Trading Spaces: The Sharing Economy’s Impact on CRE

Zoning laws and the strict definitions of the past are under pressure as the economic potential of homes and buildings is unleashed by Internet-age companies, explains Camber Creek's Nate Lowentheil.

Nate Lowentheil  Image courtesy of Camber Creek.

Until the middle of the 1800s, urban homes in the United States were rarely just for living. The front of the home may have been a store, the upstairs a small textile operation, the kitchen a neighborhood bakery or confectionary. It was only in the second half of the 19th century that families started to delineate clearly between home and work, with commercial operations moving into offices and industrial production into factories. In fact, the term “office” didn’t come into common usage until the 1850s. Simultaneously, cities began zoning sections of cities for particular kinds of economic uses―industrial here, retail there, apartments over yonder. Over time, zoning restrictions grew ever more complex and more restrictive. Cities might have half a dozen or more kinds of industrial uses, while only certain neighborhoods could host bars, restaurants or hotels. In my hometown of Baltimore, there are currently 40-odd zoning designations.

Today, the strict definitions of the past are under pressure from the sharing economy, which is changing the economic potential of homes and buildings and, in turn, starting to break down the political rules that governed their uses. Pressure is coming from two directions: home and apartment owners seeking to rent out spare space and developers looking to “flex” between different building uses. Both uses are made possible by the sharing economy and the marketplaces that it has engendered.

New Streams of Revenue for Owners

The first set of pressures are from home and apartment owners―and increasingly, investors―renting out rooms and units on short-term rental platforms like Airbnb and VRBO. Today, every apartment and every home can be instantaneously―and intermittently―transformed into a hotel room. Residential neighborhoods in many cities, like New Orleans, now serve as distributed hotels. Short-term rental platforms create new revenue streams for homeowners and renters, put pressure on the existing hospitality industry, and in some cases drive up property prices. New York, Baltimore and many other cities have seen a political backlash from home owners and renters frustrated both by higher property prices and by the impact of heavy tourism travel in what had been purely residential areas.

The combination of the short-term rental marketplaces and new technology―especially digital building access―have also created the potential for completely new business models. Historically, hotels and motels depended on centralized units to which consumers could be given direct access (imagine actual, physical keys!) and which could be easily cleaned and resupplied. But new hospitality companies can now market a distributed set of rooms through STR platforms without any single central hub―and without the risk of building or leasing a full hotel.

Currently the dominant short-term use for homes and apartments is lodging, but in time homes could start renting out space for other uses. A number of new companies let homeowners rent out spare rooms, closets or garages for storage. In time, individuals could start running small co-working operations out of their living rooms―or even pop-up restaurants. As more and more work is done remotely from the home, things may come full circle.

Building for Flex 

At the same time, developers and building owners are increasingly realizing that a real estate asset need not be devoted to a single or constant use. Pop-up hotels can be found in brand-new luxury residential buildings, creating a new revenue stream for owners during lease-up. One company has even announced they would be doing ground-up development to build buildings that could be flexed between short-term rentals (hotel), mid-term rentals (corporate housing) and long-term rentals (traditional apartments).

Even the most restrictive zoning systems have routinely provided for mixed-use buildings with retail on the bottom floor and commercial or residential above. What is new about the ‘flex’ system is the idea that uses can be routinely shifted, making it hard to define exactly what a new building is―and making it more difficult for policymakers to determine where those buildings should be allowed to locate.

Other kinds of commercial operations are converging on the flex model, even restaurants. In New York and San Francisco, a few new concerns are helping restaurants open up their doors as co-working spaces during off-peak hours.

The impacts of the sharing economy in real estate are only beginning to be felt. By reducing the transaction costs of listing, finding and renting space of all kinds, the sharing economy marketplaces are changing how existing real estate assets are utilized and new assets designed, breaking down traditional barriers and reshaping the urban landscape.

Nate Loewentheil is senior associate of Camber Creek.

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