Co-Living: What Is It and Will It Survive COVID-19?
A housing option that was once utilized primarily by college students is becoming more popular among young professionals across the globe. With rent prices rocketing in many primary-market cities like New York, San Francisco, Seattle, Washington D.C., and Chicago, urban life is out of reach for many, unless they pool their living resources in a co-living situation. This trend can be a good opportunity for investors as well as a great way for young people to live in urban centers. But will it survive the pandemic?
What is co-living?
Co-living isn’t what it used to be – it’s evolved from a few friends sharing a home to strangers sharing fully-furnished apartments. Landlords have found that by fully furnishing apartments and renting them out by the room, renters have the opportunity to have a nicer home (and better amenities) without breaking the bank.
In this new take on co-living, residents get a private bedroom in a fully furnished home but share common areas like cooking and living spaces. Co-living became popular in major cities as a form of affordable housing for students, young workers, digital nomads and city newcomers. Residents are attracted to this way of living due to the affordability, flexibility, included amenities, and sense of community.
Co-living was first popular in cities such as New York and London. Over the past few years, it’s now spread to other areas including San Francisco, Los Angeles, Chicago, Seattle, and Washington D.C. It may soon be coming to a city near you.
Why did co-living become so popular?
The increase in co-living springs from high costs of living in major cities, but also from the sense of community and belonging that is inherent in this form of living—qualities that are important to millennials. As you would expect, this trend has been most popular with younger generations, especially digital nomads who want to travel often and don’t want to worry about the upkeep of a home. This is the ultimate free lifestyle.
Benefits of co-living for investors
One reason co-living has become a popular choice for investors is the hope for higher rates of return on their properties. Real estate investors get higher net rent premiums, net operating income, and occupancy rates.
Higher rent premiums
Co-living floor plans hold nearly twice the number of bedrooms as traditional apartments, resulting in residents occupying less square footage in areas where space is at a premium and property values are high. According to JLL research, “co-living assets can capture a more than 30% net rent premium.”
Higher net operating income
By increasing the density in units and renting by the bedroom, property managers can secure higher rents per square foot, resulting in higher net operating income
Higher occupancy rates
Another reason why investors have been attracted to this trend are the high occupancy rates. As previously mentioned, multiple factors contribute to these higher rates, including the lifestyle’s affordability, flexibility, and better amenities. Even when there are vacancies in co-living spaces it’s still possible for the unit to produce anywhere from 30-50% higher than normal rent for a similar, single-occupancy unit.
Reduce the risk of sub-letting
In areas where rent is high many tenants sneak in a roommate without making the landlord aware. Co-living spaces all but eliminate this common risk of sub-letting since tenants don’t need to fill open bedrooms. Instead, the property manager or landlord can vet applicants.
What are the disadvantages of co-living for investors?
Investors can be wary of investing in co-living properties due to higher turnover rates, non-standard lease terms, and the expenses related to turning traditional apartments into co-living spaces. Some may find it a challenge to create and organize the events that support the best communal living experiences, as well.
COVID-19 and co-living spaces
Industry analysts remain optimistic about the co-living sector. A lot of co-living companies and complexes are in highly populated cities, and near major universities. Gregg Christiansen, president of co-living company Ollie, stated in a Fox Business interview that “Most of this demand came from students that didn’t have the opportunity to go home to their families or another location to go to when the campuses closed. It gave accessibility and a seamless transition for a lot of people that were displaced when college campuses closed.”
Co-living spaces have created an alternative to studio apartments, which are typically 30 percent to 40 percent more expensive. In fact, the social atmosphere that residents enjoy in co-living environments help bring a sense of normalcy while many are by themselves at home.
It may seem counterintuitive to quarantine orders to be sharing spaces with others – yet many co-living companies have found ways to ensure safety for their tenants. In addition to these new safety measures, they have also employed new methods to entice renters throughout the pandemic. One called Starcity, for example, has been offering concessions for housekeeping, access to online workouts, and rent discounts.
The future of co-living spaces in commercial real estate
While co-living hasn’t quite disrupted the multifamily sector, it could be a trend that steadily increases in popularity. Reza Merchant, founder of UK-based co-living company The Collective, told Forbes “The pandemic is going to be good for community. People are appreciating the value of connection more than ever and will look for it in the way that they choose to live in the future.”
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