Short-term rentals and the housing crisis: one complicated piece of a complex puzzle

How short-term rentals affect Flagstaff’s housing crisis, and why Arizona legislature is a key player

Editor's note: This guest article is part of a journalism independent study. Lauren Frick is pursuing a master's degree in applied sociology at NAU and holds a Bachelor of Arts degree in journalism from Eastern Illinois University.

Shockwaves from 2016 state legislation that sparked unprecedented growth of short-term rentals in Arizona still ripple throughout the state as debate in communities continues over their impact on housing.

Flagstaff city officials and housing advocates have different views on the impact short-term rentals — lodging under 30 days — have on housing, but one thing is clear: Short-term rentals are only one piece of the housing crisis puzzle.

The city of Flagstaff has identified a total of 1,299 short-term rentals within city limits as of Feb. 1, according to city officials.

Legislation passed in 2016 — better known as the “Airbnb bill”— prohibited local governments from banning short-term rentals and stripped them of regulatory powers.

The unregulated, rapid growth of short-term rentals is what Lake Havasu City Mayor Cal Sheehy calls the “Arizona model.” 

At the American Hotel and Lodging Association’s “Global Reformbnb General Assembly” in November, Sheehy said the Arizona model was an example of “what not to do” for other community leaders addressing short-term rental regulation.

“The Arizona model is a model that everybody watched as the opposite of the gold standard,” Sheehy said. “So, what happened in Arizona, they're trying not to replicate that in their areas.”

Various lawmakers and city officials have spent the years since the 2016 legislation passed fighting for more local control and attempting to address the bill’s consequences. This legislative session, 11 short-term rental bills have been filed, but none have made it to a committee hearing.

Housing in Flagstaff: a brief overview

It is no secret to anyone living in Flagstaff that finding affordable housing is a major challenge.

The Flagstaff City Council declared a housing emergency in December 2020. By January 2021, the cost of housing in Flagstaff was 33.5% higher than the national average, according to a study by ASU’s Morrison Institute of Public Policy.

Housing Solutions of Northern Arizona CEO Devonna McLaughlin has worked for the nonprofit for almost 20 years. She said the housing situation in Flagstaff is likely worse than when she started with the nonprofit.

“Not that it was great then, but it continues to be a challenge for a lot of people in our community,” McLaughlin said.

According to a report by the city of Flagstaff and Housing Solutions of Northern Arizona, nearly half of all Flagstaff renters, homeowners and households are cost-burdened, meaning more than 30% of their monthly income goes toward rent.

The report found Flagstaff renters experience this cost burden the most. A Flagstaff renter earning minimum wage would need to work more than two full-time jobs — roughly 90 hours a week — to afford a two-bedroom apartment at the average rental rate.

McLaughlin said high demand and low supply are at the heart of Flagstaff’s housing troubles. High demand is created through local and student housing needs and people wanting to move in or purchase a vacation home. McLaughlin described Flagstaff as an island, saying the low, inflexible housing supply created by the natural surroundings leads to high building costs and the inability to spread out.

Short-term rentals can also play a part in reducing Flagstaff’s already low housing supply, McLaughlin said.

“It's another issue because we're essentially taking rentals that could have been serving the workforce or could have been serving some other residential use, whether it's homeownership or whatever, and now, we've taken those out of our inventory,” McLaughlin said. “So, when you look at it, like, ‘How many problems can we pile on?’ That's just another one we get to deal with.”

The “Arizona model”: unregulated growth of short-term rentals in Arizona

Sheehy said the Arizona model refers to the unregulated growth of short-term rentals courtesy of Senate Bill 1350, which former-Gov. Doug Ducey signed into law in May 2016 and went into effect in 2017. The law was the first of its kind in the United States, according to a Goldwater Institute press release.

The bipartisan bill, supported by Airbnb and the Goldwater Institute, prohibited any city, town or county in the state from banning or restricting short-term rentals.

SB 1350 also set state rules for short-term rental taxation and allowed home rental companies, like Airbnb and VRBO, to collect the associated taxes on behalf of the individual property owner.

The bill was part of Ducey’s expansion of sharing economy industries, like home and car sharing, because a PricewaterhouseCoopers report projected global revenue from various sharing economies to increase from $15 billion in 2013 to $335 billion by 2025. The report served as the main justification for Ducey’s 2016 executive order to create the Governor’s Council on the Sharing Economy.

