As the eternal quest for corporate efficiency and collaboration continues to unfold in the minds and hearts of business owners and employees alike, the communal and social aspects of co-working have now made their way to a new frontier: your home. In the last few years, Europe has seen the proliferation of co-living, which is a relatively new form of housing combining the benefits of hotels, student housing and traditional apartments. Residents at a co-living community typically sleep in micro-sized studio apartments, sharing a kitchen, a bathroom and common spaces with their cohabitants. But what is the secret sauce that is causing renters to flock to these communities overseas, and is now starting to creep into the U.S. market?
My firm originates, structures, underwrites and asset-manages real estate investments for a wide variety of commercial real estate asset types, including co-living properties. I’ve seen these asset types increase in popularity due to their flexibility, lower cost compared to hotels and ease of use. Residents at co-living communities enjoy amenities such as laundry services, internet access and cable for a flat fee that is packaged with their rent. Units are furnished and utilities are all included, making it exceedingly easy to keep track of monthly living expenses. This notion mirrors that of co-working concepts. And co-living options tend to be more affordable than short- or long-term residencies at hotels or rentals, with pricing hovering around 25% less than a regular studio apartment (depending on the market), according to our internal observations with clients.
Co-living also provides more flexibility, offering daily, monthly and longer-term lease choices. For those who are traveling in and out of cities, a bed can be rented for months at a time without the need to buy any furniture or pay utilities. Students looking to obtain short-term housing solutions and studying in an unfamiliar city, for example, can revel in the ability to pay a few thousand for an entire summer compared to a few hundred nightly at a hotel. I’ve noticed that millennials in particular show less interest in having a gigantic apartment, instead placing stock in proximity to trendy locales and affordable pricing, making co-living that much more appealing.
For these reasons, real estate developers and owners in the U.S. market are beginning to take notice. Co-living properties are starting to pop up in major cities like New York, Chicago, San Francisco, Los Angeles and Miami. WeWork has launched a new brand called WeLive, bringing its co-living concept initially to New York City and Washington, D.C., before expanding to the West Coast, with a third location in Seattle slated for a 2020 opening. A high cost of living and severe lack of general affordability is a common thread linking these areas, providing opportunities for the co-living model to thrive as prospective tenants seek cost-effective alternatives to the standard rental process. Co-living communities provide relief and flexibility to those seeking both short- and longer-term housing and who do not mind the close quarters required for communal living.
While a permanent U.S. market for these types of properties has not yet been instituted, and the idea hasn’t quite spread to smaller markets, its potential for growth is enormous. The key to its propagation, I believe, will be the formation of the market fundamentals from the land acquisition and construction loan perspectives, as lending capital for an unfamiliar asset type presents unique challenges.
Several prominent European developers have penetrated the co-living market overseas, with some planning to bring their offerings to the U.S. Quarters, for example, through its parent firm Medici Living Group, plans to invest $300 million in American developments. While Deutsche Bank is providing financing as a permanent lender in the U.K., we haven’t yet seen a major capital provider in the U.S. take the reins. As the race to become the king atop the co-living mountain in the U.S. heats up, I predict various groups will be looking to make these properties marketable entities, not only from a lending perspective, but from that of capital markets and long-term investments.
The U.S. has lagged behind Europe with its interest in co-living developments, most likely due to Americans’ propensity for living in large, spacious accommodations. Renting is also customarily more common in some parts of Europe, in contrast with the American trend of renting an apartment for several years and then purchasing a house in the suburbs (though this may now be shifting). With new co-living developments making their presence known in several significant American economic hubs, however, the next big development boom could be on the horizon.
The field of players in the real estate industry that will establish a foothold and take advantage of this new sector remains to be seen, but it may be of particular interest to lenders and developers standing to capitalize on the new opportunities presented by co-living. While the market may not be fully formed for quite some time, co-living’s nascent impact on the U.S. will be sure to spark curiosity and interest from consumers, developers and lenders across the nation.
