The Fall of HubHaus and the Future of Co-living

For those of you that don’t know me, I am Shruti Merchant, founder of HubHaus, and CEO until February of 2020. HubHaus’ shutdown process was rough and highly criticized (much of it with good reason). While I can’t claim to have 100% knowledge on everything that happened, since I transitioned out of the company before the shutdown happened, I believe I owe it to both the HubHaus community and the co-living community to share my perspective.

We started HubHaus in 2016 with the vision of allowing anyone new to an area to have immediate access to a community. I had lived in shared housing for years with people who became my best friends. I wanted everyone to similarly be a little less lonely when they moved to a new city. In our attempt to create an inclusive and accessible community, affordability ended up being a key piece of the puzzle.

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The key to affordability was in large (5+ bedroom) single-family houses. We noticed that the price per bedroom decreases with larger properties, while the quality of the property increases. This is in part because there are not many who can afford these properties — most renters are looking for 1–2 bedroom apartments (which are in short supply in the Bay Area). This inventory is also harder for young, single co-living groups to access. In addition to the logistical hurdles — finding/convincing 5 friends to move into the same place at the same time — many young professionals were not interested in taking on the financial/credit risk and/or did not meet the individual criteria to lease these types of properties. Despite our mark up, our rooms were often some of the most affordable units on the market.

Some would say we were acting as just a middle man, and this is true. Businesses that are middlemen aren’t intrinsically bad if they offer true value. Similar to Trader Joe’s and AirBnB, it is cheaper to organize roommates and directly rent, the same way it is cheaper to buy directly from a farmer or vacation property homeowner. The value we add was increasing accessibility to these more affordable units for individuals who cannot coordinate a large group on their own (in addition to other perks, like lease flexibility and community services).

Things worked really well for the first few years: we built an incredibly active and strong community that created lasting friendships in almost every house. By mid-2019, we had become one of the largest coliving players alongside Bungalow and Common with over 1000 rooms and a fraction of the capital our competitors had. Despite growing pains (especially around repair logistics), our Bay Area houses were financially healthy and most landlords and residents were satisfied with our services. By Q4 of 2019, we decided to start talking to investors to raise more money for our Series B, to continue to expand our co-living product and grow our cash cushion.

Unfortunately, two major outside events turned the fate of HubHaus around: WeWork and COVID.

Prior to WeWork’s failed IPO, we were close to getting a Series B. Investors’ feedback was that our metrics were best in class (for this model of co-living), and we quickly got our first offer for a piece of the round. As WeWork crashed from grace, the real estate tech market crashed with it. Our deal was pulled off the table and other formerly interested investors went cold.

Given our limited capital, we decided to move away from the traditional VC-backed growth model to become a profitable self-sustaining company. It worked, but at a cost. We made tough changes, including laying off half our team, and reducing cleaning services if utility usage was higher than agreed upon per the lease. These sudden changes negatively impacted our customer experience. Through this, our business was becoming financially sustainable and we worked tirelessly to recover our high level of customer experience. HubHaus was making it out of the woods and each day was getting better.

Just as things were looking up, COVID came. It was a stab to the heart for HubHaus’ model of co-living. The squeeze came on both ends, from vacancy and non-payments of renters.

The <5% vacancy quickly climbed to over 30%. The maps showing available rooms skyrocketed from a handful of dots speckled across the bay to hundreds, with almost every house suddenly having a vacant room. There were multiple reasons for this: Rent prices crashing by over 30% in the Bay, people leaving the Bay Area to transition into remote work, a spike in unemployment, and COVID concerns around group living. Simultaneously, as unemployment rose to unprecedented high levels in our area and the US, HubHaus, who in 2019 only had a handful of nonpayment related tenant removals, suddenly faced 100’s of young professionals in our customer base unable to pay rent, which created significant cash flow risk.

Like every housing company, move-outs and non-payments come with the business. What made the situation uniquely more difficult was the legal regulations set through the pandemic. These restrictions had obvious good reasons important to protect vulnerable tenants in the pandemic, but without similar protections for landlords, HubHaus was placed in a tough spot. When someone couldn’t or didn’t want to pay rent, HubHaus was expected to take on the cash flow liability. When residents left, the partially occupied houses couldn’t legally be shown because of COVID spread risk, unlike empty apartments. While the vacancy or delinquencies were difficult but manageable, restrictions on filling rooms and the inability to apply repercussions to non-paying tenants made the situation much more dire the longer the lockdown lasted.

In order to survive, HubHaus decided to deduct member non-payments and the price of vacant rooms of each house from our rent paid to the landlord, passing through losses on a house by house basis. Many houses got full rent payments. However, other houses got just a fraction of the agreed-upon rent. At times, it was especially upsetting because these houses would appear occupied, but multiple members were unable to pay rent. The initial plan was to repay landlords once COVID was handled, expecting just a few months of COVID disruption.

As time went on, it became clear that COVID was not ending anytime soon, and leadership decided in early September to shut the company down. They felt like the most responsible thing would be to turn properties and the tenant debt over to the landlords, and close the company.

I want to be transparent: by no means do I think HubHaus was a perfect company. Much of the criticism over the last few weeks is justified, especially around the rough ending which left many landlords, members, and vendors facing tough situations.

That being said, I think it is easy to pick at the vision of companies destroyed by the pandemic, especially ones that don’t have large cash reserves to offset losses through this tough time. The reality is that especially in the Bay Area, we need affordable housing now more than ever. We aren’t building apartments fast enough, and we desperately need creative solutions that can ease the load on this rough housing market.

When I think about HubHaus, what sticks out most is the positive stories. I think of the relationships and friendships that we’ve created, and relationships of couples who met through our community. More importantly, I think of stories from members who saved money to travel, buy their own home, or even just remain in the Bay Area a little longer because of the affordability of co-living.

Though HubHaus may have failed, I will continue to be optimistic about co-living as an industry. Our model may not have worked (especially through COVID), but I am bullish on stronger market leaders, like Starcity and Common, taking the torch and continuing the co-living legacy. I am still excited to someday live in a world where every young fresh face can move to a new city without going broke, find their co-living family, and be a little less lonely.

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