Before the pandemic, cohabitation as a housing solution was already gaining popularity as urbanization drove up rents in the big cities. Now, the concept of living in accommodation with communal spaces is making a comeback after the pandemic left a rental affordability crisis i epidemic of loneliness in his step
Earlier this year, North America’s largest co-living operator, Common, announced a merger with Habyt, the largest coexistence operator in Europe and Asia. The result is a world leader in coexistence that will operate 30,000 units worldwide, many of them coexistence spaces. It is estimated that there were 74,000 bedrooms in total coexistence either leased or under development in the US by 2022. At the end of 2019, real estate investment firm CBRE found that there were approx. 5,000 beds in only about 150 coexistence communities throughout the country. It is a rapidly accelerating trend, and research shows may have staying power.
What is coexistence?
Co-living has always been a way to save money on rent: Groups of friends, especially young singles, often rent shared spaces to save money on monthly housing costs. But modern living spaces are different. Buildings built or renovated with the intention of unrelated people sharing the same living space often include premium amenities. Think high-end decor and furnishings, fitness and yoga studios, spacious co-working areas, and perks like housekeeping and high-speed WiFi. People typically live in individual, furnished bedrooms, but share common areas such as kitchens, bathrooms, laundry and living areas.
There are variations in the operation of these spaces. Some companies, like off site, use a membership model, where digital nomads can book spaces for just three nights. Others, like bungalow, works as a technology platform that connects roommates looking for housing in big cities and sublets them homes. Companies like common offers a mix of private units with co-working spaces and shared units with private bedrooms.
The growing popularity of co-living spaces has also created a market for condominium units. For example, the Co-Own Co. in Denver allows home buyers to purchase a portion of a unit with a private bedroom and bathroom. It’s a way for individuals to start building equity for a fraction of the typical cost of buying a home in the city. Some developers are also applying the coexistence concept to the single-family home through construction communities with a common house and other amenities and with programming designed to foster community.
A solution to two different problems
Rents are skyrocketing
The rent-to-income ratio in the US is now 30%, up from 27.2% in 2019. In some cities, the problem is much worse: in New York, the ratio is 68.5%, and in Miami, 41.6%. High rents are making it difficult for residents to afford high gas and grocery prices and accumulate enough savings to wait for home ownership.
The increase in rental prices, which hit Year-on-year growth of 17.1%. at its peak in February 2022, it was mainly due to limited inventory and high demand for more space during the pandemic. In some pandemic boom cities, such as Austin, Texas, rents more than doubled within a year
The rental market is starting to cool, according to Zillow, the national average asking rents are declining. Multifamily inventory is expected increase in 2023 too. But rents remain high at 8.4% more than the same time last year, and apartments are still out of reach for many residents of urban areas. In 2022 there were 16% more chronic homeless people than in 2020. Since limited space in relation to the number of residents looking for apartments is a big part of the problem, co-housing is a natural solution.
Even before the pandemic, local governments were examining the possibility of shared living spaces as a potential solution to unaffordable rents. Through SharedNYC, the New York City Department of Housing Preservation and Development selected three proposals for multi-model shared housing developments designed to provide housing for low-income residents. And in San Jose, California, lawmakers local zoning code adjusted include co-living, allowing a new development with 800 units to begin construction.
For decades in the US, pensions prevent homelessness for low-income urban workers. In the 1960s, there were an estimated 2 million “single room occupancy” units, a concept similar to modern condominiums. The National Alliance to End Homelessness sees the return of shared housing as a solution that would end homelessness for most people. Most modern co-living spaces rent at slightly below-market rates, but there is an opportunity for multifamily developments that use a co-living model to bring even more affordable units to market.
The loneliness epidemic
Renters who choose co-housing may make more money (luxury apartment amenities at below-market rental rates), but that’s not the main reason most people rent a modern co-housing unit, according to one poll co-organized by the IKEA research and design laboratory. Respondents said the best benefit of living together was the opportunity for social interaction.
Coexistence spaces offer numerous opportunities for community building through both incidental interactions and intentional programming. Digital nomads can take a moment to socialize at the “water cooler,” just like office workers. Families can get support for raising children. Seniors can only meet for meals. And everyone can have someone to call if they are hurt or need help. There are additional benefits for transplants that may need to move quickly without support; not only does cohabitation provide easier access to furnished spaces, but it also provides an instant social circle. Some co-living companies even work to place roommates with common interests.
This is a breath of fresh air for the surprising percentage of Americans who experience “severe loneliness.” A report from the Harvard Graduate School of Education puts the figure at 36 percent of all Americans, including 51 percent of mothers with young children and 61 percent of young adults. Social isolation can increase the risk of several serious health problems and it is a risk factor that rivals even smoking when it comes to premature death. Loneliness is correlated with higher rates of anxiety, depression and even suicide.
Problems with the coexistence model
Some co-living companies still haven’t solved the operational problems. For example, residents of Common’s coexistence spaces complained of unsanitary conditions, poor security, hostility between roommates and poor communication from the support team. Residents of bungalow properties in New York reported finding strangers in their rooms, which were kept unlocked due to local law. They also complained about miscommunication and sudden lease terminations, calling the operation a “scam.”
The complaints are drawing the attention of local lawmakers, who could respond by cracking down on this form of rental housing rather than relaxing regulations to make it more viable. For example, allowing locks on individually rented rooms in New York could partially solve the problem, but if complaints from tenants point to other unfair practices, the cohabitation model could be banned entirely in the city.
But in some cities, like Philadelphia and Minneapolis, lawmakers are hugging the idea of ”single room” rentals, providing legislation that allows units in multi-family and commercial areas.
A new asset class for investors
Cohabitation is not just a solution to loneliness and unaffordable rents. It is also an emerging asset class for real estate investors. Despite some issues with the coworking business model, coworking businesses generally report higher rental income per square foot than traditional rental models. For example, in New York, the income for cohabitation units is reported to be 40% to 50% higher than traditional apartment rentals.
A report by MIT students also suggests that co-housing buildings should be more resilient during an economic downturn than traditional multi-family housing. In fact, during the COVID-19 pandemic, co-living spaces continued to command a premium of 23.2% per square foot over rents per square foot for traditional studio apartments in comparable markets, according to research from the real estate services company Cushman & Wakefield.
The MIT report also indicates that cohabitation is poised for wider acceptance, both among lawmakers and the general public. Early signs show that co-living will become a “core asset class within residential real estate,” the report says. While the model is still in its infancy and presents some potential headaches, it may become a welcome alternative to traditional long-term multi-family rentals for some investors, particularly in urban areas where housing prices struggle get a positive cash flow.
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Note from BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.