Is co-living growing up?

Often thought of as home for kids who never grow up, co-living has had a tough go in New York — in name at least. During a panel last year, Stonehenge Partners CEO Ofer Yardeni offered up a biting appraisal of the product: “If you are a 35-year-old and you live in [WeLive or Common], you are a loser.”

Since co-living debuted in earnest a few years ago, its operators have offered tenants furnished private bedrooms and shared kitchens and living rooms in exchange for perks such as hotel-like shared amenities and bills for internet and gas all neatly rolled into one monthly bill. When WeWork unveiled WeLive, its co-living platform, in 2016, it was expected to grow into a service for thousands of tenants that would generate more than 11 percent of the company’s revenue that year. But so far, the company has opened only two locations — one at 110 Wall Street in New York and another in the Washington, D.C., area.

Despite some perceptions about the product, operators such as Common, Ollie and the Collective are continuing to expand their cadre of properties through partnerships with developers. One recent example: Simon Baron Development and Quadrum Global included 14 floors with 169 co-living micro-suites, operated by Ollie, as part of their new Long Island City luxury rental tower, ALTA+.

What’s more, investors are funneling cash into these companies. New York-based Ollie raised $15 million to fuel a Los Angeles expansion, while Common has collected about $60 million since it started in 2015. Meanwhile, U.K.-based the Collective recently raised $400 million — from such investors as Jonathan Teklu, an early Airbnb backer — to spearhead a move into the U.S. and Germany. So, as co-living operators grow their footprints, The Real Deal interviewed three insiders to get a better sense of the product’s evolution and future.

Brad Hargreaves
Founder, Common

There’s been growth in co-living both at Common and for other operators. What do you attribute that to? There is absolutely a major change that we’ve noticed in how developers and lenders perceive co-living. They’re looking at it as a much more reliable and traditional form of rental housing. We got into co-living not because it was new, but because it actually reflects the way people are already living: 25 million Americans live with roommates, and that’s grown by 20 percent in the last 10 years [according to a report from the Pew Research Center].

What is the typical return profile for co-living units versus traditional rentals? A good rule of thumb is that well-laid-out co-living will increase cash-on-cash yields by 100 to 150 basis points compared to traditional inventory. So, of your usual mix of studios, one- and two-bedroom units, it’s going to be about 100 to 150 basis points spread.

What do you mean when you say, “well-laid-out”? People are sacrificing some private space in exchange for better shared spaces than they would be able to afford otherwise. What we’re doing is amortizing the cost of that really nice kitchen and living room over more bedrooms. It’s not rare to see a four-, five- or even a six-bedroom unit in a Common portfolio.

Can you give me an example of how that works out better for the developer? If you were to take a Common three-bedroom unit [typically around 900 square feet], we might charge $1,500 per each tenant in each bedroom, so the rent for the whole unit would be $4,500. That’s significantly more than a 900-square-foot three-bedroom would fetch on the open market. But to the individual tenant, they’re paying a lot less than they would for equivalent traditional inventory.

Are you seeing more international tenants opt for co-living because your approach to security deposits is more flexible? Is that intentional? About 30 percent of our membership is from overseas. There are some unique challenges that make co-living a fit for someone that has nothing to do with financial qualifications. In my experience, they come to us because they’re new to the city and may be a little daunted by the process of setting up all of the things you need when moving into a new apartment. [However], we don’t have a lower standard than a traditional rental building. We use a [40 times the monthly rent] rule for determining someone’s ability to pay. We are willing to accept pay stubs and income statements in lieu of a traditional credit check. Plus, we run criminal background checks.

Are you noticing a difference in how banks and developers are responding to you? Our renewal rate on 12-month leases is around 60 percent. It’s becoming clear that this is not a momentary fad, so we’re seeing much better conversations with potential real estate partners. I think part of that is getting more sophisticated ourselves about how we structure agreements and operate buildings in a way that’s going to make lenders happy. The ideal reaction is they say, “Hey, this is just a traditional building that happens to be occupied by roommates.” That’s a really important shift, and that’s one I would say has happened over the past 12 months.

Gary Malin
President, Citi Habitats

Do some co-living operators take the place of a broker once a tenant decides to move into one of their units? I don’t necessarily know if they take the place of a broker. They’re trying to control the process, and I don’t see it as anything other than a very unique, new business model where their leadership likely wants to use their own employees who’ve been trained on the nuances of their product and how to sell it compared to some random broker. For anything that’s new, making sure people understand the value of it, the benefit of it, and making sure they understand what they’re getting into involves an education process. 

So how do brokers work with co-living operators? Up until now, I haven’t had much interaction with them. It wasn’t something that we really focused on — not because we don’t think it has viability; it’s definitely a novel, cool new idea. It was more that operators were handling it on their own. But we just launched the Long Island City building ALTA+ with Simon Baron and co-living operator Ollie, so this will really be our first experience working alongside ownership and an operator to fill co-living units.

What’s that process been like? We’re just getting going, so I think it’s too early to tell, but so far, it’s a collaboration between all of us. Ollie is doing everything they can to drive traffic to us, our leasing team is handling that process, and we’re handling it whether through their marketing efforts or our own. In the end, we’re not mutually exclusive.

Do you think co-living is the future of the rental market? I’m not sure. I certainly see the value of it: [The units are] fully furnished, they have all these services available to you, and if you don’t have any social network within the city, you don’t necessarily have to go search for roommates or live on your own. Co-living is a way to sort of embrace the culture and lifestyle the city offers. I think the question is how deep is that market? Like everything else in life, it’s always going to come down to the price: How does the service and the situation measure up to the pricing versus someone doing it on their own? Until you have enough history doing it, it’s very hard to say how it will turn out. But I think in our industry in general, you always need to embrace new ideas and try new things.

Matthew Baron
President, Simon Baron Development

Why did you introduce co-living into your new rental building, ALTA+? My partner Jonathan Simon and I were actually one of the first investors in Ollie, so we’ve been big believers in the concept for a long time. Co-living is not, from my perspective, a new business model. But it is definitely a shift in how we’re approaching the shared housing model. We’re delivering the product people are already looking for, but [we’re] making it better, more relevant.

Do you feel like an outlier? Not at all. I think people in the real estate industry are really excited about it. That being said, it’s always hard to be first one. We’re the largest co-living project in the country right now, so people are certainly looking to us as a measure of the concept’s success to a certain degree.

There’s been some brutal criticism lobbed at  co-living. How do you respond? I think that people who criticize are forgetting the fact that in the absence of co-living, you have illegal room shares, you have people living in smaller spaces — so why not create a product that is legal? The underlying fundamentals have been around for forever. Whether it be room sharing or small spaces, that dynamic exists in most major markets.

Do you think the co-living market will become competitive? The market is so broad that there’s plenty of room for competition. It’s actually a good thing because it helps legitimize the market. I’ve certainly heard of some developers that are trying to introduce co-living or that want to.