Why Cities are Cracking Down on Short-Term Rentals—And What’s Next

This week on The Breakdown, we explore why cities around the globe are implementing restrictions and bans on short-term rentals like AirBnbs and Vrbos. We explore the reasoning behind them, their impact on local homeowners, and the future of short-term real estate investing in the U.S.  

The Evolution of Short-Term Stays 

Short-term rentals (STRs) have revolutionized travel and helped real estate investors capitalize on tourism like never before – but regulations are changing that.

Booking platforms like Airbnb and Vrbo are especially facing growing criticism, mainly for shrinking local housing availability and making it harder for locals to afford rent and enjoy their communities.

Airbnb is a budget-friendly alternative to hotels for short- and medium-term travel. Whether it’s for vacation, a work trip, or a visit with family, Airbnb has given travelers more freedom and flexibility when visiting cities across the globe. These freedoms include more privacy, more space, and access to a full kitchen to cook meals and save on food costs while traveling. For many families, groups, and individuals, these affordances—in addition to the general affordability offered by most Airbnbs—make hotels a less and less attractive option.

Airbnbs and other short-term rentals are also very lucrative for investors, in some cases even more so than long-term rentals. In tourist hotspots, STR investors can leverage their propertys’ proximity to attractions and amenities and profit massively from predictable waves of visitors. According to AirDNA, a rental analytics company, Airbnb and Vrbo investors in Miami earn around $390 per night, while a long-term investor only brings in around $109 a night. This makes short-term tenancies in Miami more profitable on a daily booking basis.

In fact, STRs are so successful in Miami that Airbnb is encouraging developers to build STR condo towers there—essentially “Airbnb-ready condos,” like this one with 44 stories and 659 luxury residences scheduled to be built by 2028. It will offer not only a “fully furnished luxury home, but the option to seamlessly host on Airbnb” as well as the services of a condo concierge who will rent out the units on the platform.

But while the company and its hosts are clearly profiting, others are less optimistic about the impact of STRs on local markets and communities.

Are Short-Term Rentals Short-Lived? 

Despite Airbnb’s massive growth and upsides, STRs in some cities have incited some local governments to take action.

Residents in neighborhoods with STRs complain about tourists infiltrating their peaceful streets with loud parties, disregard for cleanliness, and general disturbances. STRs also compete with local hotels and lodgings. Perhaps the chief complaint is that STR investing inflates home prices and leaves fewer homes for home buyers seeking personal residences.

New laws regulating STRs have cropped up in cities around the world, including many in the U.S. These regulations vary in severity, from limits on numbers of guests to full on bans. Here are just a few types of regulations STR investors are looking at:

• Bans on new Airbnb listings 

• Limits on the number of days of the year that units can be rented to tourists 

• Permit and licensure requirements  

• Minimum stay requirements in tourist hotspots 

• Full bans in some cities 

Notable Bans and Regulations 

Cities are imposing STR regulations in markets across the globe. Here are just a few of these laws, as well as notable U.S. laws.

Global Regulations 

Paris

A recent law passed in Paris closed a tax loophole that benefited short-term rental owners, cutting tax relief on rental income from furnished short-term rentals from 71% to 30%.

Barcelona

Barcelona removed over 2,500 listings operating without licenses in 2018. Cities Today reported that Barcelona has plans to enact a citywide ban on all short-term rentals by November 2028.

Amsterdam

Amsterdam limits short-term rentals to 30 days a year since 2018. Its government also requires Airbnb hosts to register their rentals and obtain a permit before renting to short-term tenants.

U.S. Regulations 

New York City

New York City has tight restrictions on short-term rentals. According to Local Law 18, also known as the Short-Term Rental Registration law, hosts must register their STRs with the Mayer’s Office of Special Enforcement (OSE). Additionally, hosts cannot rent out an entire home to tourists for less than 30 days, the host must stay in the same unit or apartment as the guests, and only two guests are permitted at a time. These regulations were challenged in June 2023 by Airbnb for being a “de facto ban on short-term rentals” and have changed the dynamic for STRs in the city.

Charleston

A 2018 ordinance in Charleston banned STRs of whole houses. Additionally, no more than four adult guests can occupy an STR at once, and the homeowners must inhabit the home while hosting.

San Francisco

STRs are only legal in San Francisco if the hosts are full-time residents and if they don’t rent out the unit for more than 90 days each year. Hosts are also required to get a business registration certificate and short-term rental registration certificate. Investigation of these new regulations in 2019 found that at least half of those applying for a STR permit lied on their application about being a resident of the home being rented. Fines are currently being enforced at $484 per day per unit in violation.

Why Communities Are Feeling the Strain 

So why are so many cities banning or heavily restricting short-term rentals?

There are a few reasons. The main one is that STRs are thought to reduce the availability of long-term rental housing and exacerbate housing shortages and unaffordability. Locals complain that a lack of appropriate regulation allows investors and wealthy real estate companies to buy up multiple properties or many units in one property and use them as de facto hotels. They drive up home prices for prospective buyers and reduce tax revenues, causing local homeowners and renters to pay the price in their communities.

