Hawaii Severely Limits Short-Term Rentals To Mostly Benefit Hotels

Honolulu County awards pot of gold to hotel industry

Hawaii has had a complicated relationship with the short-term vacation rental market. Back before Silicon Valley got its claws into the process, these types of arrangements were called B&Bs (bed and breakfasts). Stereotypically, older ladies with a penchant for macramé would rent rooms and provide a meal or two – hence the name.

In recent years there’s been a (insert “large” synonym) growth in these types of listings. Back in the 1980s, Honolulu County (encompassing the island of Oahu) set a limit of 770 licensed B&Bs outside the tourist areas of Waikiki and Ko’Olina. It’s estimated there are 8,000 to 10,000 B&Bs operating on Oahu today. Suffice it to say that even subtracting those operating legally and in the designated tourist areas, there are still a ton operating illegally.

In June 2019, Honolulu County approved a measure that would increase the number of legal vacation rentals to 1,700 beginning in October 2020. That gives the city 14 months from the effective date of the legislation (August 1, 2019) to shut-down all the illegal ones. Essentially any ad placed without a license number will get a visit from the county. Violators can get slapped with a $1,000 fine for a first offence that’s then ratcheted up to $5,000 per day on the next violation and finally $10,000 per day on future offences.

The new regulations also shine a light on the already outlawed (though largely ignored) unhosted or whole-house rentals outside the tourist areas of Waikiki, Ko’Olina and Turtle Bay.

Note to readers: If you have a reservation after August 1, 2019 for a short-term vacation rental on Oahu outside designated tourist areas, you might want to recheck. The city is saying they have little sympathy for those already-made reservations. I assume landlords have been busy informing their upcoming guests.

Who benefits?

There are three issues at play here. First are the unpaid sales and occupancy taxes paid by hotels and skipped by many operators – estimated at $45 million a year (assuming the 8,000 to 10,000 survived). Second, there’s the neighborhoods not wanting the traffic, parties and the general disturbance of people on vacation – it’s why they don’t live in Waikiki in the first place. Third, the large hotels don’t like competition and have been throwing money into lobbying to restrict short-term vacation rentals – even though hotel occupancy rates remain strong.

Adding to this has been the shift to platforms like Airbnb and VRBO that make it easier for owners to connect and book clients, as well as the investment potential of owning an Airbnb house. Instead of an owner augmenting their income in an expensive location by renting out a room, investors are buying and renting whole houses for obscene profits. These “unsupervised” listings seem to be where a lot of the anger is pointed.

My continuing opinion on the Airbnb phenomenon is simple. Do what you want with your home as long as everyone around you is OK with the disturbance it causes. Informed consent is key (and frankly only fair).  For example, the building I own in allows 30-day rentals. We all knew it when we bought and for many, it was a reason to buy. Month-plus rentals are not subject to this legislation.

Closer to home, Dallas’ accessory dwelling unit ordinance requires a neighborhood or block to opt in. It also requires the owner to be living onsite too. I think the opt-in and owner present are crucial. In a holiday destination like Hawaii, unsupervised vacationers have a tendency to be loud and uncaring to those around them “I’m on vacation” beats, “I have to get up and work in the morning”. So while it’s always been the case, if Oahu will start policing this, I think it’s good for neighborhoods. This is especially true in light of an even more recent phenomenon of building homes with 15+ bedrooms seemingly to serve the Airbnb investor.

According to a New York Times report in 2017, going after Airbnb is the goal is the goal of the hotel industry. Through their lobbying arm, American Hotel and Lodging Association their attack was a “multipronged, national campaign approach at the local, state and federal level,” to thwart Airbnb. Marriott International, Hilton Worldwide and Hyatt Hotels are all members of the association.

Whomever cheers for legislation are the ones benefitting.  When Honolulu County passed the new restrictions, Kekoa McClellan, Hawaii spokesman for American Hotel and Lodging Association, thanked the mayor and city council for passing the law.

Neighborhoods inundated with vacation rentals were similarly happy. But as usual, I think the county missed a trick to favor the hotels. I think the big thing are the whole house rentals where there’s no owner to police behavior. Licensing individual room rentals (with neighbor support and recourse) while enforcing the existing ban on whole house rentals seems to satisfy everyone except the hotel industry and Airbnb landlord investors.

Honolulu’s mayor said the new regulations would combat the high cost of housing by getting rid of the investors who are making exponentially more with daily rentals than they could with a full-year tenancy by a local resident. That’s certainly true of the Airbnb landlord offering whole house rentals (but that regulation was already on the books but rarely enforced).  It’s also highly doubtful that there are enough whole house rentals to have an appreciable impact on availability of local housing.

Who loses?

Those renting rooms in order to make ends meet in a high-priced state.  Limiting those operations to 1,700 might have catastrophic effects on local residents who would be unable to keep their own home. Certainly that’s not what should have been intended (if government was representing its constituents instead of hotels)?

Similarly, the state is poised to veto legislation that would have required platform operators like Airbnb to automatically collect the required taxes and pay the state. The common refrain is that if the state allowed the platforms to collect tax, it would legitimize those illegal operations. Now that Honolulu County has drastically limited the number of potential properties available to legally rent, the state is saying it’s pointless for the platforms to collect taxes. (Mind you, Hawaii is like every other state, crying for more tax revenue.)

But there are the softer dollars spent by these tourists. A 2016 study claimed that Airbnb users spent $649 million in the state (granted, it was funded by Airbnb). A second 2016 study by the Travel Technology Association reported that $336 million in household income might be lost along with 7,000 jobs (local agents, cleaners, etc.) if hotels were the only option.

The next year or two will be interesting in Hawaii real estate. Will the crackdown cause a flurry of home sales?  Will that flurry erode housing prices? If so, for how long – a blip or a trend? Who is displaced – absentee investor/landlords or local residents? And in a state dependent on tourism, what will the state’s financial losses be?

 

Remember: When I’m not stirring up trouble in Dallas, Texas or Honolulu, Hawaii for Candysdirt.com and SecondShelters.com, I’m off scouting interesting locations for a second home.  In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards. If you’re a Realtor with second home clients who’d like me to feature their journey, shoot me an email sharewithjon@candysdirt.com. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.