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Daily Tax Report: State

Short-Term Rentals and Covid—What Could Possibly Go Wrong?

Oct. 9, 2020, 8:00 AM

The past six months have been a long, strange trip for the short-term rental (STR) industry, with the whipsaw effect of a massive dive in bookings in tandem with an equally alarming wave of cancellations, followed by a sharp V-shaped recovery that’s the envy of many other sectors, first and foremost, hotels.

Property owners and managers, and indeed booking platforms including Vrbo and Airbnb lived through a highly compressed feast to famine to feast scenario. From February through June, the lodging sector struggled across the board as businesses were forced to shut down. And from July to present we’ve seen recovery and spikes in bookings for STRs in select areas, with the follow-on lodging tax and sales tax influx for surrounding municipalities that are struggling with historic budget deficits.

Travelers want a clean, well-lighted place, far from other humans

With Covid-19 as a constant backdrop, rentals in remote or rural areas have been highly sought-after and aggressively marketed, with families and individuals seeking vacations, weekend getaways, and extended “work from anywhere” stays in a new location perceived as being safe due to distance from urban population centers, and reflecting new standards of cleanliness that have become table stakes for any serious STR property.

The hot tickets? Think Door County, Wis., and Joshua Tree, Calif., or any area featuring mountains, lakes, skiing, open country, ocean vistas, and outdoor activities. And left out in the cold? Chicago, New York, Los Angeles, and many other major cities. Since re-opening, a full 95% of new STR bookings have favored non-urban areas, according to Vrbo owner Expedia Group, as travelers follow the playbook of choosing a STR property within approximately 3 hours’ drive time.

STRs show great promise, and continued growing pains

Indeed, the past three months have delivered roundly good news for STR bookings, as traditional lodging properties continue to languish. Data analytics firm Trepp reported that one in four hotels can’t pay their mortgages, though a glimmer of hope is a report from Atlas Hospitality Group showing that hotels in “drive-thru” locations like Santa Barbara are starting to regain business. At least in the U.S. market, STR properties still have the upper hand.

But in the background, short-term rentals continue to butt up against regulation, enforcement, and compliance issues, not unlike an adolescent dragging their feet at the threshold of adulthood. Local dustups between full-time residents and STR properties are commonplace across the 41,000 municipalities in the U.S., as evidenced by election year ballot initiatives, and one-off city mandates to ban or severely curtail STRs.

At the heart of the discord are bad actors who skirt local regulations, including non-compliance with STR licensing and registrations, allowing large parties with rowdy guests, failing to collect and remit lodging tax to state and local authorities, and generally showing less than mutual respect toward full-time neighbors. After all, no one in the neighborhood asked for a Club Med to be plopped down in the middle of the block.

Crafting model STR communities in San Diego and Kauai County

With so much promise for STR success and accompanying new revenue for cash-starved municipalities, what would the path look like for a transition to stability and respectability in the lodging sector? Enacting fair short-term rental policies demands local alliances, among STR hosts, neighbors, city officials, and traditional lodging providers.

In San Diego, for instance, Expedia Group worked with city government leaders and a workers union called Unite Here, crafting a unique agreement in a memorandum of understanding (MOU) spelling out a process to monitor and regulate STRs within a framework of revamped guidelines and rules. And in Kauai County, Hawaii, Expedia coordinated an effort with local government to arrive at an MOU focused on promotion of compliant STRs, and enforcement around non-compliant properties.

Both of these MOU agreements are watershed moments for the STR industry, and have potential for a long-term impact on building stronger local economies. Significantly, they ensure transparent rules for STR hosts, guests, and residents, providing a model to short-stop the types of skirmishes that have been a mainstay of the STR landscape for years.

These model communities are proof points that embracing rules, regulations and compliance is good for the future of STRs, and fair to traditional lodging players. Steady, predictable STR bookings with responsible hosts and guests have a positive economic impact for local businesses and help bolster municipal coffers with much-needed lodging tax and sales tax revenues.

Outlook: STRs are ‘the little engine that will’

The future of any lodging industry sector, whether STRs or hotels, has never been more difficult to predict within the context of the Covid-19 pandemic, and a still yet to be determined economic shakeout impacting not only properties by modes of transport like airlines. What we know to date is that STRs have proven to be highly resilient, landing initially as the right type of lodging accommodation as guests across the board, from families on traditional vacations to families, couples, groups, and individuals simply vacating their too-familiar homes for a much-needed change of pace.

The ability to work (and school) from anywhere for the foreseeable future will have a demonstrably positive impact on STR bookings. We’ll see short-term properties begin to market dedicated office space within properties, in addition to exercise equipment, as well as emphasizing fully outfitted kitchens, as guests look to economize on longer stays, and take advantage of safe-distancing grocery deliveries.

Growing pains aside, STRs have the right stuff to become more consistently and reliably competitive in the long-term, with now clearly delineated caveats: grow up, and behave more like your established, mature traditional lodging siblings. Longevity and greater success hinge on embracing regulation, compliance, adherence to rules, and being an accountable contributor to the local sales and lodging tax base. Guests want to choose you as a preferred mode of accommodation. Now is the time to step up to the plate.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Pam Knudsen is director of compliance services at Avalara.

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