JANET YELLEN IS STUMPED. SHE IS SAYING GOODBYE TO THE FEDERAL RESERVE BOARD. BUT SHE LEAVES BEHIND A PUZZLE SHE COULD NOT SOLVE, EVEN WITH A BATTALION OF ECONOMISTS, MATHEMATICIANS, AND EVEN PHYSICISTS HELPING: WHY HAS INFLATION STAYED SO LOW DESPITE AN ECONOMIC RECOVERY? WHEN YOU TWIRL AROUND THE INFLATION QUESTION, LIKE A RUBIK’S CUBE, IT BRINGS UP OTHER MYSTERIES: HOW CAN THE 10-YEAR U.S. TREASURY SIT AT 2.40%, NOT FAR FROM RECORD HISTORICAL LOWS? WHY IS THE YIELD CURVE NEARLY FLAT, WITH A MERE 4.1% UNEMPLOYMENT RATE AND RECORD STOCK MARKET PRICES?
While many forces impact the economy, we would argue that the “gig economy” is helping to tamp down inflationary forces. This has important implications for real estate, construction, and hotels. Consider: Airbnb boasts over 4 million listings worldwide, four times as many as in 2015, more than the top five hotel brands combined, and about ten times as many as Hilton. Airbnb served over 30 million guests last year. In the U.S., Airbnb has effectively increased the number of available rooms by about 25 percent.
With that massive supply influx, Average Daily Rates and RevPar for hotels lag GDP growth. And more supply is coming online, with nearly 200,000 U.S. hotel rooms under construction and untold apartment owners and speculators jumping into the Airbnb game. Last year, hotel group Accor purchased Onefinestay, a home and apartment rental startup, which had earlier attracted an investment from Hyatt.
Airbnb may make it tougher for hotels, but here’s the upside: By offering more choices to price-sensitive conventioneers and business travelers who can take advantage of online room rentals, Airbnb encourages more conventions. An increase in the number of corporate meetings and conventions will boost demand for well-managed mainstream hotels. We expect that the stronger economy (GDP growing over 3 percent) will energize the convention sector in 2018.
The Gig Economy also shows up in shared office firms like WeWork, which recently announced it was buying the flagship Lord & Taylor store on Fifth Avenue in New York for $850 million. Lord & Taylor, owned by Hudson Bay, will shrink its square footage of floor space. But there’s an upside for the retailer. Those millennial “WeWorkers” will stroll through the aisles on the ground floor of Lord & Taylor, while making their way upstairs to the shared office spaces of WeWork. They may stop to shop for perfume, makeup, or jeans. Hudson Bay may launch a similar strategy for the landmark Saks Fifth Avenue, a dozen blocks to the north. These sorts of moves, which optimize space, effectively boost the supply of land. More effective supply means less upward price pressure and less inflation. Less inflation keeps interest rates low. Cheap borrowing costs encourage corporate expansion.
In the construction sector, the Gig Economy constrains heavy equipment companies from jacking up leasing prices. Companies like Yard Club and Dozr make it easier for contractors to rent bulldozers and backhoe loaders from others when the equipment is not in use. After Yard Club racked up $120 million in revenues last year, Caterpillar snatched up the company. Yard Club’s proprietary “peer-to-peer” software will allow Cat to improve its own my.cat.com portal. The economic point is this: we are less likely to see heavy equipment sitting idle, which means that the Gig Economy has effectively boosted the supply of equipment.
The Gig Economy is not the whole story, of course. The real estate and construction sector face many hurdles that can pressure prices higher. Builders report labor shortages, while cement and steel prices have climbed about 4 percent in the past year. Tariff disputes over Canadian lumber can make things worse. Nonetheless, we recommend that you do not underestimate the role of technology and gigging in tamping down inflation in the sector and in the economy. Maybe in retirement Janet Yellen will offer her Washington, DC apartment on Airbnb and rent a backhoe from the Yard Club.