Honolulu’s proposal to regulate short-term rentals needs serious help

Addressing the rampant proliferation of short-term vacation rentals in Hawaiʻi is critical to solving our housing crisis, but it’s imperative that we do it the right way: here’s how.

 

Hawai‘i has a serious problem: not enough roofs to shelter all our people. And the problem is only getting worse. Between 2011-2014, our state increased its housing stock by 8,458 but, at this pace, we will not be able to generate the additional 24,551 units we need by the year 2020) to house our increasing population. Importantly, it is people who earn low incomes who will be hit the hardest by this deficit: Approximately 74 percent of the total housing units required by 2025 will be needed for households making less than $75,000.

We already have the highest houseless population, per capita, in the United States. College graduates, retired parents, working families struggling to pay rent, and millennials hoping to start families of their own are all moving away to the mainland in droves. While the problem is multifaceted and complex, one very visceral contributor to the lack of housing units available to residents is the proliferation of short-term vacation rentals (STRs), which can be extremely difficult to regulate.

STRs take units out of the long-term rental market: In the City & County of Honolulu, in 2014, there were 4,411 individually-advertised STRs—that’s more than one out of every 100 housing units on O‘ahu rendered unavailable for those who need it most, according to a report by SMS Research & Marketing on behalf of the Hawaii Tourism Authority (Individually Advertised Units in Hawaiʻi (Vacation Rentals), December, 2014, p. 4).

Additionally, many STRs are owned by non-residents: more than 15 percent of homebuyers in the City & County of Honolulu are non-residents. Investor ownership, in particular, is responsible for reducing the amount of available housing for residents, and for driving up rent.

So what is to be done? Clearly, some form of regulation is necessary to prevent STRs from commercializing Hawaiʻi’s neighborhoods at the expense of its residents. The Honolulu City Council is considering proposed legislation from the Department of Planning and Permitting (DPP) that attempts to increase regulation on these vacation rentals and their owners. Hawaiʻi Appleseed appreciates the municipal government’s willingness to tackle this issue, and its recognition of this issue as extremely serious to the future of Hawaiʻi.

But the legislation, as it stands, will not protect Oʻahu’s housing stock and does not reflect the best practices of other destination cities such as New York City and San Francisco, both of which have much to teach us from their trial and error attempts to regulate STRs.

Failing to learn from these lessons could be disastrous for Hawaiʻi: without limiting STRs and providing effective enforcement, our keiki may have nowhere to live when they begin to search for houses and apartments of their own.

Appleseed has multiple recommendations that would produce effective legislation and believes, therefore, that the Planning Commission should vote against the proposed DPP legislation when it comes before the commission on Wednesday, September 19. The City & County of Honolulu must prioritize enforcement and must carefully limit the number of STRs allowed on Oʻahu.

Economic Considerations

First off, why have STRs popped up at such increasingly high rates across the state? The simple answer is economics. Renting out a unit as an STR is much more profitable than renting it long-term to a resident or family, making STRs particularly appealing business opportunities. A 2015 study by Honolulu’s Office of Community Services indicated that, even at just 80 percent occupancy, the average Airbnb unit would bring in about 3.5 times more revenue than a long-term rental arrangement.

Hawaiʻi’s property tax is also the lowest in the nation, making Hawaiʻi real estate a very safe place in which to invest money for those seeking long-term financial security and high returns on investments. This combination of profit incentives and investment opportunity makes STRs particularly appealing for non-resident investors.

Although Hawaiʻi derives some benefits from STRs through increased tourism spending and tax collection, these benefits are heavily outweighed by the costs. We can use San Francisco, which has similarly struggled to cope with high housing costs and the proliferation of STRs, as a model: its municipal government found that each housing unit taken out of the long-term rental market for use as an STR produces a substantial net negative economic impact. And that’s after factoring in the amount of income generated for the host, increased visitor spending, and hotel taxes. San Francisco estimates that its local economy loses as much as $300,000 per STR per year. The impacts of STRs on Oʻahu’s economy is very likely similar.

Furthermore, the spread of STRs could lead to lower wages for residents working in the hospitality sector. A Los Angeles report estimated that the Airbnb workforce (consisting of domestic cleaning services) makes an average of just $4.08 an hour, resulting in $1.1 million less in wages than hotel workers per week, or $54 million less per year.

