and has started raising outside funds from private equity investors to “opportunistically pick up properties that are undervalued based on their current use as long-term rentals.”

Scott falls into the still relatively exclusive category of what Pennsylvania State University professor John O’Neill calls a “mega-operator.” In a report he prepared this year for the American Hotel & Lodging Association, O’Neill looked at Airbnb activity in a dozen major cities, including San Diego, which collectively saw monthly host revenue surge from $78.1 million in September 2014 to $124.3 million last September.

Using data that Airdna scraped from Airbnb’s website for full-unit listings (excluding shared rooms), O’Neill concluded that the so-called mega-operators who rent out three or more units represent just 7 percent of hosts in the 12-city sample but generated 25 percent of the revenue during the year-long period. Those percentages were almost identical for the city of San Diego, O’Neill said.

“What it tells me is that Airbnb has become a platform for commercial operators who are not only affecting neighborhoods, but they’re also not abiding by the safety and security standards that hotels follow,” said O’Neill, director of the Center for Hospitality Real Estate Strategy at Penn State.

At the time the report was released, Airbnb dismissed it as a “specious study intended to mislead and manipulate.” In its profile of San Diego that Airbnb compiled, it does not identify the proportion of its hosts who operate more than one unit, although 65 percent of listings are a whole home or apartment, as opposed to a private room or shared space.

HomeAway official Matt Curtis remains unconvinced that vacation rentals are eating into the traditional lodging market.

“A lot of the people opposed to the concept of short-term rentals think people would otherwise stay in a hotel, and the data doesn’t necessarily show that,” said Matt Curtis, HomeAway’s senior government relations director. “When we did some surveys in San Diego, two-thirds of the community responded favorably to the idea of ensuring that a certain amount of traditional home stock be for people from San Diego looking to rent homes, for example, when remodeling or who are victims of a natural disaster or going through a divorce.”

Even as San Diego’s hotel industry enjoys post-recession peaks in occupancy and revenues, local hoteliers believe that the rising popularity of home sharing has started to intrude on its business.

“While we realize it’s competition, it should have the same kind of regulations as the hotel industry and we hope the guests will look long term to our industry for a more guaranteed stay, with the amenities and prices they pay,” said Joe Eustice, vice president of the San Diego County Hotel-Motel Association board and general manager of the Wyndham Bayside downtown. “What’s changed is that no one in the past was planting in people’s minds that you can make extra money by advertising your house online.”

Neighbors Fight Back

“Conveniently located just 5 blocks to the beach in a quiet family neighborhood, this newly remodeled 3 bedroom / 2 bath Pacific Beach home offers guests a private pool and spa, wonderful outdoor living areas, and brand new furnishings throughout. This home is a seamless blend of charming beach accommodations and the warm comfort of home.”

It is also the bane of Ronan Gray’s and Kathy Miller’s existence. The owners of a four-bedroom, two-bath home on Opal Street since 1999, the couple says it’s only since 2014 when the home next door was sold to an out-of-town buyer did their troubles begin.

They complain of late-night check-ins, loud music and gatherings in the backyard that start after the local bars close at 2 a.m. and occasional profanity that is within earshot of their three children.

“I’ve taken to videotaping my encounters and will talk over the fence and say you’re in a residential neighborhood, I have little kids here, and I get everything from, ‘I paid a lot of money to rent this place and can do whatever I like’ to much ruder responses,” said Ronan, an engineer and co-founder of Save San Diego Neighborhoods. “Last summer, we couldn’t let the kids play in the backyard because of the profanity.”

Homeowners in Pacific Beach and other communities have sought to broadcast their discontent by prominently placing signs in their yards that read, “Neighborhoods are for neighbors, NOT vacation rentals.” They also say they have reached out to the city and police, as well as the owners of the offending properties and the companies that manage them, to little effect.

As debate surrounding vacation rentals intensified, a coalition of homeowners formed the Short-Term Rental Alliance of San Diego to protect their interests, similar to an effort launched in Los Angeles, which is also weighing potential new restrictions on vacation rentals.

“I don’t do this because I love meeting people from around the world. I do it because it’s financial,” said Belinda Smith, one of the alliance organizers who rents out her south Mission Hills home on a short-term basis. “Why not take advantage of the single biggest asset you own? Just because someone else doesn’t like strangers coming and going in their neighborhood, it’s not enough to outlaw this activity.”

Jonah Mechanic, a coastal area property manager whose company, SeaBreeze Vacation Rentals, manages the Pacific Beach house on Opal, doesn’t disagree that there can be the occasional “bad apple” among his renters, but insists that his operation is always on call and tries to closely vet short-term tenants.

“We have reacted to complaints from Ronan but have never needed to evict anyone,” said Mechanic, whose 10-year-old company manages inventory from Mission Beach to Huntington Beach. “I will say we’re not perfect and we are working on ways to better monitor things. We’re going to buy 10 Wi-Fi enabled noise monitors that just came out where you can set the accepted decibel level. If it’s exceeded after a certain amount of time, it pings your cellphone, and hopefully, we can get to the property before it becomes an issue for the neighbors.”

