Disruption in the making?

Last summer two French musicians landed in Rhode Island for the final stint of a six-week-long trip across the United States. The duo traveled from Nashville, Tenn., to Los Angeles, where they caught a flight to the East Coast to spend a day before heading back to France.

Traveling on a budget, the duo decided to stay in Rhode Island with local entrepreneur Eric B. Weiner, who rents out two bedrooms in his Cranston home through Airbnb Inc., the ubiquitous Web-based company that connects travelers to independent renters for short-term lodging.

Weiner is one of about 500 hosts in Rhode Island to participate in the service. He likes it because it allows him to put a little extra money in his wallet and meet interesting people, such as the musicians.

“They asked for some dining recommendations, and I ended up having dinner with them at Angelo’s [Civita Farnese],” Weiner said with a smile. “They sang Johnny Cash to the waitress.”

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Weiner, co-founder of FoodTrucksIn.com, a website with a national following that points hungry consumers in the direction of food trucks, is one of a growing number of Rhode Island Airbnb hosts to rent out rooms, cottages, cabins and entire homes to travelers. Weiner posts photos, prices and details on his Airbnb Web page and travelers can book online. Afterward, both host and traveler can rate one another and write reviews for the benefit of future participants.

In Providence, the number of Airbnb listings in September grew 40.2 percent to 293 compared with the same period last year, according Airdna LLC, an analytics company that produces community reports for Airbnb hosts.

Providence listings range from shared rooms to entire homes, which are generating anywhere from $3,920 to $37,688 per year in total revenue, according to Airdna.

“It’s not something that’s going to replace my day job, although I think if someone owns multiple properties and does this multiple days and nights, they could,” Weiner said. “But it’s like having a fun, little part-time job.”

The growth seen in Providence and other Rhode Island communities is unsurprising given the rapid advancement of Airbnb and the emergence of the so-called “sharing economy.” The San Francisco-based startup was founded in 2008 and has already become a $25.5 billion company, according to the Wall Street Journal.

Expedited growth, however, doesn’t come without pushback and there are municipalities throughout the nation fighting vigorously against the Airbnb model, raising concerns about its legality, safety and the damaging effects it might be having on neighborhoods and local housing markets.

Those issues haven’t yet cropped up in Rhode Island in any significant way, and the state has joined a small but growing group of locations to embrace the Airbnb model. But hotel-industry experts expect that as the industry grows and the model matures, it will create a ripple effect felt throughout the business, which Providence Mayor Jorge O. Elorza argues is not something the state should prevent.

“There are some cities and states that are resisting the shared economy, but I think that we can’t stay in the way of progress,” Elorza said. “I do think that we have to embrace innovation, and we need to embrace technology, because this isn’t about slicing up the pie into ever-smaller chunks; this is about expanding the pie.”

WELCOME in RHODE ISLAND

State leaders echo the Airbnb mantra that its model provides an economic boost to the middle class, but it’s also an opportunity to capitalize on new revenue in a growing industry.

Airbnb, albeit the most well-known of its kind, isn’t the only game in town. Similarly structured companies, such as Homeaway of Austin, Texas, and Flipkey of Boston, are also operating in Rhode Island. Short-term rentals also can be found online through websites like Craigslist.com and sometimes even the classified section of daily newspapers – where the majority of them always used to exist.

The market is typically defined as a rental of 30 or fewer days and is known in some circles as “home sharing” or the “short-term rental” industry. Its rapid emergence has caused headaches for lawmakers in several cities around the globe, but Rhode Island has moved relatively quickly to show its support, which Airbnb lauds.

“It’s really great to see cities like Providence and states like Rhode Island really starting to get it,” said Molly Turner, global head of civic partnership at Airbnb. “Cities around the world are figuring it out, and we think these are the ones that are really forward thinking and looking for new economic lifelines for their middle-class residents.”