Claims that limiting STRs will hurt our tourism-based economy and spell economic disaster for Oʻahu are unfounded. Those seeking to rent out their units can continue to do so on a long-term basis to residents and still cover their costs. Renting long-term can still provide the extra income many property owners need, while also providing much-needed housing to residents.

Flaws in the DPP Legislation

One of the primary problems with the proposed legislation concerns the unfettered allowance of unlimited Bed & Breakfasts (B&Bs) in residential-zoned areas. The definition of “Bed & Breakfast” in the proposed legislation is incredibly vague: no actual breakfast is required, no communal dining room is required, and the definition does not include the requirement of internal entrances to bedrooms. If these measures are passed into law, Oʻahu would almost certainly see an exponential increase in the number of B&Bs, as owners exploit these overly-generous regulations.

Instead, the Planning Commission should tighten restrictions to require B&Bs to provide breakfast, have a communal dining room and require that entrances to bedrooms be accessible only through communal spaces (no external entrances).

Furthermore, while the proposed bill does not allow corporations to run B&Bs, the provision that a B&B owner must be a “Natural Person” is not strong enough. The proposed measure should require that B&B owners themselves live on-site whenever guests are present. Having an agent, family member or property manager present instead is not sufficient.

Additionally, the law should require that individuals own a property for a minimum of three years before being permitted to convert a property into a B&B. This will act as a disincentive for speculators and investors to enter the B&B market. The law should also limit the total number of B&Bs allowed, and should limit the number of B&Bs in each development plan or sustainable communities plan.

Enforcement Problems

Another problem with the proposed legislation has to do with the allowance of an additional 4,000 Transient Vacation Units (TVUs), i.e. STRs that are not B&Bs, in apartment-zoned districts before enacting proven enforcement measures.

In 2015, Senate Bill 519 was passed into law, and includes regulatory provisions, such as registration and advertising requirements, and attendant penalties. But, in the three years since its passage, this law has done nothing to prevent the proliferation of illegal vacation rentals. The City & County of Honolulu must adopt a far stronger and multifaceted enforcement system than the one currently in place at the state level.

Without stronger enforcement, operators will continue to take advantage of the situation and siphon off more units from long-term renters.

On Maui, a DPP memo noted that STR owners who had gone through the registration process to operate legally actually saw a decrease in occupancy as they were unable to compete with illegal rentals that could afford to set slightly lower rates. Our lack of enforcement, therefore, not only fails to catch those who are already cheating, but could also potentially deter otherwise law-abiding citizens from operating legally as they make the decision to start breaking the law just to keep up with their competition.

Successful regulators across the country, such as enforcement agencies in San Francisco and Portland, have found that a permitting process alone, largely ignored by hosts and platforms like Airbnb, is not enough. Evidence to support this same dynamic in Honolulu is widely apparent. While only 775 TVUs and B&Bs were permitted in two Honolulu zoning areas in 2016, booking sites like Airbnb featured a whopping 4,400 “individually-advertised units” across two-dozen communities on Oʻahu. The City & County of Honolulu must get enforcement under control before allowing any additional units to operate.

The best response to these issues would be to apply the enforcement standards that already exist and already work in cities such as Santa Monica, San Francisco and New York City. These destination cities have achieved success with small enforcement teams (only a five-member team in San Francisco) by maintaining high fines and, most importantly, platform accountability and transparency.

While DPP’s bill includes high fines, the City & County of Honolulu should require platforms like Airbnb to provide a monthly report of their listings. The bill should also include a liability provision that fines platforms for failing to provide this data, for advertising un-permitted units, and for violating any other provision of the ordinance. Without cracking down on the platform—the distribution point by which illegal vacation rentals connect with customers—the problem will persist and enforcement will remain an impossibility.

The City & County should also include stronger tools for neighborhood empowerment, and should utilize the Internet and other technologies to enhance community education and enforcement. For example, residents should have access to a user-friendly online complaint system and a map of all registered units (both TVUs and B&Bs) that is both searchable by address and by registration number. The DPP should initiate an education campaign by providing presentations in communities and sending letters to neighbors regularly to notify them of any new permitted STRs in the area.

Finally, the City & County should invest in web scraping technologies to prioritize enforcement against operators with multiple illegal units.

The Planning Commission must vote against the proposed DPP measures and encourage the City Council to carefully consider the above recommendations and conduct additional research when drafting a revised version of legislation to regulate the proliferation of STRs in Hawaiʻi. By doing so, the City & County of Honolulu will be one step closer to a more balanced approach to addressing the housing needs of the communities it serves.