Earlier this year, W5 Group committed $300 million to develop 1,300 co-living units across the U.S. and to increase the global reach of its brand for the co-living operator, QUARTERS. Co-living—and, more broadly, “innovating living”—has emerged as one of the most exciting opportunities in the real estate industry, and we’d like to share our insights as to why:
What is innovative living?
To understand what we mean by innovative living, and why it’s a core focus for us, it’s important to first look to the demographic and societal shifts that are influencing consumer demand. This can best be exemplified by examining the needs and wants of the largest generation in U.S. history: millennials.
Whatever your take on this oft-derided cohort, you need to understand them. They’re on track to be the most educated generation yet, and they currently comprise the largest segment of the American workforce at 35 percent. While they presently trail their predecessors in total expenditures, millennials are in fact on pace to achieve the most growth in spending of any segment.
Perhaps the most important insight into this demographic is that they aren’t buying homes. Currently, only 37 percent of 25-34 year olds own a home—a remarkably low figure in comparison to previous generations. Factor in that 63 percent of millennial homeowners reported feeling regrets about their home purchase, and the opportunity for rental innovation and innovative living begins to emerge.
Densification
Millennials desire urban living, with some 88 percent of them living in metropolitan areas where enviable experiences are abundant and rents are high. This preference is further amplified by this generation’s choice to delay marriage and children until later in life. About 57 percent of millennials indicate they have never been married, but that’s not to say they don’t value interpersonal interactions—in fact, many experience loneliness, even when surrounded by people.
Recognizing these characteristics, we’re heralding micro units and co-living spaces as the next big thing in urban living. They’re attractive to young residents who haven’t yet accumulated wealth and who are willing to trade square footage for the all-important proximity to vibrant downtown areas. Such buildings often offer curated and organic social events, providing the community experience that many crave in otherwise impersonal city environments. And for landlords? The ability to cultivate a desirable environment in your building, generate strong demand, and achieve higher yield per foot than traditional leases.
Digital nomads
Millennials are the first generation of digital natives, and rapid technological advancements have enabled them to live and work on their own terms—in a 2017 study, 47 percent of millennials reported working freelance, with that number projected to increase each year. These workers value the freedom of being their own boss, working when and where they want, and choosing their own projects. It is this tech-savvy, flexible approach to life that makes co-living an attractive fit: shorter-term leases, which can be managed through digital apps, and a turn-key solution that eliminates traditional headaches associated with moving (and, of course, messy roommates).
The opportunity for co-living is further illustrated by an increasing preference for access over ownership, in what is known as the “sharing economy.” This is evidenced by the proliferation of sharing services for everything from cars to music. According to Economist Jeremy Rifkin, “Twenty-five years from now, car sharing will be the norm, and car ownership an anomaly.”
Experience is everything
As suggested above, the millennial cohort diverges from older generations in their lack of desire to spend money on material possessions, and has led the charge in cultivating the experience economy. One study suggests that 65 percent are currently saving for travel, further underscoring the value placed on freedom and flexibility.
With that in mind, while innovation in the rental market is a priority, we’re also eyeing innovative hospitality real estate as a key opportunity to capture younger generations’ predilection for experience and what’s been termed, reluctantly, by some as ‘bleisure.’ Traditional hotel chains have caught on to these emergent trends, rolling out boutique brands replete with “Instagrammable” furnishings, ubiquitous Wi-Fi, communal areas, shared workspaces, and creative amenities like free bike rentals and happy hours. We predict that these types of properties will continue to resonate, with guest rooms in highly populated urban markets shrinking to accommodate more space for experiential common areas, restaurants and bars.
In short, the lines between living, working, and playing are increasingly blurred. Real estate prices in cities are rising and, as young professionals seek out housing and lodging in dense urban areas, we believe that current inventory isn’t aligned with their nascent demands. We’re allocating capital to meet the needs of this technologically savvy, highly educated, financially maturing generation, and are excited to see innovative living’s promise cultivate communities across the globe.
Ralph Winter is founder of W5 Group, a single-family office that focuses on real estate investments.