From BnB to AirBnB - the History and Meltdown of the Gig Economy

The Gig Economy is going to melt down, eventually.  In the meantime, most of us little folks will get hurt.

Once upon a time, maybe 50 years ago, there was a mythical land of enchantment called the United States of America.  It was a prosperous place, but one that was carefully regulated.  You couldn't just paint "taxi" on the side of your car and drive people around for money.  That had been tried, decades prior, and it was decided it was a bad idea.  So instead, the number of taxis was regulated and there were standards that had to be met to own and operate a cab.  This prevented an oversupply of cabbies and outright wars between cab companies (and by wars, we mean violence, not price wars).

Back in those halcyon days, you couldn't just throw a few mattresses on the floor and call your house a "Hotel" - there were regulations in place, beginning with zoning.  If your area was zoned residential, you could not run a commercial enterprise there.  The number, location, and type of hotels and motels was controlled, and they were inspected and had to meet standards, for example, for fire protection.   Hotel owners couldn't charge "hidden fees" tacked on to your credit card after you left.  There were rules - rules to protect the public from an unscrupulous few.

But that started to change.  Maybe it was the recession of the late 1970's and early 1980's - that's about when the "Bed and Breakfast" fad started.  People would rent out rooms in their house, or cabins, or hotel rooms as a "Bed and Breakfast" lodging, complete with a bed (duh!) and a light breakfast served the next day.  At first, there was opposition - from neighbors and from competing hotels.  But in the name of "do your own thing" many municipalities went along with this new trend, as it was deemed to be "good for the economy" and would attract tourism.

For every winner, of course, there were losers.  Maybe the "BnB" owner was making some money at it (doubtful - I have heard horror stories from nearly every BnB owners I have met - most sell out after five years or so due to the hassles and costs) but the neighbors weren't too happy about the increased traffic, the noise of vacationers having a good time, and so on and so forth.

The concept expanded.  Vacation Rentals By Owner or VRBO allowed people to rent out apartments and even houses as vacation destinations.  They are now merged with AirBnB and call themselves "Ver-Bow" which is a stupid name.

I hate to say it, but we were caught up in this trend as well.  In the early 2000's, we bought two condos in an 11-unit building that had been rental apartments in a somewhat sketchy part of Pompano Beach, Florida.  It was on the water, with deeded dock spaces and with so many vacation hotels being bulldozes to make room for high-rise condos (and we know how that worked out in 2008!) there was a demand from "Snowbirds" from up North (and Canada) for places to stay for the winter.

We rented out our condos by the week and month and made good money.  A real Godsend was back-to-back hurricanes, which provided us with rental income in the summer, as State Farm needed places for their adjusters to stay while handling the backlog of claims.  We made good money - and then sold out for twice what we paid for the place.  That was back in 2007.

Of course, there were victims in this scenario.  While it is inexcusable that waterfront property should fall so far from grace, the apartments that were there before the place went condo were a haven for local workers who needed a cheap place to live.   When the place went condo, they were evicted, and 11 units were taken out of the local housing stock (about three or four were rented back to "full time" residents, however, as their owners were only interested in the dock spaces!).

I have mixed feelings about this.  In retrospect, we were guilty of "gentrifying" the neighborhood - if "guilt" is the right word.  By sprucing up the old apartment building, we helped bring up property values in the neighborhood, which were on the rise anyway.   If we hadn't bought there, someone else would have - likely a speculator who would have flipped the properties in a matter of months.  It is a double-edged sword.

Now enter AirBnB.   AirBnB rents out apartments and houses on a nightly basis - basically turning even your spare bedroom into a hotel room.   In our new libertarian economy, this is permissible, and zoning laws have been changed to accommodate this concept.  I note that our remaining condo in Virginia does not allow for AirBnb rentals - there is a minimum rental period of one year.  So even with local ordinances modified, community rules such as HOA docs or condo docs, may prohibit such uses.

