By Cara Smith-Tenta
CoStar News
October 25, 2021

When the pandemic hit, the commercial real estate industry began closely watching the types of properties that could be shut down because users couldn’t gather in confined spaces: restaurants, shops, and offices. But there was one property type, trying to get established, that was perhaps considered the most vulnerable: coliving. While the concept, where renters take a furnished private bedroom in an apartment-like setting with shared common areas was damaged somewhat during the pandemic — at least one high-profile operator filed for bankruptcy — new data suggests coliving may have a more solid future after all.

From April 2020 through June 2021, end-of-month rent collections in national coliving properties were an average of 2.3% higher than in professionally managed apartment complexes and multifamily buildings, according to a report prepared by Cushman & Wakefield. That figure is even higher for rent collections within the first six days of the month; in that time, coliving outperformed traditional multifamily by an average of 15.5%, the report said.

Occupancy data bested traditional multifamily, too. Coliving’s worst month in that category came in June, when occupancy dipped to just above 89%, according to Cushman & Wakefield. Meanwhile, traditional multifamily occupancy bottomed out that same month, at about 84%. Today, coliving’s occupancy is roughly 94%, the report said, while traditional multifamily is about 89% occupied. “Dense urban living in the middle of a pandemic is something people didn’t want to talk about,” Susan Tjarksen, managing director with real estate firm Cushman & Wakefield in Chicago told CoStar News. “That confused the facts, and the facts were that this asset class rebounded very quickly.”

While coliving may have its roots in the boarding houses of the past century, the modern iteration began about a decade ago. Communal spaces were posed as an answer to increasing unaffordability in the wake of the Great Recession, providing housing in dense urban areas and catering to a growing number of young, white-collar workers who care less about square footage than location. The property type initially took off almost exclusively in expensive cities such as San Francisco, Los Angeles, New York, and Chicago.

Residents are typically in their 20s and 30s, a group that has more student debt than previous generations, which prevents them from saving for down payments on increasingly costly single-family homes.

The mechanics of coliving are fairly straightforward, reminiscent of a college dorm. Several roommates pay a discounted sum to rent a room in a suite with shared living and kitchen space. Typically, residents will either have a bathroom of their own or share with one other roommate.

Smaller Space

But in exchange for less space, co-living properties offer community events, cleaning services, and lounge areas. Most important, coliving sites are also typically near downtown business and entertainment districts, meaning they mostly cater to people looking for somewhere to crash after a long day or a night out.

There’s a downside to coliving in that it’s still a relatively new idea without an extensive track record and data is hard to come by because Cushman & Wakefield’s research is rare in the housing industry. And while all rental operators can be vulnerable to tenants who don’t make their rent payments, coliving can be particularly at risk because of the nature of a business in which they have to rent multiple units directly from the building owner in hopes they can fill them with tenants quickly.

For Brad Hargreaves — founder and CEO of Common, the largest U.S. coliving company — the sector’s resiliency during the pandemic points to an enduring need for affordable housing. The National Low Income Housing Coalition says the United States is facing an affordable housing deficit of more than 7.2 million units.

“There’s always a need for affordability, and coliving rents track to a discount over traditional multifamily rents,” Hargreaves said in an interview. “The people we were appealing to were going to be living with roommates one way or another — they were looking for an affordable place to live and great value.”

In figuring out how to price their properties, Hargreaves said Common, which operates in 10 cities and has roughly 5,000 tenants, determines the average cost of a studio apartment in a given city and aims to price units about 30% cheaper. The Cushman & Wakefield report found coliving costs on average about 15% to 30% less in rent than a traditional apartment unit.

Despite the cheaper rents, coliving, because of its higher tenant density, has the potential to reap bigger profits, a key advantage for owners. Net operating income can be as much as 20% to 40% more than a traditional apartment building, Hargreaves said. Cushman & Wakefield also found that coliving units typically achieve between a 20% and 30% premium on revenue compared to traditional apartments.

Coliving operators achieve higher incomes by increasing density and renting by the bedroom, rather than renting by the unit, according to the National Multifamily Housing Council. And that’s part of the reason why the U.S. housing industry pays so much attention to coliving. By increasing density in the units and renting by the bedroom, operators are able to secure higher per-square-foot rents even as residents benefit from lower rents.

“I think it was our goal and mission to increase affordability and really achieve that win-win for owners and renters,” Hargreaves said.

