The gig economy, by en large, only works by circumventing taxes paid by the employer for the employee for social security, medicare, unemployment insurance – workers are paid as independent contractors. Traditionally, this would mean that, along with other certain classifications of small business owners ( S-corps, etc ), gig workers couldn’t file for unemployment. Why? No contributions had ever been made on your behalf and you’d be drawing against your own business…That changed with Covid-19. Exemptions were folded into the program and gig workers, along with self employed corp owners, could file for unemployment via the CARES act…and in many cases earn more money via Unemployment than they did while employed.

Personally, I could see the money that VC and PE funds pour into these companies, at Billion dollar+ valuations, dry up as cash burn is allocated away from customer acquisition and purely to keep the lights on.

Gig companies across board have been hit by this exogenous event. From Uber to Doordash to Airbnb, there has been a significant drop in demand, and questions remain as to how they will rebound and respond to a new normal. In the past few years, I’ve heard stories from friends, quite a few, that first rented out a room, to now multiple properties, even in violation of their lease, to rent those properties on Airbnb. Quite a few who have done this in the auto sector as well – taking out multiple leases to rent on Turo.

These gigs grew from a way to make a few extra bucks monetizing an asset that perhaps wasn’t being used fulltime, or a room that would otherwise be vacant, to a profit machine that became full time. Some even hired Airbnb managers to absorb the overflow of work load, others hired cleaning crews, and one friend was dating someone who started a company whose function was to provide fresh linens and toiletries to properties.  A gig business based on a gig business.

What happens now that cashflows have dried up and the property leases and loans have payments due? They aren’t going to get paid. And perhaps, as I mentioned in my credit card bubble article, many of these borrowers will take advantage of forebearance and eviction freezes, but that only delays the inevitable…and we’re seeing banks size up these delinquencies in greater effect with loan loss reserves. I just wonder what the added Airbnb effect will actually have?

How the Airbnb effect may impact lending

I found the following WSJ snippet especially concerning because of the compounding effect on real estate markets. Banks could re-evaluate their exposure to Airbnb portfolios, lawmakers clamping down on short-term rentals, and hosts looking to liquidate all equate to downward pressure on prices

The pandemic’s financial hit could cause lenders to re-evaluate their exposure to Airbnb, said Susan Wachter, a real-estate professor at University of Pennsylvania’s Wharton School of business. “There’s no rescue in place for this.”

Many Airbnb hosts are desperate to sell properties, say real-estate brokers like Greg Hague, who runs a Phoenix real-estate firm and helped state lawmakers draft short-term-rental legislation. “There’s been a flood of people. You have people coming to us saying, ‘I’m a month or two away from foreclosure. What’s it going to take to get it sold now?’ ” he said. That has diminished overall property values, he said.

If you’re living in a community that has high demand for Airbnb, or in proximity to a superhost that purchased a block of properties, and those go vacant or are forced to liquidate, it means a lot of inventory hitting the market with tighter lending standards and decreased demand.  Whether or not this will be large scale or limited to pockets around the country, I’d keep a close eye if you’re exposed to such conditions.

I’m personally one of those people.  Living in Los Angeles where there is a lot of demand for Airbnb, property prices appreciating disproportionate to wages, a pause on evictions, and a growing community perspective that living near Airbnb properties isn’t ideal, I’m not only bearish on real estate markets, but how banks will approach lending throughout the remainder of the year.

It’s one thing to have exposure to traditional modalities of debt financing, but when you factor in the complexity of a global pandemic, high unemployment, an uncertain return to normal road, AND multi-variate exposure to loan loss… the banks are going to be reeling in.

How I am continuing to position

I currently hold between 15-20 credit cards, and haven’t had any credit line reductions.  I view this as a big win thus far since banks have been reducing their exposure to risk, and, knock on wood, I haven’t been affected thus far. The most important piece of leverage I have going forward is my credit score, and keeping a very low utilization rate is paramount in bolstering that score.  My biggest exposures are with Chase, Amex, and Citi which tells you whose points I value the most. While I don’t anticipate pushing my luck with new applications anytime soon, there are products with Bank of America, Barclay, and Cap1 that, should the offers get rich enough, would tempt me to reconsider my position. I’m sitting at 2/24 on recent new accounts, and think I have a bit of wiggle room before banks penalize me for seeking new credit. If I add anything, I will probably look to add small business credit cards that would leave my new accounts at 2, my credit age unaffected, and my utilization low.

If you’re facing credit line reductions, I would highly recommend speaking with a rep to see how you can either retain your old line, or split the difference. Remember, you want to keep your utilization below 10%, and if you allow this number to get too high, even with full payments each cycle, you may risk having other lines reduced as a result of risk contagion. What I mean by that, is just via line reduction, you may raise flags within banks regarding your risk profile, even though you have continued to pay your cards off in full. If you had 5 cards, but one card had $30k and the other 4 had $5k a piece, and the $30k card reduces to $10k, you’d had a 40% reduction overall in depth of credit: $50k to $30k.