Until recently, however, the Airbnb model has evaded paying Rhode Island taxes that other more-traditional lodgings pay, such as hotels and long-term rentals. To level the playing field, and to capture some of that lost revenue, the state passed legislation earlier this year mandating the new industry pay taxes on par with other lodgings in the state.

The state estimates the new tax could generate about $1.5 million in yearly revenue.

R.I. Secretary of Commerce Stefan Pryor says the tax was created for two primary reasons: the state needs new revenue streams to fund its tourism campaign, and it brings the Airbnb model in step with other lodging institutions.

A third reason, Pryor added, was to position Rhode Island as “a forward-thinking state.

“The sharing economy is emerging as an important force in the overall economy,” Pryor said. “It’s important for us to recognize [it].”

The new tax also directly benefits the R.I. Commerce Corp., which Pryor heads. Beginning in January, state hotel revenue generated from the Airbnb model will be reallocated between Commerce Corp. and Rhode Island municipalities, which differs from how the state hotel tax is typically divvied up between the state’s regional tourism districts.

When asked why it was structured this way, Pryor replied, “There were a variety of allocations and reallocations that occurred in crafting the new revenue structure for tourism and business attraction.”

In July, the state began collecting the taxes. People renting an entire dwelling for 30 days or less are now subject to the local 1 percent hotel tax, plus the state’s 7 percent sales and use tax. Those renting part of a home are subject to the local 1 percent hotel tax, the state’s 5 percent hotel tax and the 7 percent sales tax.

Weiner says the new tax hasn’t been an issue for him, because Airbnb collects and remits the funds to the state for him. The added cost, he says, is passed along to the traveler.

“I haven’t had anyone say that it’s deterring them from a visit, and I’m glad it’s getting passed along to the state,” Weiner said. “It’s an add-on, so it’s not taking anything away from my rate.”

It also should be noted that the Rhode Island legislation prevents any individual municipality restricting hosts, meaning Airbnb’s model is safe from local governance. Similar legislation has passed in North Carolina, Washington, D.C., and Washington state, along with 16 cities throughout the world, according to Airbnb.

COMPLEMENT OR COMPETITION?

It’s too early to measure what type of long-term effect the emerging economy will have on Rhode Island, but preliminary results are a mixed bag.

July was the first month the state started collecting the new taxes. The existing local 1 percent hotel tax generated a year-over-year increase of 24.9 percent – or $106,479 – totaling $534,771. The 5 percent state hotel tax yielded an increase of 24.7 percent – or $532,299 – growing to $2.7 million compared with the same period last year, according to the R.I. Department of Revenue.

In August the local hotel tax collection increased 4.9 percent to $548,266 compared with the same period last year. The 5 percent hotel tax collection grew 4.9 percent to $2.1 million compared with August of last year.

But while demand for lodgings is up across the industry, tax collection from the Airbnb-specific entities hasn’t been as promising. Through the first quarter of fiscal 2016, the state brought in between $60,000 and $100,000, according to Tax Administrator David M. Sullivan, well short of the $2 million to $3 million that was originally predicted.

Sullivan, who is leaving his post for a private-sector job Dec 11, stresses that it’s early for the new tax and that he still expects it to generate, in aggregate, about $7.1 million for the entire fiscal year. “This is a new tax to many property owners, and we are working with taxpayers to make sure they’re in compliance,” Sullivan told Providence Business News. “So it’s very early to make comparisons, given that the data we have thus far covers only the first three months of the fiscal year.”

Martha Sheridan, president and CEO of the Providence Warwick Convention & Visitors Bureau, believes Airbnb is filling a void in Rhode Island where hotel growth has been stagnant and recent tourism has been strong. This past summer, Providence recorded an 82.2 percent weekend occupancy rate in August, according to the hotel industry research company STR Inc.

“Frankly, our hotels sell out and Airbnb provides us with supplemental inventory for our visitors to be able to come and stay at peak times when there might otherwise not be hotel availability,” Sheridan said.

