“Why Co-Living Is the Next Big Thing in Housing,” read Globe St’s December 27 headline. It is only fitting that this article came out at the end of 2018 as co-living has been a growing trend in U.S. housing throughout the year.
What is co-living?
Most co-living properties are a collection of micro-units with shared amenities and common spaces. Co-living aims to provide both more affordability and a greater quality of life for renters. Shared living increases the density of housing developments and works well for growing cities and in-demand urban centers with limited housing. While it is a small portion of the country’s overall housing stock, it is a growing sector being adopted by more real estate developers and landlords to address the significant issue of housing affordability.
Co-living is another facet of today’s sharing economy which is in many ways better aligned to meet the needs of modern living in expensive urban areas. Built with openness and collaboration in mind, these co-living communities offer in person social networking and interaction with one’s neighbors. Co-living is geared toward enhancing one’s work-life balance and offers an environment that promotes overall health and wellness. These flexible and low-cost housing arrangements have become increasingly popular in recent years.
The smaller units, energy efficient building technology, and denser housing in co-living projects are in line with many cities’ goals of reducing carbon footprints and creating sustainable clusters of housing in sought after urban areas. Smaller unit sizes sacrifice private space for public space, but the lower overall rent is attractive to young professionals seeking to live close to work. While the units have lower rents than the market average in most cases, the price per square foot number is significantly more. Utilities and sometimes internet or cable are included in the rent, giving residents less bills to worry about. As society craves more connection and community in this internet-driven age, co-living offer residents a true sense of belonging.
A solution to housing affordability?
With the country’s affordable housing crisis showing few signs of slowing down, especially in coastal urban enclaves, co-living has emerged as a viable solution. Duplexes can be transformed into fourplexes and other underutilized residential properties can be renovated into co-living housing. Co-living has the ability to disrupt the U.S. housing industry in the years to come, similar to other shared economy success stories like WeWork, Airbnb, and Uber.
As rents continue to soar, co-living is seen as an appealing alternative to renters. One example is Carmel Place, an apartment building in the Kips Bay neighborhood of Manhattan, which has been run by Ollie since it opened in 2016. The co-living startup has 55 studio units below 300 square feet in the building where rents start at $2,775 a month (above or around $10 per square foot), which includes cable, Wi-Fi, and regular housekeeping. A block away, an unfurnished 510 square foot studio is listed at $3,150 per month.
Co-living rents compared to traditional studio and one bedroom rents in the same neighborhood are regularly 10 to 20 percent less expensive. There is undoubtedly a growing pool of renters willing to adopt this minimalist lifestyle, sacrificing some private space for a higher quality of living, lower overall rental costs, and flexibility. In May, a growing co-living startup, Ollie, expanded in Long Island City, the neighborhood in Queens that Amazon just announced it is opening new offices with plans to hire up to 40,000 employees by 2034. The new two- and three-bedroom furnished apartments with kitchens but no living rooms on 13 floors in a 42-story high rise matches roomates who can pay as little as $1,393 per month in this new co-living project. Ollie’s rents are much less than other two-bedrooms in the neighborhood that typically go for around $2,000 a month or more.
Many co-living companies are trying to become to co-living what WeWork has been to co-working. However, even WeWork has dipped into co-living with its WeLive projects recently opened in both Manhattan and Arlington, Virginia. The company’s third WeLive location will be rolled out in Seattle by the spring of 2020 in a 36-story building under construction at 3rd and Lenora, where 384 small apartment units will be in the same building as floors of WeWork’s co-working space and common areas.
Co-living captures funding and large renter demographic
Co-living continues to attract massive amounts of funding and new co-living companies are spending that capital to expand their rental portfolios across the country. Medici Living Group, for example, plans to raise more than $1 billion in 2019 to invest in shared apartments across the U.S. to become the “WeWork of co-living.” The Berlin-based company will announce plans early this year on how it will spend its new capital to build or buy in Boston, Washington DC, Denver, Philadelphia, Los Angeles, San Francisco, and Austin. Medici is proving to be a real disruptor to the conventional landlord-tenant apartment leasing model.
Co-living tends to be most attractive to young professionals in their 20s and 30s who are mostly single. They crave the flexibility, lower cost of living, and shared amenities that co-living projects provide. But some empty nesters in their 60s and 70s who are downsizing and relocating from the suburbs to the city have also been known to rent in co-living communities.