‘Degree of Skepticism’

As an investment, coliving has some appeal, but it remains a niche housing type, according to some investors, and any outperformance against traditional multifamily on paper fails to acknowledge that the average coliving tenant looks different from the average apartment dweller.

Clelia Warburg Peters, a venture partner at Bain Capital, said co-living properties experience stronger rent collections because their renters are, on average, high-earning workers in white-collar fields. She described the typical pool of potential coliving residents as 95% of the well-employed millennials in a given major urban environment.

“I do think there are some people who are really bullish on coliving,” Warburg Peters told CoStar. “I have not been one of those people, and I would say largely, most people I know have some degree of skepticism around coliving.”

Warburg Peters has followed the coliving industry for about seven or eight years. In that time, she’s seen scores of operators crop up, get seed funding, expand, and eventually fizzle out. Some of that attrition can be ascribed to the standard risks of being a startup. Common’s Hargreaves attributed the sector’s high turnover rate, especially during the pandemic, as boiling down to an unsustainable financial position.

“For each and every company, you can point to reasons why they fell by the wayside,” Hargreaves said. “The most typical reason, I think, really comes down to debt.”

Typically, the standard coliving model involves the operator signing a master lease, or a long-term lease, on a building, and then renting out the units to tenants for a profit. But if those units don’t get leased, the operator can quickly find itself in debt to the building owner.

“Master leases are debt, loans are debt, and it doesn’t work very well to layer debt on top of startup operating companies,” Hargreaves said. “They could’ve gotten away with it and continued to grow had COVID not happened.”

Common, for its part, has been aggressive in assuming the managing rights over its former competitors’ properties.

In recent years, the company has taken over coliving brands including WeLive, flexible office space provider WeWork’s abandoned take on the concept, as well as Quarters, which filed for bankruptcy earlier this year.

Another competitor, Ollie, was acquired by coliving company StarCity; Common gobbled up StarCity this year and now manages its roughly 7,500-unit portfolio.

Pandemic Nixes Deal

According to Bob Kennedy, a partner at private investment firm Six Peak Capital, in2018 and 2019 more institutional investors began considering co-living as a viable option to park their money. Six Peak is an investor in Common. In 2019, a report from real estate firm CBRE said, “Industry interest in coliving is vast despite the small size of the product inventory.” Kennedy said the pandemic delayed investments, setting buyers back by 18 months.

When the pandemic started, Six Peak had just acquired six parcels of land in Los Angeles and was planning to develop coliving properties in a joint venture with an investment firm. At the time, Six Peak had term sheets with three investors, Kennedy said, describing two as large private equity firms with more than $10 billion under management and the third as a major investment bank.

But eventually, in May 2020, the deal fell through.

“In all our scenario planning, we never planned for a global pandemic that feeds on density,” Kennedy said. “It really became obvious, relatively quickly, that they or anyone else in the institutional world was not going to touch this thing with a 10-foot pole without lots and lots of data showing that the pandemic was not the death knell of coliving.”

Coliving still has a lot to prove. There are just over 70,000 coliving units in theUnited States, according to Cushman & Wakefield eld’s report. By comparison, there were roughly 140 million U.S. rental housing units as of June, census data shows.

“I would be very, very surprised if it ever gets beyond 1% of [rental housing stock],” Warburg Peters said of coliving. “Even 1% feels like it would be enormous.”

Instead, she said coliving’s biggest impact will be in how it changes the way developers think about rental housing.

Just in the same way that coworking opened office developers’ eyes to the fact that workers thrive in highly amenitized environments where they don’t feel siloed, she said coliving will similarly show housing developers the attractiveness of trendy, furnished spaces with amenities such as free cleaning services, complimentary Wi-Fi and fully stocked common work areas.

“It would absolutely be wrong to dismiss coliving as a failure or a failed concept,” Warburg Peters said. “Coliving has played a significant role in reshaping some of our ideas about what the residential experience or multifamily experience can and should be like.”

For Kennedy, those parcels in Los Angeles are still on their way toward being developed. At the end of summer, Six Peak had three new term sheets with three institutional investors and recently closed a $75 million joint venture with a private equity firm to fund the development of three of the parcels.

“I am still very bullish,” Kennedy said. One reason: He estimates that developers have only penetrated between 1% and 2% of coliving’s total market potential.

Smith-Tenta, Cara. “Clobbered by the Pandemic, Coliving Looks To Make a Comeback.” Product.costar.com, 25 Oct. 2021, 2:47 P.M., product.costar.com/home/news/2103211404.