Turner says an Airbnb-run survey of customers from its top-tier markets shows that about 35 percent of its guests wouldn’t have traveled to their destination – or stayed so long – if it hadn’t been for their service. Both Turner and Sheridan say the model complements the existing hotel industry.

But the growing popularity of Airbnb has some people believing that it will eventually force competitors, such as hotels, to shift their business models in order to stay competitive.

“Some in the industry underestimated Airbnb’s impact,” said Karen Silva, chairwoman of the International Hotel School in the School of Hospitality at Johnson & Wales University.

“Hotels are going to need to focus more on group business, as more individual and leisure travelers will be using Airbnb and similar entities,” she added. “For example, millennials prefer a more personalized experience, which they believe they find at Airbnb. On the other hand, mature travelers prefer traditional models and properties.”

The growth also could potentially create more competition with Realtors for short-term rentals, especially during the summer months, as the service allows homeowners to become their own agent. But Cecile Cohen, who does a lot of summer rentals as an associate broker manager at Randle Realtors in Charlestown, says she hasn’t noticed any trends yet.

Terrence L. Strong, director of sales and marketing at the Omni Hotel Providence, largely agrees with Silva, saying Omni hasn’t yet felt the effect of Airbnb because its clientele base is typically more interested in more traditional amenities found at hotels.

But he believes it must be watched closely.

“[Airbnb] is certainly something that we have to keep an eye on,” Strong said. “As it continues to grow, I’d be foolish not to follow it.”

A GROWING MARKET

The model is growing quickly in Rhode Island.

In September, there were 745 Airbnb listings in the Ocean State. And while year-over-year growth was unavailable for the entire state, Airdna reports that September listings in Providence grew 40.2 percent to 211 compared with the same period last year. Newport listings grew 58.7 percent to 180 during the same period.

“That’s like adding another hotel to [Newport],” said Robert Burnetti, general manager of Hotel Viking – a Newport hotel that’s been around since 1924. “It’s such a new thing that I’m not sure that it’s impacted us based on occupancy numbers. But as it matures, maybe, we’ll see.”

The growth may not pose an immediate threat to the hotel industry, but that could change in the future, especially since there’s the potential for new hotels on the horizon. PBN reported in August that five new hotels have been proposed in Providence alone, and if the new rooms come online and Airbnb tweaks its model to attract a more diverse clientele pool, competition would likely follow.

“I think [Airbnb] would be real competition if they start negotiating with the business travelers,” Strong said. “If they went there, they would become more competitive in this market, especially because it would be affecting our core business here in Providence.”

Turner estimates there are about 500 hosts in Rhode Island, meaning that with 745 Airbnb listings, some hosts are renting more than one unit, suggesting the model has moved beyond the idea of “home sharing” and into a more lucrative commerce.

Using real examples, Airdna estimates a three-bedroom home on Providence’s Federal Hill would yield $32,663 per year if booked 18 times with an average stay of about six days. A four-bedroom home near the Newport mansions would yield $79,250 each year if booked 11 times with an average stay of about three days.

Burnetti says his biggest question about the Airbnb model is requirements of quality and standards. Hotel Viking, he says, is regularly subject to safety and health inspections and must follow strict protocols in the event of an emergency. Homes are also subject to standards of safety, but typically not to routine checkups.

“What if there’s a problem? Who do they contact?” Burnetti asked, hypothetically. “Here, at Viking, it’s me.”

Airbnb does offer safety guidelines for both hosts and travelers and even provides up to $1 million in protection in the event of damages to certain types of properties. But travelers and hosts largely depend on the reviews of past customers when deciding whether or not to make a deal.

PBN asked Pryor whether he thought the state needed to implement further regulations on the Airbnb model, and he replied, “Yet to be determined.”

Burnetti has accepted the idea that they will have to compete with Airbnb, and he thinks the state should do what it can to level the playing field, but he’s not too concerned about the resiliency of the hotel industry with the emergence of the sharing economy.

“The hotel industry has been around for a long time, and we always find ways to reinvent ourselves,” Burnetti said. “We’ll find a way to survive.” •

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