Co-Living: Understanding an Emerging Asset Class

November 6, 2020
By Caroline Angelini

What is Co-Living?

Roommates, communal bathrooms, and shared common spaces might bring you back to your college days. However, many working professionals are turning to this type of lifestyle for a sense of community and a lower cost of living. In gateway cities where rent has become increasingly expensive—such as San Francisco, New York, and Los Angeles—the co-living model is a viable, lower-cost alternative for professionals who are seeking proximity to employment and cultural opportunities.

Co-living is a form of communal living in which residents get a private bedroom in a furnished multi-unit property with shared common areas. Since its emergence in 2008, the co-living asset class has demonstrated consistent growth. The increasing cost of living and lack of affordable housing options in many urban cores across the U.S. has led to the rapid growth in demand for co-living units and the proliferation of well-capitalized co-living development companies. In this article we take a look at the major advantages of investing in co-living assets and why it is a particularly favorable time for the asset class.

Why Investing in Co-Living Makes Sense

Increasing Cost of Living

Over the past several decades, premier urban markets have experienced a revival following decades of net migration to suburbs. As the U.S. economy becomes more tech-driven, knowledge capitals like San Francisco, New York, Boston, Los Angeles, and Seattle are becoming increasingly desirable for early and mid-career professionals. This trend, combined with restrictive zoning that has constrained the supply of multifamily, is driving up the cost of rent in some markets to the point that even professionals in lucrative fields struggle to afford rent on 1 and 2-bedroom apartments.

rent growth by city that informs the move toward co-living

Co-Living: Survey of the Co-Living Landscape, Cushman & Wakefield

While rents have increased over the past 50 years, real wages have remained largely stagnant for most Americans. Millennials, the bedrock of America’s multifamily tenant market, carry more debt than any prior generation, further constraining their ability to afford typical apartment rents. In gateway cities where the overall cost of living has increased dramatically, workers in blue-collar professions—teachers, nurses, and public sector employees—are particularly vulnerable to rising rents and often forced to consider moving out of urban cores or into alternative housing models.

Co-living presents one such alternative pathway to more affordable living. Unlike the other options a rent-challenged urban resident may consider, co-living offers tenancy within the urban core and a living experience that brings the best of what a vibrant city offers: diversity, community, and access. 

Why This Asset Class Makes Sense in the COVID-19 Era

The sharing of communal space may seem inconsistent with social distancing. However, challenges presented by the pandemic are not unique to this arrangement. Multifamily, office, and hospitality operators across the country have scrambled to institute new safety protocols and work with rent-challenged tenants. If anything, many co-live properties are better positioned than traditional multifamily properties to weather the crisis due to more active community management and operations. Most co-living companies are relatively new, technology-driven, and operationally mature. As such, companies like Common have adapted quickly, instituting no-guest policies and moving community activities online. 

In some respects, the co-living model fits the moment and is capturing demand created by these unique challenges. These properties have opened their doors to health-care workers in New York who arrived on temporary contracts to battle the virus; several companies have offered units to students who were forced to leave dorms because of the outbreak. Co-living operators are well-positioned to continue offering adaptive, experiential living at an affordable price tag.

Some people have even chosen to relocate to shared communities from their former multifamily residencies during the pandemic. Treehouse, a co-living space in Los Angeles, has seen applications skyrocket since COVID lockdowns went into effect. Most of Treehouse’s residents signed their year-long leases after the start of the pandemic. With COVID quarantines placing much of the country in isolation, many individuals living on their own sought out co-living spaces to avoid the remoteness of their single-person households. Even before the pandemic, Americans were reporting feelings of loneliness. Nearly half of adults reported that they felt lonely sometimes or always in a study by Cigna. Gen Z and Millennials demonstrated the highest rates of feelings of loneliness. 

2018 Cigna U.S. Loneliness Index 

The community fostered by co-living can resolve these feelings of isolation, which explains why many Gen Z and Millennial individuals have flocked to the spaces. Common, the largest co-living operator in the U.S., reports that 67% of residents participate in the organized events put together by Common both inside the co-living community and in the community at large. While the majority of these community-building and networking events have moved online, individuals have still sought out the sense of connection that co-living provides during the COVID-19 pandemic.

Differentiating From Multifamily Investing

Beyond the macroeconomic imperative, co-living offers several advantages over multifamily investment. While tenants benefit from lower rent and community perks, co-living operators can achieve significantly higher NOI for a similarly sized property – garnering up to 40% more in aggregate than a traditional rental. Because of the shared spaces in co-living communities, developers are able to create more bedrooms than they are in traditional multifamily buildings. There is less space needed for individual kitchens, bathrooms, and living rooms. This extra space allows for more rooms to be rented by more tenants. According to JLL, “on average, co-living asset floorplans hold nearly twice the number of bedrooms than comparably sized conventional multifamily assets.” In properties of similar size, operators are able to earn higher rents in co-living assets compared to multifamily given that residents rent by the bed.

Take this sample cost comparison as an example. In buildings the same size, co-living developers are able to save more than half on cost per bed despite spending slightly more on construction. The increased density of co-living properties typically increases the cost of construction compared to multifamily properties because the interior finish and mechanical, engineering, and plumbing (MEP) costs increase as well. However, despite this increased cost in construction, the enormous increase in the number of beds helps offset this cost. The revenue that can be generated by the high number of beds outweighs the additional upfront cost of construction, enabling co-living investors to expect a higher gross income compared to the traditional multifamily design.

The operators are not the only winners, though; they are able to secure higher per-square-foot rents at the same time as co-living residents benefit from a decreased cost of living. A bed at a co-living community can cost as much as $800 per month less for a studio in cities like Los Angeles and New York. Not only do residents save on rent, but co-living properties cover expenses such as utilities, WiFi, and furniture. Common estimates that their residents save on average $380 per month compared to a studio apartment.

If you are interested in learning about investment opportunities on our platform or would like to find out more information on the co-living asset class (or other unique commercial real estate investment opportunities on the EquityMultiple platform), please don’t hesitate to contact our investor relations team via ir@equitymultiple.com or schedule a time to speak with us by clicking here.

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