The problems are the same as with the BnB and VRBO only amplified.   Neighbors now have to deal with nightly rentals and in many cases, people are renting out AirBnB properties and holding a rave with 100 people attending.   Neighboring homeowners are getting upset.

Not only that, but the profits are so staggering that people are snapping up properties to turn them into full-time AirBnB resorts.  They even have special mortgage instruments that factor in potential AirBnB income to allow folks to pay top dollar for properties.  Of course, this means the working stiff who just wants a place to live, is priced out of the equation.

Some "landlords" are cutting to the chase and renting out properties they don't even own.   It is an old scam - put an ad on Craigslist or even VRBO advertising a property for rent - collect a "deposit" and tell the tenants to move in.  The tenants arrive and find that someone else, in fact, owns the property and never had it for rent - on VRBO or anywhere.

A couple in Miami took it to the next level - renting out apartments and paying the first months' rent and then renting the place nightly on AirBnB - for months and months, until the owner of the property could "evict" the "tenant" who never paid rent, but raked in 100% pure profits from their AirBnB rentals.  Worse yet, since the properties were specifically zoned to prohibit nightly rentals, the owner of the property ends up being fined for the actions of their "tenant".

You start to see why we had these pesky "regulations" in the first place.  Libertarianism is a fine theory, but it falls apart in real-life practice because human beings are pretty shitty most of the time.  This is why we can't have nice things.

It gets worse.  Many renters are finding that they are being socked with "cleaning fees" and arbitrary fees, often buried in the rental agreement.  A simple two-bedroom apartment, listed for $250 a night ends up costing $1500 with excess fees.   Guests are tasked with doing chores before they leave (cleaning, doing dishes, washing sheets) or end up zinged with punitive fees.   Many are starting to wonder whether a hotel room, with maid service and endless clean towels, isn't a better bargain all around.

Of course, this model is nothing really new, at least in vacation destination resort areas.  On our little island, we had a "Hotel Condo" where each "room" was owned separately but rented out by the "hotel" to guests.  It worked OK, although the income from the nightly rentals was never quite enough to justify the ownership costs (by my calculations).  Many owners freaked out recently when they were hit with $50,000 special assessments to repair the aging buildings.  Such is the joy of owning a condo.

But since that condo-hotel was built (in the 1970s) the island has expanded the concept.   The local real estate companies rent out houses by the night or week, and many folks come here with extended families and party all night long, parking a dozen cars on the lawn.  It is hard on the properties and fortunately it is mostly limited to the beach side (we are on the marsh side which is quieter).  But more and more properties, including some on our street - are switching to this model.   For some owners, it is the only way they can "afford" a vacation home.

I recall a law partner I worked for once had a house on the Outer Banks.  It was rented almost every week of the year, other than the two or three weeks he and his wife visited it.  Their plan was to rent it out until they retired, at which point the mortgage would be paid off and they would gut-and-remodel the place, as it would be pretty tired by then.  And for many middle-class and upper-middle-class Americans, this was the battle plan.  Today, some folks are amassing multiple rental properties and becoming the Conrad Hilton of AirBnb, albeit on a smaller scale.

When our island was redeveloped, six hotels were torn down, but only three were rebuilt - as hotels.  The remainder were made into houses or townhomes, which are perpetually rented to vacationers.  The model of renting a house for vacation is here to stay, it seems.

But nearly everyone, it seems, is getting screwed on this deal.  The owners end up getting fined, the neighbors end up getting pissed, the guests end up getting zinged, and the locals end up priced out of the housing market.  Who wins?

Silicon Valley.  AirBnB and VRBO, like Uber and Lyft and the plethora of "side gig" economy jobs such as food delivery (which is technology doncha know!) all skim a pretty hefty chunk off the top of each transaction and provide little more than a listing platform.  When landlords or renters get into trouble, AirBnB washes their hands of the whole thing.  "We're just a listing platform!  We don't own the properties, we don't negotiate the prices!"   So they benefit from running the world's largest virtual hotel chain, without the messy business of maintaining buildings, securing tenants, and paying employees (other than themselves).

