Before the pandemic, co-living seemed to be an up-and-coming investment property type, with appeal to millennials and venture-backed startups abounding. Some developers even claimed that co-living projects delivered better rents per sq. ft. than conventional multifamily properties.
But now, nearly three years since the onset of the Covid pandemic, the co-living sector has seen a consolidation of major players and a shift in view of these units as a specialty offering in a multifamily building, particularly for renters looking to catch a break in a pricey city.
“There were a number of co-living companies that did not survive the pandemic,” says Sarah Yaussi, vice president of business strategy at the National Multifamily Housing Council, an industry group for the apartment industry. “But if you think bigger picture, there's so much demand for different kinds of living situations.”
Before the pandemic, there were plenty of reports talking about how co-living—essentially, roommates sharing spaces—had always existed, but was taking off in a new, purpose-built fashion, fueled by the rise of new operators hoping to make a name in the space. At the end of 2019, there were 5,000 beds in co-living communities across the U.S., compared to a handful the four years prior, and there were some 40 operators on the scene, according to one report from commercial real estate services firm CBRE.
In part, the pandemic led to a pullback in the flow of capital into the kinds of proptech firms that ran co-living operations. “It’s tough. In general, there’s a lot of uncertainty,” Yaussi says.
But companies that specialized in master leases or development of co-living projects also struggled. “What the pandemic did is it shook out questionable business models within the sector,” says Brad Hargreaves, founder of co-living company Common.
Hargreaves, who also founded the technology trade school General Assembly, founded Common in 2015 with the hopes of formalizing what was a dreaded process to find a roommate on Craigslist.
“Twenty-five million Americans live with roommates or someone they're not related to,” Hargreaves notes. “This is a much broader part of the housing market than most developers, most investors give it credit for. … Think about it as roommates done better.”
Common, which raised some $113 million in funding, operates in 10 markets today. During the start of the pandemic, Common experienced a low renewal rate and the company had to make aggressive concession offers to bring tenants back. The company also focused on attracting travel nurses and other essential workers that may have needed apartments quickly.
Common’s business then grew as the firm took over assets from other operators that fell by the wayside, according to Hargreaves, and bounced back by the summer of 2021. When the pandemic hit, Common had around 1,500 units. Heading into 2022, that number quadrupled to around 6,000.
The firm’s model is more akin to a property management firm, partnering with developers to design and manage co-living buildings and units. Common has also diversified its portfolio by offering other types of units, like workforce housing.
“That is how we've evolved over the past three years,” Hargreaves says. “If we work with a client, we want to be able to work across their portfolio.”
The co-living industry has faced other challenges, in addition to the pandemic-related drop in demand. Common, like other co-living companies, faced criticism from tenants over its housing conditions, and in August, Hargreaves stepped down as the company’s CEO. New York Attorney General Letitia James’s office told Gothamist that it’s paying close attention to complaints lodged against co-living firms. Not to mention, rising interest rates and construction costs now pose hurdles on the development side.
"There's kind of a right amount of strain that developers feel about creative options like co-living,” Hargreaves says. And if traditional units are penciling into the plans well, “it's tough to get developers to do anything else,” he adds.
Hargreaves’s tactic? Focus on how a co-living project can increase returns for investors and developers. Co-living ups a building’s density with more paying tenants in more units, which can translate into more dollars. Also: underscore how Common isn’t another short-term rental company bemoaned by local governments and enforce the same or better credit standards as a traditional rental building.
“And then finally, say, ‘Let's not necessarily make a building 100 percent co-living, but look at co-living as a unit type within the building,’” he says. “And that is usually what gets lenders comfortable. So co-living is a unit type—it’s not a distinct and distinguished product.”
Yaussi, of the NMHC, agrees. “There's a real value to it because there's an affordability challenge.”
NMHC’s annual housing preferences survey found that 8 percent of respondents would consider a co-living unit in their next rental search.
“There is a cohort that is interested in this. But is it 40 percent? No—40 percent said they were interested in detached family homes,” Yaussi says. “There’s a real interest, but it’s small.”