CO-LIVING: Reverting to the Middle Ages — The Millennials May be Forced to Trace Their Living Habits Back to Those from the 12th Century.

Increasing economic pressures and technological advancements at world-class cities are leading to the phenomenon of co-living, popular amongst Millennials. Co-living presents many financial, social and psychological benefits for residents. Interestingly, this phenomenon resembles living habits of those from the Middle Ages. Entrepreneurial efforts are taking advantage of this rising trend and opportunity — WeLive, Knotel, Common and Founder House to name a few — for the better or worse.

Summary

Given that I work in real estate, the concept of co-living caught my attention. As a Millennial living in a major Canadian city, Vancouver, I experience first hand the pressure of rising rents and housing prices, while salary levels have been kept relatively flat over the years. With Baby Boomers (the generation that valued home ownership) not yet ready to downsize, market housing supply is restricted, which further pushes up prices. Youth around the world (the United States, Europe and Asia) exhibits similar living patterns. Yet, it is often said that with each crisis, there presents an opportunity. Budding entrepreneurs are taking advantage of this trend by creating co-living spaces that are appealing to Millennials from not only a financial, but also a social and psychological angle. I will elaborate on this later. Numerous start-ups that follow the co-living business model include: WeLive (a member of the shared-office giant WeWork Cos), Knotel, Common and Founder House. The intriguing matter is that the Millennials’ living pattern closely resemble that from the Middle Ages, when “it took a whole village to raise a child”. The concept is not new. These co-living start-ups are receiving much support from venture capitalists; however, the profitability of these ventures as part of the share-economy remains questionable.

The Co-Living Phenomenon and Why It Exists

Co-living is an arrangement for living that involves furnished apartments with shared common spaces and kitchens, emphasizing on community and amenities. The phenomenon of co-living became popular in the last decade or so, especially amongst millennials as they search for financial, social and psychological support. Interestingly, the co-living phenomenon resembles the form of living arrangement that is common in the Middle Ages, during which, most people commonly live in cohorts and borders amongst families in the same community was not common. Children are often “raised by the whole village”, and may live at strangers’ places given that everyone in the same village knew each other. Truthfully, the concept of nuclear family only became truly popular in the 18th century in Europe and North America, where the Protestant belief system put Jesus as the father at the center of the family, the mother as the priest, and the children as the congregants. With today’s economic and social conditions, it is not a surprise that residents in larger metropolitan cities are reverting to co-living as they search for communal support.

Co-living also appears to take different forms, serving people with all sorts of priorities. In San Francisco, hacker’s houses host coders and programmers that bunk together to work on their start-ups or projects. Single mothers use CoAbode to live together and raise children together. In Los Angeles, about a dozen young adults live together to make art, hold salons, divide up chores and cook communal meals four days a week at Synchronicity LA. Despite all of its different forms, the central theme behind co-living is the same, it connects people of different resources in the larger, seemingly heartless cities, to make their lives easier. It knocks on the same fundamental set of human needs and desires that were found in us today as well as 2 centuries ago, that is the need to be supported in a community to grow as a society despite economical and technological changes. As explained extensively previously, co-living is a natural offspring of socioeconomic conditions of our age. Obviously, this socioeconomic phenomenon presents an interesting real-estate business opportunity that has caught my, and other aspiring entrepreneurs’ attention.

Co-living resonates with fundamental human need for community.

Entrepreneurial Efforts in Co-Living

With this increasing desire for co-living in the major first-tier global cities, ventures such WeWork, Knotel, Common and Founders’ House, are catching attention of not only a new wave of residents, but also hungry investors that are looking for the next “Uber”. These new real-estate start-up ventures often receive in the millions or billions for each round of their funding, shuffling themselves to join the ranks of “decacorns” in Silicon Valley that often project targets that may be too hard to achieve. The general investment community (i.e. Wellington Management, Goldman Sachs, Harvard Endowment Fund, and Soft Bank to name a few) may have been convinced by the optimistic outlook painted, I would like to hold a reserved outlook based on conversations with experienced investors such as @Terrence Yang. A closer examination at WeWork’s pitch documents serves to highlight the aggressiveness associated with such projections.

This suite of co-living ventures, including WeWork / WeLive, vows to bring the Starwood model of hotels into the apartment and business rental markets, serving the needs of a changing demographic both in the way that they live and in the way that they work. The business model of WeWork functions by the start-up entering a long-term lease agreement (sometimes up to 15 years) with the landlord, while it rents out at a higher premium to tenants either for living or for work at a significant premium. The Starwood model serves to provide branding for these ventures from which potential customers can expect consistent experiences around the world with these ventures.

These founders prove to be great story tellers — not necessarily great operators. WeWork’s investing papers that helped it raise $355 million from investors in 2014 leaked out. Growth was projected to be triple digit in the early years, while WeWork is ambitious that the growth of the market would continue, and expenses are kept down because the company is asset-light and has had numerous agreements with landlords for lower expenses and more amenable rents. However, in 2016, the company’s founders, Adam Neumann and Miguel revised down their profit and margin projections, as the venture continues to experience negative cash flow despite being 6 years in operations. Accordingly, it became apparent that these business ventures often performed accounting tricks that did not abide by GAAP rules lead to overly optimistic projections which often filled the needs of all too eager private investors filled with FOMO. Once hitting IPO, these “decacorns” should deflate and correct to more accurate valuations.

The co-living phenomenon presents a viable business need, yet venture investors appear to be overly optimistic in where they invest their money.

Re-Cap

In the modern society, co-living becomes a popular trend for those living in first-tier cities, because it presents an option that offers financial and psychological benefits for those participating. The phenomenon is like those exhibited during the middle ages. Yet, this time, it presents an entrepreneurial opportunity that is fueled by three things — 1) a market that is flush with investors’ money; 2) advancing technology that is changing myriad aspects of our lives, including the way we live, and 3) an overvalued commercial and residential real estate market. As a result of these three factors, it is not surprising that although the natural human evolution has presented an opportunity, yet human greed may ruin its viability in many ways.

References:

  1. https://therealdeal.com/2017/03/01/the-long-view-the-starwoodification-of-real-estate/
  2. https://www.buzzfeed.com/nitashatiku/how-wework-convinced-investors-its-worth-billions?utm_term=.wszrxgXGY#.vqol1RnXz
  3. https://pitchbook.com/newsletter/knotel-pulls-in-25m-funding
  4. https://www.forbes.com/sites/alexkonrad/2016/07/15/wework-cut-revenue-target-and-bagels/#521ff9e7579c
  5. https://www.wsj.com/articles/friends-with-amenities-new-york-apartment-developers-embrace-co-living-1502303978
  6. https://www.theatlantic.com/business/archive/2016/09/millennial-housing-communal-living-middle-ages/501467/
  7. http://milagrocohousing.org/
  8. http://www.cohousing.org/node/1537
  9. http://www.commonspace.io/
  10. http://www.crea.ca/cafe/millennials-boomers-and-housing/
  11. https://www.citylab.com/equity/2017/04/who-will-buy-baby-boomers-homes/522912/
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