Ducey expressed his hope for Arizona and the sharing economy to become what “Texas is to oil and what Silicon Valley used to be to the tech industry” during his 2016 State of the State Address.

Key opposition to the bill included the League of Arizona Cities and Towns and individual lobbyists for Paradise Valley, Scottsdale and Tucson.

Before the bill, cities like Sedona and Scottsdale had bans against short-term rentals for decades. Sedona enacted its ban in early 1995.

Lake Havasu City had a history of embracing short-term rentals in its communities prior to SB 1350.

“We've had short-term rentals here since the 1970s before we even incorporated as a city,” Sheehy said. “It's always been part of who we are, but what changed was our ability to manage it from a local perspective.”

Before the bill, Lake Havasu City required short-term rental owners to provide contact information to the city and keep a “good neighbor brochure” for renters in their unit, Sheehy said.

SB 1350 overturned all short-term rental regulations. Since, local governments have tried to regain control of short-term rentals within their communities.

After years of political debate over who should regulate short-term rentals and how, Ducey signed House Bill 2672, which aimed to mitigate the nuisance and noise issues connected to short-term rentals turned “party houses” but left regulation up to the state.

Some power was restored to local governments through Senate Bill 1168, which took effect in September 2022. The bill allows cities, towns and counties to license short-term rentals in their communities and suspend licenses when three verified violations occur within a year.

Local governments cannot prohibit short-term rentals, but they can restrict or regulate them based on eight criteria, including adopting and enforcing use and zoning ordinances — nuisance issues — and requiring short-term rental owners to provide the city or town with an emergency contact.

The Flagstaff City Council passed its short-term rental regulation in July 2023.

While SB 1168 moved through the legislature in 2022, the League of Arizona Cities and Towns, Airbnb and Expedia Group — the owner of VRBO — agreed to a three-year restriction of lobbying to “change state law that limits how cities and towns can regulate short-term rentals.”

The league believed the temporary lobbying ban was the only way to get SB 1168 passed, according to The Arizona Republic.

Additionally, the league cannot try to repeal SB 1350 for five years and cannot advocate placing numeric caps or density limits on short-term rentals.

A 2022 Morrison Institute of Public Policy study found the average number of monthly listings of short-term rentals increased by nearly five times from 2016 to 2020 in Coconino County. Sedona Councilor Jessica Williams said 17% of the city’s housing in 2023 was short-term rentals, one of the highest short-term rental densities in the state, according to Sedona.Biz.

This combination of growth and lack of regulation is at the heart of the Arizona model discussed in Washington, D.C.

Sheehy said the bill was originally advertised as “Grandma and Grandpa renting their casita in their backyard” but instead brought Arizona into the spotlight, allowing larger short-term rental companies to move into the state and use that law to further their business interests.

A breakdown of short-term rentals in Flagstaff

The Arizona Daily Sun reported short-term rentals made up 3.3% of Flagstaff housing in July 2023 based on 1,045 short-term rentals identified by the city at the time. Based on U.S. Census Bureau data, the 1,299 short-term rentals now identified by the city would increase the percentage to 4.1%.

City of Flagstaff customer service manager Jessica Kittleson said the city has contracted with a third-party vendor, GovOS, to identify short-term rental properties in Flagstaff since January 2021. 

The map below uses city data to show the locations of 1,415 city-identified short-term rentals. This includes some properties previously identified by the city but not currently listed online. Kittleson said the constant removal and re-listing of short-term rentals is why the numbers do not always align. 

The short-term rental data analytics company AirDNA identified 2,385 total listings in Flagstaff between Airbnb and VRBO as of Feb. 10. Subtracting duplicate listings adjusts the total to 1,430 short-term rental properties. Using the same U.S. Census Bureau housing unit data, this represents 4.6% of Flagstaff housing.

Both GovOS and AirDNA use information systems that “scrape” online short-term rental listings to find properties in certain geographical locations. GovOS claims to be 98% accurate in identifying properties, while AirDNA advertises a 97.5% accuracy rate.

AirDNA provides additional information on short-term rentals not tracked by the city. It reports the average daily rate of listings in Flagstaff is $266.40, and 92% of listings are entire homes or apartments, while 8% are private rooms.

In Flagstaff, larger corporations Evolve and Vasca take the top two spots with 131 and 72 listings, respectively. Local property managers are placed lower on the list, according to AirDNA.

A sample of the first 245 Flagstaff Airbnb listings in January offers a glimpse into the people managing the short-term rentals.

