Coliving: A primer for real estate investors
Each week, Compound delivers real insight into real estate investing. This week, we’re taking a closer look at coliving, the buzzy communal living model developing in cities around the world.
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Coliving is living with people who are strangers and sharing communal living spaces with them. It’s a familiar model — like roommating or a boarding house — but this new generation of companies is bringing hotel-style furnishings, events and technology to the mix.
With coliving, tenants sign leases that make them liable only for their own bedroom. Usually, the coliving operator furnishes and cleans the common spaces and may even provide some high-end amenities like game rooms, movie theaters and gyms.
Real estate investors watch coliving carefully, curious to understand whether it can generate better rental returns than traditional leases do. At Compound, we do the same. We love the idea of creating a less lonely, more cost-effective way of living, and of course we’re interested in making more money by leasing out real estate in a slightly different way.
Coliving Considerations
Despite all this excitement around coliving, there are potential pitfalls that we’ve observed, particularly from our CEO’s experience in the hospitality and coliving industry.
Here are some of the most significant challenges:
1) FF&E replacement reserves — Residential home furnishings are not built for the wear-and-tear of excessive moving in and moving out (not to mention beer pong or wild parties). We’re concerned that operators may not be reserving enough cash flow to refurbish units often enough to maintain that new and pristine look that is so inviting to tenants.
2) Highly seasonal occupancy — Many operators rent out rooms on a monthly basis, which takes a predictable 12-month lease and increases the potential for gaps in occupancy, especially during slower times of year, like the winter when cities are not as awash with interns looking for temporary housing. This seasonal variability is partly to blame for the high rates charged by hotels who must defray the daily dips in occupancy with much higher nightly rates.
3) Low-margin business that is operationally complex — Coliving companies are essentially hotels with all the ancillary expenses, customer expectations and complexity associated with hotel operations. Operating costs are high — often much higher than expected — and we’re concerned that operators may not be accurately predicting this complexity when they forecast unit profitability.
4) Price-sensitive customers — Roommating tends to appeal most to younger, price-sensitive people. While coliving spaces are often much nicer than the Craigslist roommating situations that are more widely available, price-sensitive people may be unwilling to “pay up” for a housing brand when it costs significantly more than other solutions.
5) Gender balancing — Coliving companies have a notoriously difficult time attracting female tenants for a host of reasons, not least of which that women are much less willing to live with strangers because they usually have their own friends and are more concerned about safety. Because coliving companies are not permitted to select tenants on the basis of their gender (due to Equal Opportunity Housing laws), it doesn’t take much for a coliving space to become 80/20 male-to-female and very quickly start to feel like a fraternity.
Coliving’s Potential
Despite our hesitations, we love to see companies using branding and marketing to connect with new customers and potentially enhance investor returns. Coliving offers that hope. And don’t just take our word for it. Ian Schrager, the original boutique hotel evangelist, recently described coliving as the next big disruptor in hospitality, blurring the distinction between residential and hotels.
At Compound, we’ll consider renting our properties to coliving operators when the math makes sense for our shareholders. We’re particularly intrigued by the technology-only solutions which promise to turn regular buildings into a more coliving-like experience without any additional build-out or reconfiguration of common areas.
The one we’ve noticed is:
Cobu (formerly Doorbell Communities) — Helps apartment landlords turn standard buildings into more communal experiences through in-person events and digital engagement via its proprietary software, the Cobu app.
Below is an overview of some of the coliving companies on our radar and how they differ from each other. As you can see, there are many companies — and many more than we’ve listed — and it’s a dynamic sector that changes every day.
Large-scale, institutional-quality operators
Niche, boutique-style operators:
Furnished apartment companies that rent out rooms by the month:
Coliving for senior citizens (aka Dorothy, Rose, Blanche & Sophia):
Single-Family Houses turned into Coliving:
Big Brands trying their hand at Coliving:
Coliving Hotels:
Compound is a venture capital-backed asset management firm that creates city-specific residential real estate funds called ReTFs designed for the next generation of investors. Our first fund invests in Manhattan residential real estate, an asset class that has historically been out of reach for the average investor but has outperformed almost every relevant benchmark, including the S&P 500.
