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February 12, 2019

Is Co-Living The New Co-Working?

In big cities around the country, co-working has become a major trend. Now co-working leader WeWork, along with competitors like Common, Open Door, Bungalow, X Social Communities, Starcity and a number of others, are leaping on to the emerging co-living real estate trend. Co-living offers a number of benefits, from housing cost relief to energy efficiencies. Among those closely watching the trend is Jeff Berman, general partner at Washington, D.C.-based venture capital firm Camber Creek, which focuses entirely on investing in real-estate-related technologies.

It’s important to acknowledge the co-living movement is almost completely confined to the Millennial cohort. Two seemingly disparate but actually related factors account for the surge in co-living among the Millennial generation, one economic, the other sociological, he says.

“From an economic standpoint, you’re dealing with a demo that has come of age in a job market with largely flat wage growth,” he reports. “Meanwhile, for a variety of reasons – like zoning restrictions – housing in many popular cities is very expensive. From a sociological perspective, Millennials are famous for prioritizing convenience and flexibility. Every person wants to feel like they are part of a community, but only Millennials want that community created for them, on demand, instantaneously and with no long-term commitment. Co-living is the perfect solution. While more expensive on a per-square-foot basis, most co-living apartments are cheaper in terms of absolute dollars, offer more flexible terms than standard leases and provide a sense of community with absolutely no commitment.”

Pros and cons

The upsides and downsides of co-living should be viewed from both landlord and resident perspectives, Berman says. Co-living’s chief benefit for landlords is its ability to generate a higher yield per foot than traditional leases. Downsides from the landlord’s perspective include high turnover, non-standard lease terms and expenses related to retrofitting traditional apartments for co-living purposes. Facilitating a communal living experience and creating and organizing programming are two additional hurdles landlords must surmount.

From the renter’s standpoint, advantages include flexibility, the ease of renting fully-furnished spaces, smoother, technology-enabled renting experiences and the chance to live alongside others of similar age, experience and mindsets. A big negative is a more compact home, comparatively higher rental costs per square foot vis-a-vis apartments, and the fact that communal living may not be to the renter’s liking.

Obstacles also exist for developers and real estate firms intent on creating co-living space, Berman says. “There are challenges at every step of the process,” he explains. “If you’re building from scratch, you’ll have to convince investors the extra costs of building custom co-living space are going to pay off. If you want to build a property that offers more traditional units and co-living, you’re taking a big risk your more traditional customers are comfortable being in a building with the co-living crowd. Any new product is going to be competing against both traditional residential units and against market-leading co-living spaces. So you’ll have to offer a differentiated product. And of course, as more and more co-living spaces enter the market, margins will go down.”

To overcome these hurdles, developers might want to find one of the ingenious modular alternatives now entering the market that permit more efficient creation of multi-person living spaces, Berman says. Another option? Finding a brand to operate the co-living space.

Final word

All in all, Berman believes today’s macro-economic environment is ideal for co-living. A good employment market encouraging urban living, younger renters’ desire to try both communal living and flexible duration terms and an economy that is spurring developers to chase yields and absorb risk are all, Berman says, “externalities” met by the co-living trend.

“I believe you’ll continue to see the sector grow,” he predicts. “However, for co-living to escape the label of a trend and mature into a permanent category in the residential vernacular, it’s going to have to prove a broader customer base, overcome the aging out of its primary demographic and survive the vicissitudes of economic cycles.”

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