Of the several hosts who indicated they did not live on the rental property, there was a mix between hosts who lived in Flagstaff and hosts who lived out of the state. Some hosts indicated the listing was a vacation home; many of those hosts also said they live in Phoenix.

Additionally, many hosts identified as travelers or highlighted their involvement with real estate and home renovation. Frequently used host descriptors included travel junkie, nature lover, those who were interested in the hospitality side of Airbnb and those who refurbish homes.

Provided below is a sample of Flagstaff Airbnb host biographies.

— “My family lives in CA most of the year and gets to spend vacation time in Flagstaff. We love our house’s proximity to nature and our next adventure!”

— “You may see us out and about the property taking care of the land and farm animals or taking our dogs for a walk. We look forward to having you and seeing you around Golden Acres!”

— “My wife and I live between Flagstaff and the Phoenix area. Our favorite life adventures are traveling and staying in unique places, discovering hidden gems and great food! We love using Airbnb and hosting others for our unique stays!”

— “I’ve spent my life working at 5-star resorts – from folding towels at the age of 14 in a 5-star spa to parking cars at a 5-star restaurant and checking in guests at a 5-star hotel – from The Sanctuary at Kiawah Island to The Grand Del Mar in San Diego – I know 5-star service. That’s my mission in Flagstaff, to compliment this wonderful mountain town with the elevated rentals and incredible customer service it deserves. I look forward to providing you with a fantastic Flagstaff experience!”

Short-term rental impact on housing in Flagstaff: important variables and the unknowns

A 2019 Harvard Business Review study found the growth of Airbnb contributes to about one-fifth of the average annual increase in U.S. rent and one-seventh of the average annual increase in housing prices. Additionally, a 2019 Economic Policy Institute cost-benefit analysis concluded the local economic costs of Airbnb likely outweigh the benefits for travelers and property owners.

Very little research outside an NAU student’s 2021 master’s thesis has been conducted to understand the specific impacts of short-term rentals on Flagstaff housing. However, larger studies paint a picture of the impacts on Flagstaff.

According to the Economic Policy Institute, when a housing market has an inelastic demand, even relatively small changes in housing supply can cause significant changes to the cost of housing. Inelastic demand means individual households cannot go without housing even when it becomes more expensive, forcing them to bear the burden of higher costs.

Flagstaff City Councilmember Lori Matthews said she believes the market can correct the impacts of 3% of Flagstaff’s housing being short-term rentals, saying the single-digit percentage indicates a lesser impact in the grand scheme of all housing.

McLaughlin said whether it is 3% or 20%, replacing short-term rentals with residential housing could go quite a ways in addressing housing needs.

“That's why I say it's just another thing that adds to the supply constraints,” McLaughlin said. “When you take out 1,200 or 1,400 homes, even if you took out 200 homes, if you're looking at what we're putting into the market that's affordable, it doesn't make up for what's being taken out.” 

The type of listing is also a factor in assessing impact on housing. Short-term rental listings can be different based on the host — multiple rental property owner versus single rental property owner — and whether the property being rented is an entire house versus a single room.

A 2023 study of Airbnb listings in New York City found entire home listings by multi-unit hosts had the greatest impact on rent, housing value and gentrification. Room listings for single-unit hosts had the opposite impact.

Additionally, the 2019 Harvard Business Review study found the more short-term rentals there are in a community where the owner also lives on the property, the less of an impact there will be on overall housing prices. 

AirDNA found 92% of the short-term rentals in Flagstaff are not occupied by their owners on a seasonal basis or at all.  

The sample of January Flagstaff Airbnb listings had only six listings with a host who lived in the rental or on the property.

Sheehy said short-term rentals are also “taking neighbors out of the neighborhood.”

“So, you don't know your neighbors anymore,” Sheehy said. “If it's a different guest every night, you're not going to know your neighbor and be able to do neighborly things, whether that's keep an eye on [them] or notice that they haven't grabbed their mail in a few days.”

Sheehy said replacing neighbors with short-term rental guests changes the dynamics of the neighborhood and is not a positive thing.

Several studies also highlight the racial and class implications on housing due to short-term rentals.

The 2019 Economic Policy Institute analysis found Airbnb hosting is an option predominantly for wealthy and white owners of housing wealth, and long-term renters may be one of the groups most harmed by short-term rentals. Americans who are Black, Latine and younger are more likely to rent than own, according to the Urban Institute.

The city of Flagstaff’s 2022 "10-Year Housing Plan" revealed that “white alone, non-Hispanic” residents have the lowest percentage of renter households in the city with 38% compared to 62% of homeowner households.

