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After Big Industry Merger, Co-living is Poised to Enter a Growth Phase

At the beginning of the year, the country’s largest co-living operator, Common, announced it was merging with Habyt, the largest co-living company outside the US. It was big news for the co-living sector, representing a small but growing corner of the country’s multifamily housing market. The newly-formed entity will be called Habyt Group. It will be based in Berlin and oversee co-living and traditional apartment units operated by Common in the US and Habyt in Europe and Asia. The move, intended to help both companies become more profitable by combining their resources into one brand, ultimately created the largest co-living brand in the world. The new company will now have locations in more than 40 cities and 14 countries, with more than 30,000 units of co-living, as well as studios and traditional rental apartments. The merger (along with growing demand for co-living communities and more calls to remove regulatory barriers that can hamper development of them) could result in soaring growth for the sector.

A modern take

Brad Hargreaves co-founded Common in 2015, and the company’s first co-living building opened in Brooklyn’s Crown Heights neighborhood the same year. Common partnered with a local real estate developer to purchase the building, which it later remodeled for less than $1 million. Hargreaves helped create Common after co-founding the continuing education school General Assembly in 2011. The new venture quickly earned support from major real estate players in the New York City area. Among the backers of an initial funding round were the LeFrak Company, a technology arm of the Milstein Family, as well as Ron Burkle’s Inevitable Ventures. Since its inception, Common has raised $113 million in venture capital. Habyt, launched in 2017, has raised over $50 million from several companies, including Sequoia Capital and Burda Principal Investments. In co-living communities, since rooms are rented separately, and apartments are sometimes reconfigured to accommodate more roommates, apartment rents can be up to 50 percent higher than those with typical layouts, which certainly seems like a draw for landlords.

Last August, Hargreaves announced he was stepping down from the startup as CEO and becoming chair and chief creative officer. He explained the decision on Twitter as something he came to alone and not as a result of pressure from investors. It was also based on a desire to make the company profitable. “By merging, we are creating an international co-living network that more and more renters are seeking out right now,” he said in a press release announcing the deal. Both companies reported seeing their business grow exponentially last year, and they anticipate their businesses doubling this year and, as a result of merging, turning profitable. A key driver behind the merger was the need to scale operations in order to be more resilient as a company and more effective at what they do, Hargreaves said. “This is a major driver behind consolidation in both the coliving and STR markets,” he said. “Both business models get much, much stronger with greater operational scale.” Merging the two companies will also further amplify two major co-living brands and reduce the number of competitors in the space.

Co-living may have emerged as a more modern, amenity-laden roommate-sharing concept with companies like Common within the last decade. Still, it has its roots in the tenements and boarding houses that arose in the 19th century. Its modern application, dubbed by some as “adult dorms,” came amid the rise of the sharing economy and offered users an easy experience in finding housing in an urban area: nicely furnished quarters, often including everything from sheets to silverware, and weekly apartment cleaning. Plus, co-living communities typically have apps and other tech to make rent payments and communication with staff easy. The other key element was a built-in community and social network. “Common is housing for people who want to know their neighbors,” Hargreaves said during a 2017 press tour of a newly-opened Common building in Brooklyn. However, even that’s changed somewhat as the sector has evolved over the years. 

In a recent issue of his newsletter, titled “Thesis Driven,” Hargreaves reflected on the past several years of running a co-living company and what will be necessary for the industry going forward. Despite the typical talk of forming a community being a driving factor in co-living communities, he said it wasn’t the most important thing for residents. “Fewer than 10 percent of our applicants cited a desire for community or new connections as the primary driver for renting with Common,” Hargreaves wrote, adding that community events still drew interest and attention from some residents, but that community “wasn’t a primary selling point.” Instead, he said, what attracted most of its residents was a home in a well-run building in a good area at a reasonable price.

