I wrote in October 2017 that co-living was here to stay, and that hasn’t changed over the past two years. With the bulk of Generation Z now out of college and joining a significant percentage of the expected 76 million millennials who have chosen to settle in America’s urban core, their approach to live, work, play is shifting the housing landscape in major cities across the U.S.
Three things in particular are driving the demand for co-living:
1. All U.S. gateway markets — i.e., major international cities that serve as an entry point into a country — are experiencing an affordable housing crisis. When you crunch the numbers, 60% to 120% area median income (AMI) is not enough to cover rent in New York City, San Francisco, Boston, Chicago or Washington, D.C. As many as half the renters in cities like these are cost-burdened, meaning they spend more than one-third of their gross household income on rent. Simply put, the very design of co-living helps renters access homes with a more affordable rent.
2. The 2018 Cigna Loneliness Index reported that millennials and Gen Z survey respondents experienced loneliness more often than any of the other generations surveyed. Co-living communities typically include structured events that are meant to engage tenants and create a sense of neighborhood, community and belonging. From ravioli making to bookbinding, from morning runs to movie nights, joint activities provide opportunities for built-in socialization for renters.
3. Young people often have a desire for disposable income and experiential lifestyles. The unintended consequences of Instagram are that Gen Z and millennial social status and currency is often based on pictures of trips and out-of-the-box adventures, whether it be ax throwing in Scotland, sheep shearing in Patagonia or sea caving in Thailand. This trend and desire for experiential trips is not going to go away, but the lifestyle requires disposable income, which means there is a personal cap on how much income can be tied up in rent.
For Multifamily Investors
It’s imperative to look at the three C’s of co-living:
1. Cost/affordability: Current rates for co-living units are approximately 25% cheaper than studio apartments in some gateway markets.
2. Convenience: The ability to live within a 20-minute commute of the workplace is essential to these renters.
3. Community: Gen Z has a strong desire to live and work in densely urban areas.
For investors, the future is bright based on a proven demand for co-living in all major gateway markets across the U.S. A record number of individuals under 35 are renters. Limited housing stock and rising prices in major U.S. markets have placed pressures upon those in the service sector (restaurant, retail and rideshare) and other key workforces like teaching, nursing and local government. The majority of these renter segments fall within what HUD defines as 60% to 100% of AMI. Co-living units are priced more affordably for these renters, averaging a 25% rent-to-income ratio dependent on market.
Further, the increased returns that these purpose-built assets generate compared to traditional multifamily apartment assets is attracting investment at unheard-of levels. Overall, the current supply of approximately 3,200 co-living beds in the U.S. is relatively low compared to demand.
This opens up more opportunities for building conversions or new construction. But before this begins, many aspects remain that need to be explored:
1. The future is blended, meaning that traditional apartments, co-living units and short-term rentals are going to live harmoniously in the same buildings.
2. Buildings (the actual sticks and bricks) need to be flexible and allow for several compatible uses that change over time.
3. The operator is key to the success of these asset classes. Investors vetting them should make sure their technology is both cutting-edge and battle-tested. Also, make sure you pick an operator who is well funded and has staying power to be in business five to 10 years from now.
4. The appeal of these co-living units is that they are fully furnished and have a modern style and quality to them. Plan for furniture, fixtures and equipment (known as FF&E) replacement, just as you would in a hotel.
5. Community involvement is key, meaning the ground floors of these assets are no longer rigid. They should operate like hotel lobbies, welcoming the public to enjoy using the space, whether they’re there working, dining or socializing with friends and colleagues.
Proof of concept has shown that co-living works. The sky’s the limit to where it goes from here.