Starcity Raises $30 Million In A Post-WeWork, COVID Crisis To Scale Its Affordable Co-Living Spaces

In a city like San Francisco, there are generally two options when it comes to apartment rentals: Go for the expensive, luxury high-rise buildings or spin the Craigslist roulette, with the risk of ending up in someone’s living room. In 2016, Starcity saw an opportunity to bridge this gap and created affordable co-living spaces in the Bay Area. Four years later, the company has 12 locations across San Francisco, Oakland and Los Angeles, and announced today its Series B round of $30 million. Investors include Bullpen Capital, Deciens Capital, Pay It Forward VC, Peak State Ventures, Reshape and Y Combinator. 

Raising this amount of capital is no small feat, especially in a post-WeWork era, where most investors run for the hills upon hearing the prefix “co”.

“We definitely had the whole cloud of WeWork lurking over us,” Starcity co-founder and CEO Jon Dishotsky told me in an interview. “So we had a lot of questions about how this is different.” 

Contrary to WeWork, which takes out a master lease on most of its assets, Starcity owns its spaces. 

“We are set up as both a developer and operator with full-stack real estate development, design and management capabilities,” Dishotsky added.

Build, Design And Operate

Having the freedom to design and build its own spaces is a huge plus for Starcity, both in terms of the vibe it chooses to go for and in terms of cutting costs. Dishotsky explains that him and his team wanted residents to have their own private space, all the while being able to socialize with their neighbors — a great way to counter the sense of isolation one can feel in a big city. Architecturally, this translates into a fully-furnished, private bedroom and bathroom, with the rest of the facilities being shared, including the living room and kitchen. 

By expanding the communal areas and reducing the size of the units, Starcity is able to offer residents a discount of 20-30% on new apartments, which amounts to a monthly rent that ranges between $1,000 and $2,000. Another perk is Starcity’s app, which allows residents to connect with their neighbors — a hyperlocalized form of Nextdoor, if you will. Dishotsky wants Starcity to become a lifestyle brand residents love.

A Brand People Love

“There are so many brands consumers love, yet there’s never really been that in the housing space,” he said. “We saw an opportunity to reset the landlord-tenant relationship.”

In some ways, Starcity is revamping the co-living space the same way Starwood and W revamped the hospitality space — creating elegant, boutique-type spaces that are edgier, and bringing what was once out of reach for many to a more affordable price point.

“The spiraling cost of living in U.S. cities is one of the great challenges of our generation, exacerbating income inequality and political divides,” YC partner Jared Friedman wrote in an email. ”Starcity’s communities make expensive cities with great jobs accessible to more people, and we’re proud to support this important work.”

Starcity competitors include well-established names, like AvalonBay or Equity Residential, but also newcomers, like Bungalow, which raised a whopping $47 million last November. 

Bungalow has a very different approach to Starcity, however, as it works with existing homes, rather than build new ones. For some properties, Bungalow follows a WeWork-type model where it will sign a master lease with the homeowner and then add bedrooms to the property. In a Forbes article that covered their latest funding, the co-founders stated that they are experimenting with a new business model that would align more closely with Airbnb.

Money, Money, Money

In order to act as both a developer and an operator, Starcity needs to raise capital on two fronts: From venture capitalists, to fund the company’s expansion, and from limited partners and lenders, to fund the property developments. These real estate investors are looking for a return over a certain hold period and are typically family offices, high net worth individuals, private equity funds and asset managers. 

“We target a high teens, low 20’s internal rate of return for our developments and this is attractive to the trillions of dollars of real estate private equity that is chasing ‘opportunistic returns’,” said Dishotsky. “We’re at the point now where we’re narrowing our real estate capital partners down to a handful of large funds who can invest ‘programmatically’ in many Starcity developments as we’ve figured out the playbook.”

There is unfortunately nothing in that playbook that prepared the Starcity team for the COVID crisis, however. 

Co-Living During COVID

“The first few weeks were a pretty big shock,” Dishotsky said. “But we reacted quickly.” 

The company increased the house cleaning frequency, switched to all-virtual community tours and moved all social events online. Most importantly though, Starcity checked in with every single resident, reinforcing the sense of community in a time of fear and uncertainty. Dishotsky says some residents had to cancel their lease due to personal or professional reasons.

“We waived all termination fees for those experiencing financial hardships and worked on payment relief programs,” he said. “In the last week or so, however, things have definitely picked up.”

Internally, Starcity says it did do a small furlough of employees due to the crisis but hasn’t had to lay off anyone from its team of 40. Dishotsky says they are also taking cost-cutting measures such as subleasing office space, reducing travel, renegotiating vendor contracts and bringing legal services in-house.

Construction-wise, new projects in San Francisco have been put on hold due to city regulations. Dishotsky isn’t worried, however. 

“Lenders on construction projects have come to the table to figure out what’s a good loan modification to extend the runway,” he said. “When a snag like this occurs, investors retrench into more classical investments. For-rent housing has always been counter-cyclical as the demographic that lives in our buildings is pretty resilient. We’re also getting word from city regulators that our projects will be able to resume as soon as May.”

Dishotsky is also confident about the owner-operator model, referencing publicly-traded real estate companies like AvalonBay (AVB) and Equity Residential (EQR), which have 30-40% operating margins and trade at 10-13x revenue multiples. 

“They can survive downturns quite well as they have large balance sheets that they can issue debt on,” he said. 

Starcity, however, is still a private company and will have to power through this pandemic to stay afloat. The company has been experimenting with innovative ways to build its co-living spaces — assembling the units offsite, for example, for a fraction of the cost. It is also working on making its spaces more affordable to people living on minimum wage, and is working on a project in San Francisco that will be able to accommodate 270 people. Dishotsky hopes this new space will attract a variety of residents, from teachers to nurses and baristas.

With many gig economy workers losing their jobs as a result of the pandemic, affordable co-living spaces have never been this crucial. 

This post first appeared on Forbes.com. To see the original, click here.