Ali McMahon has endured more than her fair share of challenges in the past few years running her Kailua clothing boutiques Olive, which sells women’s clothes, and Oliver, for men.

There was the shutdown of the Pali Highway due to mudslides in early 2019, which hindered travel to the Windward side for months. Then in August 2019, the City and County of Honolulu started imposing an ordinance, Bill 89, to crack down on illegal vacation rentals. That caused rental operators to take thousands of units off the market, dampening tourism in Kailua and Lanikai.

Ali McMahon, Ollie & Oliver
Ali McMahon, owner of the boutiques Olive and Oliver in Kailua, has endured a tough two years and soon will face another blow. Stewart Yerton/Civil Beat /2021

Less than a year later came Covid-19 and, in March 2020, quarantine orders that largely shut down travel to Hawaii for months. Now that tourists are finally starting to come back to Oahu, Kailua is feeling left out. Vacation rentals are still relatively scarce, she said. And rental cars that people could drive from Waikiki, at least for awhile, were hard to find.

Hawaii's Changinge Economy Special Project Badge

Now, McMahon faces another potential blow. The Honolulu City Council is considering Bill 41, another measure designed to crack down on unpermitted short-term rentals. If the City Council passes the current measure – and Mayor Rick Blangiardi enforces it — it would remove thousands more units from Oahu’s inventory of visitor accommodations.

Since 1989, Oahu’s land-use ordinance has generally banned short-term rentals, with exceptions for slivers of land in Waikiki and Ko Olina and about 800 properties grandfathered in. But the law has proven difficult to enforce as thousands of units have sprung up thanks to platforms like Airbnb and VRBO. Proponents say Bill 41 would amend the ordinance to make it easier to enforce.

If that happens, the result could be the loss of millions of tourists annually, compared to 2019’s peak. In essence, the bill would put a lid on tourists by taking away places for them to stay.

Oahu vacation rentals
A map published in March by the University of Hawaii Economic Research Organization shows the location of short-term vacation rentals in East Oahu at the time. The blue dots show rentals in resort zones. The red dots show units outside of resort zones which are generally illegal, including large concentrations in Kailua and Lanikai. UHERO, HTA, Transparent

While this is likely to hit businesses across Oahu, Paul Brewbaker, a Kailua-based economist who has studied the economics of short-term rentals, says small businesses on the Windward side could be among those hit hardest. Many of Kailua’s newer boutiques have sprung up to serve what had become a tourist trade that once flourished in the area.

“It’s the only reason they exist,” Brewbaker said. “A bedroom community alone won’t support them.”

Thousands Of Units Already Are Gone

How much Bill 41 will affect Oahu’s economy depends on a myriad of variables. But one thing seems almost certain: The immediate effects will be muted. That’s because Oahu’s inventory of short-term rentals already has shrunk, says Carl Bonham, executive director of the University of Hawaii Economic Research Organization.

Bonham points to a September 2019 paper in which UHERO reported that the previous Honolulu ordinance, known as Bill 89, already had an enormous impact. Based on data from AirBnB, UHERO estimated Oahu had about 10,000 rentals, 6,000 of which were operating illegally.

“Since the ordinance went into effect, about 3,500 units have withdrawn their listings,” UHERO reported. “This represents a greater-than-8% drop in Oahu’s overall visitor plant inventory, which averaged a little more than 40,000 units in the first half of this year.”

Some of those 3,500 units eventually came back on the market, Bonham said. But then Covid-19 emerged, Gov. David Ige imposed mandatory quarantines for travelers and tourism came to a standstill. When Hawaii’s Safe Travels program reopened the state to tourists in October 2020, short-term rentals proved a popular option.

By July, during the peak of tourism, Hawaii hosted some 880,000 visitors, according to the Hawaii Tourism Authority. Many of them chose to stay in vacation rentals.  Occupancy at vacation rentals was 81.8% for the month, according to HTA, which was slightly lower than hotel occupancy. The average rental raked in $251 per night.