Employees at tech companies are also drawn to co-living units, but other renters like teachers, non-profit workers, and some young couples are also interested in trying out co-living. This living model is suitable for both single Millennials and small families in two-bedroom plans. But co-living also works for contract workers and empty nesters as well, providing a deep pool of prospective renters clamoring for a more communal way of life.
Primarily, cash-strapped single Millennials looking for affordable housing in large cities along the coasts are the number one demographic for co-living renters. Many young renters move to a new city and look for roommates on Craigslist to share space and split housing costs. Co-living provides a solution to this affordability problem and co-living providers have secured significant levels of funding to expand their co-living offerings.
Co-living providers are providing a service to renters living paycheck to paycheck who want to live in expensive housing markets like San Francisco, Seattle, Portland, New York, or Chicago. By living in these shared communities, renters save money and benefit from a refreshing sense of community, while co-living operators provide a profit for landlords and developers. A win-win for all parties involved.
Successful co-living companies
OpenDoor is an Oakland-based co-living company that sees its business “as a platform for your life,” according to its website. “For becoming your best self by being part of something bigger. For sharing space, skills, resources and dreams with other inspiring and creative people. For living with a purpose.” OpenDoor manages co-living homes and apartments. As housing prices skyrocket in urban areas, OpenDoor’s co-living units provide a communal living experience at a reasonable cost.
Offering a suite of services and amenities to make shared living more enjoyable, OpenDoor provides furnished common areas, regular cleanings, high-speed WiFi, community programming, events, and use of smart technology. OpenDoor has been partnering with real estate owners, developers, and investors to provide quality co-living units to residents, and has also developed its own projects, assembling deals that are both profitable and impactful. OpenDoor’s ability to build higher density housing with strong unit economics brings higher overall rents and revenue than a traditional apartment project. OpenDoor currently operates six co-living properties along the West Coast. Three of the six properties are fully leased.
New York-based Common has been another successful co-living company. Common raised $16 million in venture capital in 2016, increasing its total fundraising efforts to $25 million at the time. In December 2017, Common raised $40 million in a Series C round. Funding has come from notable real estate businesses like the LeFrak Organization and the Milstein Family. Since its founding in 2015, Common has raised $63.4 million through four rounds of funding.
Brandon Hargreaves, founder of Common, attributes the recent growth in co-living to developers and lenders “looking at it as a much more reliable and traditional form of rental housing,” he said in an interview with The Real Deal for an August 2018 article. Co-living can increase cash-on-cash yields by 100 to 150 basis points, according to Hargreaves. Common’s properties maximize profits for the developer. A 900 square foot three bedroom unit, for example, can have three co-living tenants who each pay $1,500 per month in rent, or $4,500 total when a traditional apartment would lease that same unit to one tenant for far less. Renewal rates on 12 month leases at Common’s properties are around 60 percent, which has led to a closer conversation with Common’s real estate partners for future projects.
Simon Baron Development and Quadrum Global included 14 floors with 169 co-living micro-units, operated by Ollie, in its new Long Island City project, ALTA+. Ollie is a co-living operator and recently raised $15 million that it will use to expand in Los Angeles.
Co-living’s market opportunity
There is plenty of market opportunity for co-living developments. Co-living has proven to be feasible in major cities with high apartment rents, allowing renters to pay less for a smaller space while giving property owners a higher rent per square foot in these dense projects. Single renters in West Coast tech hubs have been particularly drawn to the co-living arrangement as a cost-effective alternative. Demographics in California, Oregon, and Washington are prime for co-living projects with a high tech workforce, urban entrepreneurial class, environmentally conscious renters, and an aging population looking to make the suburban to urban transition.
A January 2018 Forbes article delved into how real estate developers are beginning to experiment with co-living projects. Many co-living operators have teamed up with established developers and landlords throughout this past year, becoming property managers on behalf of the owners.
While co-living companies are only starting to grow and become profitable options for developers, the fact that major developers like the Durst Organization and Property Markets Group are adding co-living units to their portfolios is proof of the real upside in this housing concept.
Common’s Brad Hargreaves is encouraged by developers’ increasing interest in co-living as an opportunity to provide affordable housing to renters and profits to landlords. “More developers entering the space means more partners for us to work with,” Hargreaves said in the Forbes article. “In the early days, education was a hurdle for us. Common needed to prove that our model worked just as well for new, ground-up projects as it did for our earliest renovation projects. Today, as more developers get on board with co-living, we have even greater opportunity to continue expanding our operations in new and existing markets.”
Contact Matt Ryan at Re-viv to learn more about co-living opportunities today.