Market Reaction to Short-Term Rental Regulation: An Event Study of New York City’s Local Law 18 and the Role of Geographic Exposure in Lodging REITs

Abstract

This thesis examines whether equity markets anticipated the improvements in hotel operating performance associated with New York City’s Local Law 18 by analyzing the stock market response of 15 publicly traded lodging real estate investment trusts (REITs) to three key legislative milestones: the May 12th, 2021 introduction, the January 9th, 2022 enactment, and the September 5th, 2023 enforcement. Using a two-stage event study framework, I first estimate firm-level cumulative abnormal returns (CARs) and cumulative average abnormal returns (CAARs) around each milestone using the market model. I then regress firm-level CARs on each REIT’s portfolio exposure to the New York City hotel market, measured as the proportion of its total hotel rooms located in the city and represented by the variable NYC Exposure, to test whether the market reaction was stronger for REITs with greater exposure to the regulated market. The results indicate that lodging REITs experienced large, positive, and statistically significant CAARs of 4.606% and 5.858% in the three- and seven-day event windows around the enactment. However, this reaction was broadly distributed across the sector rather than concentrated among REITs with greater New York City portfolio exposure, as the coefficient on NYC Exposure was insignificant in both windows, while the constant was highly significant. The market did not react significantly to the introduction, and the coefficient on NYC Exposure was insignificant at both the introduction and the enforcement, while the enforcement produced only marginally significant CAARs. These results suggest that investors priced in the anticipated improvements in hotel operating performance associated with Local Law 18 at the enactment stage, but interpreted the law as a signal about the future competitive environment for the lodging REIT sector more broadly rather than as a narrowly New York City-specific event.