The same is true for more traditional vacation rentals, such as here on our island.  The local "real estate" companies seem less interested in listing or selling houses as they are in renting them, which is a steady income stream.  More and more listings on our island are from off-island real estate agents.   The rental business is just too good.

But even then, there are regulations.  We live under the benevolent dictatorship of the "Island Authority" which pretty much does what it wants to do, but treats us pretty fairly, all things considered.  And one of the things they decided to do was require that people obtain a license if they want to rent out their homes (or a room or whatever) and pay a "bed tax" as well.  Properties are subject to inspection and expected to meet certain standards.  They don't want someone renting out a run-down hovel and giving people a bad impression of the island.

Those sort of things do happen.  I met ore than one landlord who put the rattiest stuff in their rental units - broken furniture, mis-matched and chipped china, bent cutlery, and so on and so forth.  "They're just  renters - screw 'em!" they would say.  Others simply shipped off to their condo whatever cast-off furniture they were getting rid off from their own house (and buying new stuff and deducting it as a "business expense" on their taxes).

Of course, the renters were not all innocent parties.  I met a young couple who regaled me with stories about problem renters.  They put all new glassware and tableware in the kitchen and new pillows in the bedrooms.  A few months later, they come back to find old jelly jars replacing the new glassware, and mismatched silverware in the drawers and chipped and mismatched plates in the cupboards.  On the beds are lumpy and moldy pillows.  It seems that some of these tenants bring their old crap with them when they go on vacation and then swap it out with "the good stuff" the landlord left behind.  The cleaning service is charged with counting the number of cups and saucers and forks and pillows.  So long as the numbers add up, the quality isn't questioned and the cleaning lady, who works on 20 houses, has no idea what was supposed to be there.

Again, humans are shitty.  We can't have nice things.

Hotels see the same thing - people steal towels and silverware and whatnot.  They leave horrific messes for hotel staff to clean up.  Sometimes they even tear out the walls - but they usually charge guests for that sort of thing.

Many municipalities have already enacted laws limiting or outlawing AirBnB-type rentals.  As in our condo, rentals can be limited to no less than a year or six months or whatever, which essentially kills off the weekly or nightly business.  I suspect, that, over time, perhaps more municipalities will enact such rules (which, at one time, were in place - it's called zoning!) thus limiting online overnight rentals to tourist districts or selected areas.

And now we are back where we started.  It seems we go through this every 20-30 years or so.  We decide to abolish "restrictive" laws because they are bad for business or that people are chafing against restrictions of their "freedoms".  Then we realizes, a decade later, why we had these laws - taxi laws, zoning laws, banking laws - and then re-enact them.

Back in 1935, my Grandfather Wiggins would fly down from Idlewild Airport to Washington National in a Ford Trimotor, to meet with banking officials to help draft new banking laws and rules to prevent the excesses of the 1920's that lead to the great depression.  He was chair of the banking committee of the New York State Bar and represented Cities Bank.  And those laws were enacted - at least in part - and over the next 30-40 years the economy grew and prospered, despite these "restrictions" on "banking freedoms" or perhaps because of it.  Banks could no longer dabble in the stock market, for example.  Today, every major bank has a trading house affiliated with it.

We create these rules after things go wrong - to try to make an even playing field and make sure the bulk of humanity doesn't get ripped off.  Zoning laws were enacted to prevent people from building a rendering plant in a residential neighborhood (as happened in Georgetown, DC, back in the day).  Taxi laws put an end to the taxi wars - and drivers and passengers being ripped off or exploited.   Hotel regulations were put into effect to provide safe lodging and prevent tragic fires.  Laws prohibit hotel owners from excluding customers on the basis of race or religion.  These are not bad laws.  But some folks think they go too far.

