Portugal Shows The Impact Of Airbnb On Local Businesses

13th December 2024

Short-term rentals don't just happen in a vacuum. They affect the environment around them, contributing to the closure of low-productivity firms and the expansion of surviving ones, especially tourist-oriented enterprises. Ronize Cruz, Francisco Nobre and João Pereira dos Santos write that short-term rentals may reshape the urban business landscape, creating a division between touristic and residential areas.

What happens when short-term rentals open in your neighbourhood? This question has sparked intense debate across academia and the media. It has also received attention from policymakers, mainly due to some negative implications: reducing housing supply, increasing house prices and displacing residents.

However, short-term rentals can also offer more opportunities for local businesses and create new jobs. Portugal provides the ideal setting to scrutinise the impact of this type of accommodation on its surrounding economic environment. After 2013, the use of peer-to-peer accommodation platforms, especially in Lisbon and Porto, Portugal's two largest urban centres, surged dramatically, as shown in figure 1.

According to a report from the UN Economic Commission for Europe, around 12 per cent of the housing stock in Porto and 11 per cent in Lisbon were used for short-term rentals between 2015 and 2020. These figures are considerably higher compared to other European cities such as Paris (4.6 per cent), Madrid (3 percent), and Barcelona (9.3 per cent).

The lessons learned from the Portuguese experience can help elucidate how Airbnb-type accommodations shape neighbourhoods, impacting the performance of local businesses.

Prior research and contribution
Previous research has identified a positive relationship between the number of short-term rentals and house prices, drawing on data from various cities with different institutional contexts. Some studies have examined how a period of sustained Airbnb growth has affected property valuation in Barcelona, Portugal's metropolitan areas and Boston, while others have analysed the effect of placing restrictions on the opening of new short-term rentals in Berlin, Los Angeles, Lisbon and Irvine (California).

Research has also focused on how short-term rentals drive demand for local amenities such as restaurants, bars and entertainment venues. In Madrid, for example, an increase of 10 Airbnb rooms in a neighbourhood led to the opening of one more restaurant. Similarly, in Chicago, the growth in Airbnb accommodations contributed to the rise in liquor, retail food and entertainment business licenses.

In our research, we present novel evidence of the effects of short-term rentals on local businesses. We divided our analysis in three main parts:

1) the impact on firm closure;

2) for surviving firms, changes in sales, productivity, employment, profits and financial position, and how business performance evolves;

3) which firms enter the market and whether they tend to have larger sales, productivity and profits than those that close.

Main findings
We began by defining the exposure to short-term rentals in civil parishes of Lisbon and Porto. The exposure is calculated by dividing the number of new short-term rentals in 2016 by the total number of dwellings. This measure, termed the "registry rate", enabled us to determine which areas were highly or less exposed to short-term rentals. We then estimated the effect of different registry rates on the evolution of certain firm-level outcomes between 2016 and 2019, accounting for firm and neighbourhood characteristics.

Firms closing
Our analysis shows that higher exposure to short-term rentals in 2016 increased the probability of firm closures. We also observed a negative and significant effect on firm longevity. Closing firms consistently had lower sales, sales per worker and net profits over time. Commercial rent increases are one plausible channel through which short-term rentals may lead to closures.

Figure 2 displays the average rent reported by closing firms in areas with registry rates above and below the median. While not all firms reported this information, the figure reveals a clear divergence: firms in areas with registry rates above the median experienced dramatic rent increases from 2015 onwards. This likely strained the financial health of firms already performing poorly, ultimately contributing to their closure.

Employment effects
For the entire sample of surviving firms, we found that exposure to short-term rentals led to an average increase of 12 per cent in hours worked and 13 per cent in wages. We differentiated between resident-oriented and tourist-oriented firms. As residents tend to be the primary customers of retail stores, we classified them as resident oriented. Restaurants and bars were classified as tourist oriented. The employment effects were stronger for tourist-oriented firms, with an average increase of 23 per cent in hours worked, 25 per cent in employment, and 28 per cent in wages.

Increased sales
Sales increased around 16 per cent for both resident- and tourist-oriented firms. Many food retail businesses, which we classify as resident-oriented, cater also to tourists who stay in short-term rentals without access to prepared meals. The effects on sales per worker and net profits were less pronounced, which is unsurprising considering the low productivity affecting the Portuguese economy over the last two decades.

Liabilities and expenses
Total liabilities and external expenses increased, likely due to the need for increased supplies to meet rising demand driven by tourists. Only tourist-oriented firms saw an increase in liquidity, as measured by cash and bank deposits.

Firm entry
We found that higher registry rates increase the likelihood that new firms will be tourist-oriented, reinforcing the role of short-term rentals in driving demand for leisure amenities. And while entry firms have larger turnovers, they are not necessarily more productive or profitable.

This potentially leads to a clearer separation between areas with more tourist-oriented activities and those with businesses more focused on residential needs.

Conclusion
Our research builds on existing literature by revealing substantial effects of the increase of Airbnb-type accommodations on local business performance. Short-term rentals can contribute to the closure of low-productivity firms, primarily due to rent increases for commercial properties. At the same time, they drive the expansion of surviving firms, especially tourist-oriented enterprises.

Short-term rentals may also reshape the urban business landscape, creating a division between touristic and residential areas, thereby demonstrating the broader social and economic implications of these accommodation services.

Authors
Ronize Cruz is an Assistant Professor at University of Coimbra (Portugal).

Francisco Nobre is a PhD student in Economics at the University of Surrey.

João Pereira dos Santos is a Marie Skłodowska-Curie Actions Postdoctoral Fellow at Queen Mary University of London and an Assistant Professor at University of Lisbon - ISEG School of Economics and Management.

For more from the London School of Economics go HERE