While these numbers show how popular vacation rentals are, they obscure one thing: Oahu’s rentals are still far below the 10,000 the island once had.

Bonham points to HTA’s latest report on vacation rentals, showing there were about 163,000 “unit days” available in September, to estimate Oahu’s inventory was about 5,200 units per day. Bill 41 would likely shut down the vast majority of those.

Could Bill Cap Visitors At 2009 Levels?

The big question is what that will mean for Hawaii’s economy overall.

“If you take away five or six thousand units, it’s not like demand will just go away,” Bonham said. “Legal short-term rentals always will benefit.”

Hotels also are likely to gain. But how much? One argument in favor of short-term rentals is that many travelers simply would not come to Hawaii if they could not stay in a chic, decorated ohana cottage in a residential neighborhood like Lanikai, Manoa or the North Shore. Data show there’s truth to the argument.

A 2016 survey commissioned by HTA found that 15% of recent visitors to Hawaii said they would not have come if they couldn’t have stayed in alternative accommodations. Brewbaker says this shows preferences had changed significantly, before Covid-19 made people more reluctant to stay in hotels. Even before the virus, he said, many travelers had decided they didn’t want to be “segregated spacially into these ghettos that we call ‘resorts.’”

Regardless, Bonham said the result could mean fewer tourists spending more money in the local economy. Although Bonham acknowledged there will be winners and losers, “the net effect on the economy,” he said, “is positive.”

Kekoa McClellan, the Hawaii spokesman for the American Hotel and Lodging Association, said the industry had not studied the economic effects of Bill 41 and took issue with the idea of assessing the economic impact of shutting down an illegal activity.

“We never stopped to quantify the value of pill mills in our communities,” he said. “We never quantified the cost of shutting down a pill mill in Nanakuli.”

Nonetheless, McClellan pointed out something that other travel executives, including Hawaii Airlines Chief Executive Peter Ingram, have noted: Short-term rentals have enabled millions of visitors to come to Hawaii in recent years.

Specifically, McClellan said, there were no new hotel rooms built between 2009, when Hawaii had about 7 million visitors, and 2019, when the state had more than 10 million.

“We know that those 3 million visitors were not staying in our hotels,” he said. “They were invading our neighborhoods. They were taking housing away from residents. They were clogging our roads. And they were taking over our sacred spaces.”

Julia Finch, Mahina
Julia Fina, manager of the Mahina women’s boutique in Kailua, said local customers have kept the store afloat during the pandemic but added the shop still needs tourists to thrive. Residents, she said, “can only shop so much.” Stewart Yerton/Civil Beat /2021

So what will happen if Bill 41 effectively caps Oahu visitors to 2009 levels?

“A ban on short-term rentals would permanently exclude recovery of the $400-500 million annually in Oahu tourism receipts associated with pre-Covid vacation rentals,” Brewbaker said in an email.  He predicts that could grow to “$1 billion or more annually in tourism receipts on Oahu by the early- to mid-2020s.”

Meanwhile, small businesses are just trying to make the best of a challenging situation.

The clientele at Soha Living’s Kailua location has changed significantly during the pandemic, said Taylor Mickel, the store’s manager. With none of the Japanese tourists who used to come in from Waikiki and fewer tourists staying in the area, SoHa now relies on more people from nearby military bases, as well as real estate agents staging homes to sell.

Down the street at Mahina, a women’s clothing store, Julia Finch, the store’s manager, said it’s not just declining numbers of nearby rentals and Japanese travelers. A shortage of rental cars has also made it harder for tourists to travel from Waikiki to the Windward side. Even with those challenges, she said, tourists are starting to come back. Shutting down vacation homes, just as things start to pick up, “will have a bad effect,” she said.

The store has survived thanks to loyal local customers, she said. But she added: “There’s only so many locals here. They can only shop so much.”

Hawaii’s Changing Economy” is supported by a grant from the Hawaii Community Foundation as part of its CHANGE Framework project.

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