Today, we are seeing, once again, why these regulations were put into place.  Maybe the taxi laws weren't providing better taxi service.  And maybe there should have been a better way of regulating cabs.  The former mayor of New York tried to standardize NYC taxis along the lines of the famous London Cabs - but was shot down by a judge who decided that used Police cars would make better taxis than brand-new purpose-built Nissans.  Freedom!  Freedom to have a shitty taxi service, that is.

Uber drivers are finding they are being exploited.  Passengers are being zinged with rush-hour pricing.  The lack of background checks means some are being raped or robbed.   The Wild-West or Libertarian approach doesn't always work - in fact, it rarely does.  One wonders whether this model is sustainable.  Uber is pleading with people to come to "work" for them (as a contractor, of course!) with online ads showing how much you could make if you turned the family car into a taxi (for which it was designed, of course!).  Despite all of that, Uber continues to lose money - as most of these "gig economy" companies do.  Of course, the people running these companies are raking in millions of dollars, in salaries and stock options.  Stock options pumped up by inflated priced because - you guessed it - the "little guy" buys into the idea that this is "the next big thing!"  Gee, just about everyone gets screwed in these "side hustle" gigs, don't they?

Surprisingly, AirBnB doesn't seem to be all that profitable - if profitable at all.  Some charts show the company as losing money, while others claim it has a P/E ration of 85 or so (which is very high).  Either way, it doesn't smell good.  By the way, it is interesting how, on the Internet, when you try to research whether a company is profitable or not, you get lots of "Revenue" charts (which only shows gross income) or "EBITA" charts (which shows a mythical income if the company didn't have to pay its bills - wtf?) or other specious metrics.  Debts have to paid back - along with taxes.  It doesn't matter if your company is "profitable" but mired in debt and has a negative cash-flow when servicing its debt and tax obligations.  Eventually it will go out of business.

But like Uber, AirBnB and VRBO are advertising heavily online - like a man desperate for a date when the bar is about to close.  It makes one wonder what is really going on.

Myself, I am starting to like hotels again - the few times I have had to use them.  You know the price up front, you don't have to do the laundry or the dishes, and there is an endless supply of clean towels.  Plus, you don't have to dick around with some "app" just to make a reservation.  That sort of shit is getting really old, in my book, particularly when the apps are buggy and don't work very well.  Maybe over time, they will improve, but I doubt it - IT guys just have to throw in yet another slow-loading animated logo and slide show, just so you can order a sandwich at a restaurant.  Shit never ends, does it?

The bottom line is this:  The "gig economy" isn't helping us little people at all.  We were sold on this idea that we would get discount airfares on Expedia (also affiliated with AirBnB) or cheap taxi rids on Uber, or a cool resort vacation for cheap on VRBO.  Our food would be delivered cheaply via GrubHub and we could all buy cool stuff for cheap on Amazon - and work in the warehouse to pay for it all!

Oh, right, thatA leaked memo claims that Amazon has a staggering 150% turnover rate every year.  You go to work at Amazon in January, and expect to be fired or quit by September.  Worse yet, this turnover right is twice that of retail in general.  That's right - retail has a 75% turnover rate as it is.  A career in the retail business is an oxymoron.

This is in stark contrast to our friends in Europe, where jobs like "Waiter" or "Store Clerk" are indeed careers, not something you do while in high school or looking for your "real" job.   In France and Italy, being a waiter is seen as a honorable career - people retire from such jobs.  But for some reason, in America, we view such people at little more than a disposable commodity - to be paid a sub-minimum wage.  They have to hope the customers take pity on them and tip - another concept alien to our European friends.

Maybe they have the right idea, maybe not.  But it seems like this "gig economy" thing is just turning into a dog-eat-dog mentality, where everyone is trying to screw everyone else out of their last dime.  How on Earth is this sustainable?