You’ve heard about coworking’s enormous success in a multitude of U.S. markets. But will co-living follow in its footsteps? The answer is hazy—while some U.S. markets might not see this trend take off in the near future, in other markets, early adoption is more likely. Co-living is certainly gaining traction in Europe. In December 2018, Medici Living, a co-living company based in Berlin, raised $1.1 billion U.S. dollars to build a portfolio of as many as 35 co-living properties across Europe. It’s speculated that Medici Living is looking to raise as much—if not more—in the U.S. throughout 2019, and has already raised $300 million so far.
So, what exactly is co-living, and what are the benefits and challenges attached to this unique property type? We’ll dive deeper into these questions, as well as look at the potential of two U.S. markets where co-living may take off.
Co-living: What is it?
Just as its name implies, co-living spaces are shared living spaces. Oftentimes synonymous with units that are smaller in square footage in relation to traditional apartments, there is actually more to it. Co-living spaces also mean that individuals share amenities, kitchens, bathrooms and other common area spaces. WeLive, the co-living arm of The We Company (formerly known as WeWork), describes themselves as a “new way of living built upon community, flexibility and a fundamental belief that we are only as good as the people we surround ourselves with,” and “challenges traditional apartment living through physical spaces that foster meaningful relationships.”
The Catalysts of Co-living
Medici Living sees an untapped investment opportunity in co-living. Gunther Schmidt, Medici’s CEO, explains, “A lot of investors and companies feel they missed the train with coworking, and WeWork came in and disrupted the market.” Citing the affordability crisis combined with millennial preferences, Schmidt believes co-living will explode in Europe as well as in America, and notes that the cost of living in a co-living dwelling is about 10-20% lower than the price of a studio apartment.
While this emerging property type is certainly gaining a lot of attention, there are multiple challenges which could hinder its widescale entrance into U.S. markets. On one hand, regulatory reform is required in most cities to allow for the development of co-living structures. Numerous states have laws that allow a maximum number of people per bedroom in any given apartment, which could prove tricky to the co-living concept. In California, the current law states that the maximum number of occupants in a two-bedroom unit is five people.
Additionally, developing co-living properties could be complicated and costly. Traditional apartment buildings are typically built as separate units. To develop co-living units from these existing structures, it would mean essentially gutting and renovating to create shared kitchen and living spaces. Could the high cost of this negate the potential benefits of co-living developments? It certainly seems possible. So, what can U.S. markets do to support this trend, and which are more likely (and unlikely) to see an influx of this property type in the near future?
Likely: San Francisco
San Francisco is home to a handful of chart-topping stats: number of millennials, median salaries and residential rental rates, to name a few. The city boasts one of the largest millennial-aged populations—with 23% of the city’s population between 25-34, according to this Politico survey. At $120,000, the median income is also much higher here in comparison to many other parts of the country. And while many are reaching (or surpassing) this income level, there are many who are not—which can prove to be challenging in terms of rental affordability, given that San Francisco rents are among the highest in the U.S. As of December 2018, monthly rental of a one-bedroom apartment in San Francisco averaged upward of $3,500, while a two-bedroom was more than $4,700, representing a 5% and nearly 8% increase year over year, respectively. These sky-high rents create a dire need for affordable housing solutions for many Bay Area residents.
On a smaller scale, investors are dipping their toes in the co-living pool in San Francisco. Ryan Wagner, senior vice president at Colliers in San Francisco discussed how investors are experimenting with this trend in the market. “Investors are renting out entire homes, then those homes are furnished with bunk beds and turned around to rent individually by bed. This is common in the Palo Alto area and is especially appealing to young tech talent fresh out of college, who might not have the funds to afford their own place in the market yet.” Although small-scale, this trend might set the tone for co-living to take off in San Francisco.
While Boston also houses a large millennial population, it faces challenges that might make larger-scale adoption of co-living more difficult. Aaron Jodka, research director at Colliers in Boston discussed the hurdles that the market faces. “Boston has new Airbnb regulations that limit the ability to rent units. This essentially has leveled the playing field from a tax standpoint, as Airbnb’s will be taxed similar to hotel rooms. Could regulations also ring true for co-living developments? Additionally, investors here just aren’t quite sure how successful co-living will be—is it just a fad or a real trend?”
Boston has yet to see this concept come to fruition. Jodka adds, “In order for such co-living operators to come to Boston, or many cities for that matter, they are likely going to need to find pre-construction development, and a joint venture with the developer/owner in order to design the units to meet the co-living operator’s business model.” However, Boston has recently reduced square footage requirements in the city, which could mean that microunits might be the more feasible trend to take off here before co-living.
Factors to Consider for Other U.S. Markets
New York City is another likely candidate for co-living. “New York has the population density, talent and affordability challenges that make it a good potential fit for this trend,” says Wagner. “As for other U.S. markets, cities such as Los Angeles and Seattle might be less likely to get on board with co-living on a large scale, as they don’t have the sky-high rents to drive that demand.” It’s important to note that while a handful of cities across the U.S. already have co-living operations in existence on a small scale, no market has seen this trend take off in major ways just yet.
What’s Next for Co-living in the U.S.?
It’s unclear when large-scale co-living developments will enter the U.S. What we do know is that forward-thinking cities with a large entrepreneurial talent pool, combined with high average rents, will be more likely to get on board with this trend. Cities with a high percentage of millennials and Generation Z individuals are also a key factor. “Young professionals who are recent college graduates were already living in environments similar to co-living. With a lot of the same shared spaces, student housing and co-living certainly overlap. As this talent pool first leaves academia and transitions into entrepreneurial, tech or similar industries in U.S. cities, they’re more likely to gravitate toward experiences that they’re already familiar with, making co-living especially attractive to this age group,” says Wagner. “As for owners and developers, it all comes down to maximizing efficiency. If co-living spaces can reasonably generate $10 per square foot rents, then it should be a resilient asset class even when this current cycle inevitably slows and corrects.”
This article was written by the U.S. Colliers Editorial Board, whose mission is to produce new and noteworthy commercial real estate thought leadership pieces to create conversation around proactive content. The Editorial Board focuses on CRE trends in the United States, and is comprised of Colliers marketing, research, communication and service line leaders.