From an outsider’s point of view, Annapolis, Maryland, has a thriving downtown area. In the warm summer months, during popular holiday periods or during unique events such as the U.S. Boat Shows or those associated with the United States Naval Academy, there are a lot of people walking around, seeing the historic sights, and patronizing the many bars and restaurants. But if you look a bit deeper, you will see anecdotally a significant percentage of the people do not live in the immediate area near downtown. They are either from the extensive surrounding metro area or are visiting from places farther away.

Don’t get me wrong, regional and national tourism is a good problem to have, as it generates a lot of revenue for the local economy. However, when incentives are such that tourism starts to crowd out traditional residents, it makes the local economy a monoculture and it becomes fragile. In the downtown area those incentives have promoted conversion of residential housing to full-time short-term lodging rentals (STR). Many quaint streets with historic row houses are almost completely converted to STRs and residents bemoan the loss of community as they no longer know any neighbors. This has subtly changed the character of the neighborhood from thriving mixed use to short term tourist related, and has prompted a lot of public policy discussion between residents and the city government. Before wading into the policy issues, I think it’s important to take a step back and look at the background of STRs and the incentives that promote them.

STRs are not a new phenomenon. In fact, the history goes back a long time; they were just called something else (such as a boarding house, mother-in-law suite, basement apartment, or even a bed and breakfast in recent times). The fundamental idea of this kind of living arrangement then, and today, is to monetize an underutilized asset, whether it be spare bedrooms or an outbuilding (aka an accessory dwelling unit, or ADU), allowing someone to supplement their income by renting that asset while staying in the house in order to afford to live there. These arrangements provided a lot of value to both the owners and renters, as it provides economic resilience, allowing both to gain both financial and social capital in the neighborhood—both positive outcomes.

As with many other genres, the internet has greatly decreased transactional friction and as a result, platforms such as Airbnb have enabled virtually anyone to participate in this marketplace. That change comes with both upsides and downsides. The upsides are well known from the end-user standpoint (lots of new lodging options), but fundamentally it has jumbled the incentives to owning and living on a property in any specific neighborhood. This is most pronounced in a place like downtown Annapolis. There is high demand due to tourism ranging from “one-offs” looking to party for the weekend to “regulars” with a connection to the United States Naval Academy who visit often. The cost of living is high due to the desirability of the location, regulatory factors such as Historic Preservation regulation and tight zoning that limits supply, and also the national trend of over-valuation of the housing stock. Lastly, current cultural preferences (auto mobility, large dwellings, and modern household amenities, among others) make it less attractive for families to pay higher costs for less “quality of life.” These flip the incentives from owning/living in that neighborhood (“housing”) to short-term rentals (“lodging”).

If you couple these effects with low transactional friction, the initial-use case of “monetizing an underused asset” by a resident property owner has been professionalized far beyond its initial intent. This is what we are seeing in downtown Annapolis. A property is more valuable to rent on a daily basis than it is to live in, and when that incentive is so strong, inevitably there is an opportunity for “investors.” To be clear, I am lumping all investors together as people who buy properties strictly for short-term rental and don’t simultaneously live there (aka true non-resident owners). These include the spectrum from a lifelong Annapolitan who has multiple houses (maybe they inherited a family place from another era downtown, in addition to the newer one they bought to actually live in) to a faceless institutional investor in New York City (who are buying residential housing everywhere in the U.S. today). It really doesn’t matter who the investor is or at what scale they are operating; the end result is the same: the loss of “community” and less residential housing supply.

As longtime residents have noted, this has started to degrade the social capital or fabric of the neighborhood, as people don’t get to know their neighbors and short-term renters are not interested in local civic life beyond the immediate needs of their stay. That’s not to say they are disruptive or otherwise unpleasant or even use more community resources—after all, resident owners and long-term renters can be messy or loud and usually have as many, or more, cars—it’s just that people who don’t spend much time in a place don’t build the social capital of the neighborhood.

While I don’t live downtown (but within easy walking/biking distance) I understand what people are reacting to with this increase in STRs. Nothing really looks different, other than perhaps more people walking around pulling wheelie bags, but the feel of the neighborhood is different, and it’s insidious: it’s slow, it’s real, and it’s hard to quantify. Personally, I want to have a downtown that has a good mix of locals and tourists, as that makes it an interesting place that is economically antifragile. I want to run into friends and enjoy a city where I have a lot of social capital. If it’s mostly tourists, I might as well be anywhere that has a pleasant view of the water and nice bars. And when the hospitality economy goes south, as it did during the pandemic, it results in an especially difficult burden on the city.

Now back to the public policy discussion. Let’s not pretend this trend is “just the free market talking.” As mentioned above, the incentives are shaped in part by factors out of city control, but in a city that tends to favor heavy regulation, there is for sure a hand on the market scale. If the recent move towards more STRs is not the desired outcome, and we want housing, not lodging, what kind of public policy should be enacted to promote this?

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There is no easy answer, but ideally, we have to look at the underlying incentives and change those to make it more desirable and economically viable for people to actually live there. This will be a slow but necessary task, and it will no doubt require a balancing of the varied points of view. In many ways it’s akin to the discussion Strong Towns has been having (here and here and here and here and many others) about the incoherent nature of the housing industry. In the interim, some simple regulations can be put in place to limit the incentive for investment-only properties, such as an owner occupancy requirement for an STRs license. This brings STRs much closer to the original intent of “monetizing an underused asset” by a resident owner, and helps prevent our housing supply from becoming a lodging supply. Yes, it may keep the value more in line with residential property values versus higher commercial property values, but that is a compromise that helps change the underlying incentive. Recent city STR data suggests that we are nearing saturation of owner-occupied STR licenses, so this requirement would likely limit additional STRs. However, that provision was struck from recent legislation.

While an owner-occupancy requirement is no panacea, an owner-occupant one is invested in the local community in a very different way from an investor-owner, as they have some skin in the game in terms of the social fabric and are not just interested in the property’s monetary value. Further, allowing some aspects of STRs enables owner-occupants to have options to offset the costs and inconveniences of living in a downtown area. And of course, one must be contextually sensitive, as an owner-occupant requirement for a STR may be a reasonable policy compromise in the downtown area, but one that is overly burdensome in a different area within the city that does not have the same set of circumstances. One size definitely does not fit all. Ultimately, this flexibility provides an element of resilience, a core foundation to creating a Strong Town.

Editor’s Note: Credit for the phrase “Housing, Not Lodging” goes to Annapolis Alderman Brooks Schandelmeier.

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