Earlier this year, the COVID-19 pandemic looked like it might be the death knell for startups in the “co-living,” or shared housing, sector. Urban dwellers were fleeing crowded cities like San Francisco and New York–causing rents to plummet–as the widespread shift to remote work opened up the chance to earn a living from anywhere. The idea that renters would still want to live in arranged roommate situations seemed questionable at best.
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But co-living startups have continued to raise significant venture investment this year despite the pandemic, and some real estate experts even argue that the market is ripe for companies flush with cash to build or expand through a dampened rental market.
Co-living startups essentially turn roommate living into a product: They aim to offer a more affordable, social living arrangement for city dwellers by renting out spaces with private bedrooms but shared common spaces like kitchens and sometimes bathrooms. The companies often match roommates and furnish apartments, as well as provide cleaning services and community events.
Despite several high-profile closures among co-living startups and controversies with others, several companies in the sector have drawn significant venture investment this year.
They include Starcity, a co-living startup that owns and develops most of its properties and announced a $30 million Series B funding round in April. CEO Jon Dishotsky said occupancy at his company’s projects took a hit in March, but demand has since rebounded and is now higher than it was pre-COVID.
“The first few months were really nerve racking,” Dishotsky said. “As soon as May, June started to hit, we started to see our numbers start to come back and demand come back, and since then it’s been a really fast-paced growth back to normal.”
Starcity will have 1,000 beds in operation by the end of the year. The company expects that figure to double in 2021, and it has 6,000 beds in the pipeline. The company has expansion plans for San Francisco, San Jose and Madrid, and is looking at cities like Seattle, Portland and Austin.
Still, the news isn’t all rosy for co-living developers.
HubHaus, which rented homes in major cities including San Francisco and subdivided them into rooms for rent, shut down amid financial issues last month. The company angered tenants and property owners alike, billing tenants for services like house cleaning that were discontinued and ceasing to pay rent to homeowners, according to Mission Local. Bungalow Living, which signed long-term leases on properties and then turned them into co-living spaces, reportedly told some of its landlords that it didn’t intend to pay October’s rent, citing rental market declines for its financial problems.
Overall, real estate watchers say co-living has held up as well as or better than “Class A” apartments during the pandemic because they offer a better value for renters who don’t mind sharing common spaces and apartment amenities with roommates. Although the pandemic has pushed down apartment rents in cities like San Francisco and New York, many tenants in expensive cities may still be priced out of the regular apartment market.
“We’re seeing very strong interest in this space, both by the developers and the operators, and by the institutional capital,” Susan Tjarksen, a managing director with commercial real estate brokerage Cushman & Wakefield, said in an interview with Crunchbase News. Tjarksen, based in Chicago, wrote Cushman & Wakefield’s 2019 report on co-living, and said co-living is still alive and well, with interest in the asset class in the past two months back where it was pre-pandemic.
By Cushman & Wakefield’s estimate, there are about 7,820 co-living beds in the United States operated by companies like Common Living, Starcity and Quarters. The firm estimates that there are more than 54,000 co-living beds in the pipeline lower bound.
“We really see these co-living companies expanding like crazy right now, trying to take advantage of building through the bottom of the cycle,” Tjarksen said.
Many co-living companies have made announcements of expansions into “secondary cities,” Tjarksen said. Those include cities like Austin, Portland and Denver where there’s a lot of growth in STEM fields.
Common Living, a startup that offers co-living and conventional units and acts as a property manager, raised a $50 million Series D in September.
The company, which operates in 11 cities including New York, Los Angeles and San Francisco, with about half of its units as co-living and the other half conventional apartments, saw its occupancy take a hit in March when COVID-19 was declared a pandemic. However, Common had record months in July, August and September for new leases signed, according to CEO Brad Hargreaves.
“That need for affordability didn’t change when COVID came around. In fact it only became more acute,” Hargreaves said. “In fact, the type of people we serve haven’t left cities.”
Common Living’s demographic has a median income of $70,000 and a median age of 30. The people who are leaving big cities seem to be older and wealthier, Hargreaves said.
The only group that left Common Living and did not return were people from other countries who were in the U.S. on a visa, he said, but new tenants have taken their spots.
Owner-operator model wins out
The operating models for co-living startups vary. Some, like Starcity, own and develop their properties, while others, like Common Living, are third-party managers hired by the building owner to manage it. Some companies, like Bungalow, sign long-term leases.
“Signing a master lease taking on balance sheet risk, taking on that liability … it’s a very risky way to scale,” Stoffer said. “I think over time what you’ll start to see across real estate is sharing of risk.”
Stoffer said he believes the era of venture-backed companies raising hundreds of millions of dollars and signing master leases won’t continue. The co-living sector is more likely to operate on management agreements where there’s more strong, predictable revenue, Stoffer said.
As for the future of co-living, Stoffer is bullish on the resilience of residential real estate. Even with the pandemic, people still need a place to live and affordability is top of mind, he said. The hurdles somebody faces to get an apartment in high-cost places like New York are big, according to Stoffer, and so there will be a consumerization of the experience.
“The amount of friction required to get an apartment is just enormous, and you live in a world where people just want to click a button and make something happen,” Stoffer said.
Illustration: Dom Guzman