Texas real estate developer Rami Amir said he purchased the home next to the Grays, in part, to have a place where two of his three children could live should they be admitted to UC San Diego, where they are hoping to attend college. When the family visits San Diego, it’s also a convenient place to stay, he said.

“I pay my vacation rental company to control the environment and to make sure there are no late parties and not a lot of noise and people,” Amir said. “I know a neighbor has posted signs and given some of our tenants a very hard time. It makes people very uncomfortable and we’ve had cancellations of rentals because of that.”

Hostile reactions to vacation rentals aren’t unique to the beach communities. Homeowners in neighborhoods like University Heights, North Park and Mission Hills have raised concerns as well.

The anger and frustration is palpable in Andy Hockman’s voice as he recounts the late-night hot tub parties, occasional marijuana smoke that wafts into his yard and the noise from vacationers who he says have tormented his family for the last year. He says he’s tried on a number of occasions to reach out to the city’s code enforcement division but has received no satisfaction.

Rather than impose restrictions limiting short-term rentals in residential neighborhoods, some San Diego City Council members have argued that a better approach is to beef up enforcement of nuisance complaints.

“With Airbnb, you have people who come every weekend and want a party and you don’t know who they are,” said Hochman, a fifth-grade teacher and father of four. “As a homeowner, it makes you tense and anxious. I’ve saved for years for my house, worked tirelessly on my backyard so my children could enjoy it, and now I have to deal with this neighbor. It’s not fair.”

Airbnb is not indifferent to the inevitable complaints that arise as a result of unruly vacationers. Late last month, it launched a new tool that allows neighbors of Airbnb hosts to contact the company directly if they have a concern about a short-term rental.

“Hosting is a big responsibility,” the company said in a blog post, “and those who repeatedly fail to meet our standards and expectations will be subject to suspension or removal from the Airbnb community.”

Long Term vs. Short Term

“Very spacious, den with a futon for an extra person to sleep. King size bed. Hardwood floors & tile. It also has a huge deck overlooking the canyon with a great breeze. 5 night min stay.”

Paul Abraham and his wife Cecilia hadn’t given much thought to renting out their South Park investment property to short-term visitors until Paul knocked on the door of their long-term tenant’s upstairs unit last spring, only to find an unfamiliar face.

“This guy asked who I was and I said I’m the landlord,” recalled Abraham, whose family lives elsewhere in South Park. “He said he was from Las Vegas with his family renting from my tenant who was Airbnb-ing it. We let our tenant stay for a couple more months while we decided to rent the downstairs short term. It did so well, we had the other guy move.”

While the couple has spent a considerable amount of money furnishing the two units, they believe their pivot to hosting short-term renters will prove more profitable. Paul Abraham said the lower two-bedroom unit brings in about $3,200 a month, where before it rented for $1,600, and the upstairs one-bedroom now fetches $2,500 a month compared with $1,300 previously.

“By the end of the year, I’ll see more revenue and that makes me happy,” said Abraham, 42. “The tenant who had been renting out our unit told us he’d basically manage the units for us while living upstairs, and I said, ‘Dream on, I can do it myself.’”

The financial calculus for guiding a homeowner’s decision to rent short-term or long is a complicated one that’s influenced by a number of factors, including the desirability of the location, not to mention the time and cost associated with managing such rentals.

Tim Riley says managing his short-term rental in Hillcrest is the equivalent of having a second job. After 10 years of renting out the four-bedroom century-old craftsman to long-term tenants, Riley realized that the rental income would no longer cover a second mortgage that had kicked in.

With his tenants unable to afford a hike in the $2,900 monthly rent, he took the plunge early this year into the short-term rental niche, charging roughly $240 a night. World travelers, family gatherings and wedding celebrations so far are helping yield a healthier return, and for now he says he’s sticking with his short-term experiment.

Properties like the Abrahams’ and Riley’s have fueled the argument that long-term rental stock is gradually being diminished as the home sharing economy matures. National University researcher Erik Bruvold, who last year studied the economics of San Diego’s short-term rental market at the behest of Airbnb and the San Diego Short-Term Rental Alliance, believes otherwise. He calculated that owners would have to rent their properties more than 138 days a year for it to make financial sense to convert them to a short-term rental.

In the city of San Diego, roughly 8 percent of Airbnb’s inventory exceeds that threshold, he found.

“I don’t see where an increase of a few hundred short-term rentals are going to make that much difference,” said Bruvold, president at the National University System Institute for Policy Research. “And it’s not clear to me you get all those back into the long-term rental market if you suddenly outlawed Airbnbs.”

Still, the debate is likely to persist as more consumers choose home rentals over traditional lodging choices and hosts continue to prosper. Scott Shatford, who founded the Airdna data analytics firm and authored the “Airbnb Expert’s Playbook: Secrets to Making Six-Figures as a Rentalpreneur,” is banking on surging demand.

“I’m focusing on how to empower other entrepreneurs running mini hospitality businesses,” said Shatford, who has listed rented Santa Monica apartments on Airbnb. “My entire focus is on the data and analytics on how Airbnb is disrupting the lodging industry and how to make wise investment decisions in this burgeoning industry.”

Data specialist Daniel Wheaton contributed to this report.

©2016 The San Diego Union-Tribune Distributed by Tribune Content Agency, LLC.