At least half of all households in every other race and ethnicity group were renters, according to the report. The groups with the highest percentage of renters in Flagstaff are “Black or African American alone, non-Hispanic” and “American Indian or Native Alaskan alone, non-Hispanic,” with 76% and 68%, respectively. 

Pushing for more regulation

Flagstaff’s new regulation took effect in November. It requires owners of short-term rentals within city limits to annually acquire a license from the city for each rental unit. A license fee of $175 will be used to cover the costs of running the license program.

Short-term rental owners must provide an emergency point of contact to the city; complete the “neighborhood notification,” which requires an emergency contact to be shared with all properties adjacent to the rental and provide proof of a Transaction Privilege Tax (TPT) license.

Matthews said she is optimistic the new regulations will address some common residential complaints related to noise, trash and parties.

“We can monitor if there's a problem,” Matthews said. “Some people felt unheard. Maybe these places were renting to party places and it was a nightmare all the time — noise, having to call the police, then not complying, and they weren't the owners so they didn't care. So, I would expect that to diminish.”

The city of Flagstaff issued approximately 680 licenses as of Feb. 9, according to city officials. That means roughly half of the short-term rentals identified by the city are currently in compliance. The city also uses GovOS to identify properties that are not in compliance.

Short-term rental owners have 30 days from the date they receive notice from the city to acquire a license. After, they can be penalized up to $1,000 per month.

Kittleson said owners should have received a notice from the city by the end of February.

Many state representatives from both parties do not think the current regulations are strong enough for their communities.

Eleven short-term rental bills were introduced this legislative session to expand regulatory powers. The bills were filed with co-sponsors covering 17 of 30 legislative districts and represented 22 Democrats and four Republicans.

Bills from Sen. John Kavanagh, R-Fountain Hills, and Rep. Selina Bliss, R-Prescott, would allow local governments to limit the number of short-term rentals within city boundaries.

In an August press conference, Gov. Katie Hobbs said she would support legislation that gives local governments more regulatory power as it relates to density caps — limits to the number of short-term rentals in a certain area. 

Hobbs also supports lawmakers revisiting SB 1350 to shift short-term rental regulation power back to local governments, according to the Daily Independent.

Despite this and bipartisan support, none of the bills received hearings in legislative committees. Sedona City Attorney Kurt Christianson said the bills are “effectively dead for this session,” according to Sedona Red Rock News.

Some cities outside Arizona with more local control have enacted legislation on density caps and limiting the number of short-term rentals in their communities. Atlanta’s ordinance requires all owners to be residents of the city and caps short-term rental ownership to two properties per resident, with one property as their primary residence.

Irvine, California enacted a complete ban on short-term rentals in residential zones in 2018. A study conducted by a group of business and economic university researchers concluded the ban resulted in a 2.7% decrease in long-term rental prices, translating to $1,212 in average annual savings on rent for Irvine residents.

While Sheehy supports restoring power to local municipalities, he said he does not see limiting the number of short-term rentals as an option for Lake Havasu City because he believes people should be allowed to enjoy their private property rights.

“I think that the horses have left the barn on this … we're here with it now, and we have to deal with it,” Sheehy said. “I think any additional regulation would need to revolve around a level and fair playing field with health and safety licensing requirements and health inspections that traditional restaurants and hotels have to go through.”

One complicated piece of a complex puzzle

Matthews, Sheehy and McLaughlin all made one thing abundantly clear: Short-term rentals are not the only factor in the housing crisis.

“[The housing crisis] is a puzzle and a pickle, and it's not just one problem or one cause,” McLaughlin said.

Matthews said citizens sometimes come to her and only see the short-term rental component of the housing crisis in Flagstaff, but she warns it is a much bigger issue.

Both McLaughlin and Matthews advocated for more people to get involved with local government. McLaughlin said it is important to remain educated about the housing crisis in Flagstaff, which includes going to city council meetings either in-person or online.

“It doesn’t fit on a bumper sticker,” McLaughlin said. “It’d be so great if the answer to everything was just bumper stickerish, but it’s not. So, how do you learn more about a complicated issue? You spend the time to learn.”

With SB 1350 still in effect, McLaughlin said the state legislature is also key for someone in Flagstaff who wants to address the impacts of short-term rentals directly.

“You can talk to city council all you want, and they’ll tell you the same thing, ‘Our hands are tied,’” she said.