Before the pandemic hit, the co-living niche was thriving. Both demand and the number of new co-living developments were growing, according to a CBRE report on the sector published in January 2020. At the end of 2019, five years after the first modern co-living communities were launched, there were more than 5,000 beds in roughly 150 co-living communities around the US. Things were looking good, venture capital was flowing, and more startups were entering the sector. But then early 2020 came around, the COVID-19 virus upended the world, and questions started floating around. “How Will Co-Living Survive the Pandemic?” “Can Co-Living Survive in a Socially-Distanced Future?” dotted the headlines then. It was a reasonable question in an incredibly uncertain time. 

Evolving for the future

Like traditional rental apartments, vacancies at co-living properties spiked during the first several months of the pandemic, when many people fled cities that were hotspots for the virus, like New York. In a bid to bring them back, co-living companies offered rental concessions, flexible lease terms, and a more streamlined move-in process. Many, including Common, even offered medical workers who traveled to cities to help with the onslaught of COVID-19 patients discounted rates and no deposits at their properties. By late 2020, demand had picked up again, and occupancy rates had risen back up to 90 percent (after hitting a low of 86 percent in June 2020). While some companies like Common and Habyt managed to survive throughout the pandemic, many others shuttered operations for good, including Quarters, Ollie, and Roam.

When COVID-19 hit, and social distancing became paramount, it was easy to think that the idea of co-living might not necessarily be what people wanted. However, after a brief dip in 2020, occupancy rates quickly picked back up, and the isolating experience of the global health crisis, especially for people who live alone, may have even led to more interest in co-living. Studies have indeed linked the COVID-19 pandemic to increased feelings of social isolation and loneliness. “The desire to return to a more communal way of living is a byproduct of our modern society, where we have become more connected yet more isolated than ever before,” American Planning Association (APA) authors wrote in the November 2022 issue of Zoning Practice magazine. In its study on the sector, the organization points to the domino effect of the rapid rise of smartphones, to the rapid growth of mobile-sharing apps and the sharing economy between 2011 and 2021, which have led to changes in ordinances in zoning to support the new kinds of services.

While co-living is popular in some major cities, there are still many areas where zoning ordinances restrict this kind of housing use, and neighborhood opposition to co-living can be difficult to overcome. “Education is a critical component to building support for co-living,” researchers wrote in the APA study. There’s often a lack of clear regulation, because of how co-living is categorized depending on the zoning ordinances in a particular jurisdiction. Co-living can be grouped in with uses like SRO facilities, dormitories or group dwellings, and those are often only allowed in certain areas and require approval from lawmakers. Because of negative perceptions of some of those kinds of facilities, it makes getting approval for co-living that much harder. The industry has also had to contend with recent criticisms from tenants of co-living communities. Last fall, amid a number of complaints from tenants about co-living operators in New York City, New York’s Attorney General Letitia James said her office will be keeping a close eye on the industry. And building new co-living properties also comes with challenges, given high construction costs and rising interest rates. According to a HUD study from 2019, these barriers “will need to be addressed before co-living spaces are fully reintroduced into the affordable housing stock,” researchers wrote in the report.

Despite worries over venture capital drying up and the negative impacts of continued economic turbulence on the co-living sector, there is still a lot of demand for co-living space, especially as the cost to rent has soared. Government agencies like HUD see the concept serving an important function as affordable housing that diversifies housing stock and preserves more open space by typically being built with higher-density. However, for co-living operators to be profitable, a necessary evolution in the makeup of co-living properties needs to take place. “Five years ago, most coliving projects were standalone assets: a developer built 20, 50, or 100 coliving rooms in one project,” Hargreaves wrote in his newsletter. “Today, the majority of developers are blending those units into much larger projects, achieving the differentiation and NOI gains of coliving while creating a more diverse, resilient, and financeable asset.”

Now, nearly three years later, we have an answer to those headlines questioning the future of co-living. The sector has indeed survived the pandemic (so far) and with the merger of two of the biggest brands, plus continued demand, the future looks bright. There is still more needed change on the regulatory front to address barriers to opening co-living communities in some cities due to zoning restrictions, and dedicated rules surrounding co-living are rare. Still, it seems that now, several years after the first communities were launched, and despite the roller coaster of the pandemic and an unpredictable rental market, co-living may be entering its most promising growth phase yet.

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