Community concerns are another common concern for STRs. The increasing prevalence of STRs disrupts local neighborhoods with their high turnover and tendency to cause noise. Vacationers have little reason to care about the communities they’re visiting beyond their stay, and therefore usually aren’t motivated to contribute to keeping the neighborhood clean and safe. Meanwhile, short-term renters strain local services like waste management, public transit, and emergency services without providing any benefit to the community in return, besides perhaps spending their money. But they aren’t spending that money at local hotels or BnBs, leading to competition and strain for business at those establishments.

Another major concern is that STRs operate outside of the existing regulatory frameworks for hotels and traditional lodgings. They aren't subject to the same strict regulations as hotels, which could potentially endanger some short-term renters if the property owner hasn’t been keeping up with maintaining the building to health/safety code standards.

Each of these factors plays a role in the recent uptick of short-term rental regulations. As communities are feeling the hardships of supporting STRs without receiving much benefit in return, cities are cracking down on them—leaving investors with a new problem.

New Rules, New Realities for Investors 

80% Airbnb markets globally have regulations that impact short-term rentals. What do these new regulations mean for investors?

The effects of these laws on Airbnb hosts and other short-term real estate investors can be significant. Bans can have an immediate negative effect on the rental income potential of an STR. According to the National Bureau of Economic Research Digest, Airbnb listings in Chicago fell by 16% when short-term rental regulations were enacted.

Some investors are taking this as a sign to pivot and transition their properties into long-term rentals. This will increase housing supply in the market. But it’s a major strategy shift: Moving from STRs that generate income at a faster daily rate to long-term rentals that necessitate a more gradual approach isn’t in everyone’s plans and will likely require some financial restructuring.

Investors planning to stick to STRs might need to get creative and lean into STR opportunities that can operate within increasingly strict regulations. Miami’s “Airbnb-ready condos,” for example, may offer such an opportunity – new builds with units concentrated in a single large complex don’t use up the current housing supply or interfere with quiet neighborhoods in the same way that STRs do as apartments or single-family homes in established residential neighborhoods.

The Post-Ban Housing Landscape 

It’s hard to say what exactly a housing market riddled with STR bans and regulations will look like. What will the long-term effect on homeowners and renters be? How will vacancies shape home values?

The goal of many of these regulations is to curb rent inflation and reduce housing prices in dense cities and tourist hotspots. Will this happen? To answer this question, we must understand the true effect of short-term rentals on home prices, rents, and the housing market in general.

A recent AirDNA literature survey focused on this exact question. One important finding was that if former STRs are made inoperable due to regulations and are not converted to long-term rentals, they may just sit vacant, representing an overall loss of economic value of that property. As the survey succinctly stated, “...if regulating away STRs only results in former STR properties being vacant, there will be no appreciable impact on rental rates.”

As we can see, STR long-term substitutability is an important factor to consider moving forward—and some markets are more likely than others to have homes lying vacant for part of the year. Studies have found that mountain, lakeside, and coastal vacation towns in the U.S. have the most vacant units relative to total residencies, making short-term rental bans and restrictions a problem that may disproportionately affect resorts, luxury vacation rentals, and seasonal STRs.

The same AirDNA literature survey commented that although many believe that too many long-term housing units are being converted to STRs, much of the existing inventory of STRs has historically been used for seasonal, recreational, or occasional uses. So not all STRs are taking up properties that could be permanent housing. Many of these properties were tourism-related lodgings to begin with.

And to address the impact of STRs on rents, the survey referenced a recent study, Calder-Wang (2021), which stated that rent increases due to the increased presence of STRs fall mainly on high-income and highly educated renters. The study looked at the distribution of changes to New York rents after STR regulations, which were concentrated primarily in wealthier, tourist areas.

Harvard Business Review’s study on the impact of the New York City ban, published earlier this year, likewise concluded that short term rentals are not the biggest contributor to high rents. It recommended that regulations, rather than bans, would offer better benefits to the city and locals alike.

Likewise, the effect of STRs on housing prices was found by AirDNA to be “localized in highly touristic areas, and most likely to affect up-market assets and renters.” At the very least, this evidence suggests that banning or restricting STRs isn't necessarily a perfect policy tool to help make housing affordable for low-income households—although it certainly plays a role.

The Future of Short-Term Real Estate Investing 

Every market is different. The future of short-term real estate investing will also probably vary depending on the market you’re looking at.

If you’re a STR investor concerned about the future of your business, our best advice is to spend some time analyzing the impact and weight of STRs and Airbnbs in your specific market and carefully consider the local regulatory environment before making investment decisions. Here are some tips for making your way in the STR world while the future of regulations remains uncertain:

• Stay informed about new laws and regulations being passed. 

• Work with an attorney to understand your city’s specific laws. Violations can cause penalties, fines, or even liens against the property to enforce payment. 

• Have a back-up plan  (e.g., Try converting your STR to a medium-term rental targeting traveling nurses or other professionals who travel for work). 

• Take the time to register your STR and get the appropriate permit if your city has regulations. 

• Advocate for equitable policies that consider the needs of hosts, guests, and locals. 

• Stay adaptable to future changes. 

As short-term rental regulations continue to take shape, it may seem like a particularly daunting environment to buy in tourist locations. While these changes are challenging, they also offer opportunities for innovation and growth. Start with navigating regulations and compliance in the cities you currently invest in. In the meantime, we’ll be tuned in to see how short-term stays continue to evolve—here and abroad.