Communal Living: Should Real Estate Developers Be Interested?

Got me thinking! Is technology the way? Interesting, read and you will be inspired.

Technology has seeped into virtually every aspect of the human experience these days and the sharing economy is just one manifestation of its impact. Tech startups like Uber and Airbnb represent the vanguard, reshaping the way we spend our vacation or simply travel across town.

In recent years, the concept of utilizing shared resources has gained traction in
the housing market. Targeting cities where demand for rental properties has prompted a spike in prices, communal living has emerged as a cost-effective alternative. The rise of communal living is an attempt to fill a gap in the residential marketplace and a buzz continues to build around the startups that are spearheading the charge. At issue for real estate developers, however, is whether it’s a trend that’s both sustainable and powerful enough to transcend beyond a small market niche.

These aren’t the hippie communes of the 60s, however. Companies like NYC-based Common and Syracuse’sCommonspace are putting a new spin on the rental market by creating co-living spaces that offer both flexibility and a sense of community that’s often lacking in a standard rental arrangement. Both companies are attacking the concept in different ways.

Gauging the Temperature of the Rental Market In Major Cities

The emergence of co-living communities has been concentrated largely in cities where rental rates have outstripped the national average. San Francisco, for example, has become an obvious target for communal living development. Despite the fact that rental rates have fallen steadily over the past year, a two-bedroom apartment still comes with a median rent price of $4,570 per month.

New York, and Washington D.C. have also emerged as markets that are ripe for something new in the housing arena, as their rental rates rank them among the top 5 most expensive cities in the nation. Rental prices for a two-bedroom apartment in those cities came to $4,310 and $3,000 respectively, as of December 2016.

Common, founded by General Assembly co-founder Brad Hargreaves, is one of the companies that’s at the forefront of encouraging the spread of the co-living movement in these major markets. The company currently operates three buildings in Brooklyn and two in San Francisco, with the opening of a Washington, D.C. property slated for January.

Common properties feature fully furnished bedrooms with shared kitchen and bathroom space, as well as a lengthy list of on-site amenities. Hargreaves estimates that since launching in October 2015, his company has received 10,000 applications for membership, indicating a positive reception among renters.

Moving Beyond the Big 6 Markets

While larger cities have become a focal point of communal living development, the co-living trend has also gained a foothold in smaller markets. After opening CoWorks, a communal workspace in Syracuse, New York, developer Troy Evans followed up with Commonspace this past summer.

Tenants have an opportunity to choose from three distinct layouts, with rental rates beginning at $850 per month with a one-year lease. That’s well below the national median rate of $1,100 for a one-bedroom apartment. Each unit comes fully furnished and has its own private bathroom and kitchenette, and tenants have access to a common dining and cooking area.

The focus at Commonspace is on increasing engagement between residents through shared living space and like Common, it’s been well-received. Evans says the building’s 21 units have been full since day one and there’s a lengthy waiting list of people hoping for a chance to get their foot in the door.

Navigating the Obstacles of Communal Living Development

While both Common and Commonspace have a similar mission, the two companies take different approaches to development. That in turn, raises some unique issues with regard to identifying suitable properties, securing financing and getting them market-ready.

Common, for instance, coordinates with real estate developers and investors to identify properties that are good candidates for expansion. According to Hargreaves, the company focuses exclusively on ground-up developments or previously vacant buildings. Once an appropriate property has been identified, Common works with its partners to manage each stage of the design and construction process.

In terms of the challenges of aligning a property with Common’s standards, Hargreaves says those can vary based on the property itself.

“Generally, we don’t increase a developer’s construction costs--if anything, we decrease costs for ground-up developments, as co-living floor plans don’t need as many kitchens,” Hargreaves says.

On the other hand, he notes that certain elements are critical to enhancing the experience of those living in a Common home. He cites high-qualifty WiFi as an example of something that is desirable from a tenant’s perspective and is also instrumental in increasing the property’s value.

Paul Henry, a partner with Brooklyn-based real estate development firm Patoma, one of the companies that has aided Common with design and planning, says furthering the development of co-living properties goes beyond navigating zoning laws or building codes.

“One of the main challenges is getting lenders and investors on board because the concept is so new,” Henry says. “We’ve been able to do it, but it’s been more difficult than for a standard project.”

At Commonspace, the perspective takes yet another slant. Evans describes himself and his team as being “passionate about reuse” and rehabs are his first choice when scouting out properties for expansion.

“There are a lot of great old buildings in the northeast,” Evans says. “This isn’t a market where you need to build new.”

He also prefers to stick with smaller metros. For example, a new Commonspace property is in the works approximately an hour away in Rochester. That’s influenced the way the company has financed the development of its units. To date, the company has yet to take on investment capital from outside sources. According to Evans, the rent prices and lower volume in Rust Belt cities and smaller markets may be less attractive to outside investors. Instead, he’s successfully looked to other sources to secure funding.

“I used local banks and my own funds, along with a state grant for 20 percent of the construction costs,” Evans says. “We explained [the project] as a small economic engine for the downtown area and it’s delivered on that.”

That’s a far cry from Common, which announced a $16 million venture funding round in June 2016. In July 2015, the company raised a $7.35 million Series A funding round. The variation in the way each company has approached the financial side of development is reflective of how they’ve scaled their individual platforms thus far.

Where Does Communal Living Go Next?

Broadly speaking, the response to communal living from a consumer perspective has been encouraging. Over the long-term, it remains to be seen whether this burgeoning segment of the market will be able to maintain its momentum but the founders of Common and Commonspace remain optimistic.

“Most people want to know their neighbors,” Hargreaves says. “This isn’t exclusive to young people or single people or people in major U.S. cities.”

He believes that community-focused residential developments will surge in popularity over the next 5 to 10 years. At the same time, the existing co-living market will continue to grow. To keep up with demand, Common plans to open buildings in three additional cities by the end of 2017 and add to its property holdings in San Francisco, New York and Washington, D.C.

That sentiment is echoed by Evans. He says communal living is something that can work anywhere, regardless of market size. Evans predicts that shared housing will eventually enter into the mainstream, fueled by a desire for people to become connected in a more tangible way than social media or text messages.

The long-term success of communal living ultimately comes down to how well co-living companies are able to make their business scalable. Developers aren’t likely to move forward with this kind of project on their own--they need a company with the vision and determination to market and manage the properties.

For pioneers like Common and Commonspace that are operating in the space, it’s about developing a culture and personality that translates beyond a handful of properties. The model that these companies have created is certainly viable and there’s a wide swath of opportunity for new players to enter the scene. The pressure for those newcomers lies in being able to duplicate the sense of community that has proven so attractive to renters while distinguishing themselves from the competition.



Sourced- Forbes