There is an affordability crisis in cities across our nation and around the world. In the United States alone, 40 percent of renters are cost-constrained, meaning they spend more than 30 percent of their income on rent (Pew Trusts). An analyst at a consulting firm makes $75,000 per year, and spends at least $22,500 per year on rent, or $1,875 per month. Someone making $50,000 per year, spends $1,250 per month in rent. In cities around the country it’s difficult to find places to live at those rent levels, which means that many pay over 30 percent of their income on rent. Keep in mind that Millennials, on average, have over $33,000 in student debt, so when they graduate and start renting, they are, on average, paying around $400 per month for student loans (CNBC).
If you make $75,000 a year and spend $22,500 a year on rent, like in the example above, after taxes you are left with roughly $600 per week to live and contribute to savings. If you make $50,000 a year that drops to $368 per week. In major cities, that’s a tall order. That’s one reason why, as reported by CNBC, 67 percent of people ages 18-24 have less than $1,000 in savings — and this doesn’t just impact Millennials. More than half of all Americans have less than $1,000 in savings.
Housing is too expensive, period. And in urban areas it’s difficult to build more, because of physical and zoning limitations as well as increasing cost to build new product or renovate existing properties, which drives prices even higher.
How do people typically live for less in cities?
The answer? Roommates. In New York City alone, one million people live with roommates. Four years ago, Common, a leading co-living brand, started to make that experience better in an effort to make living in cities more affordable, but they are not alone. Dozens of co-living companies have sprouted up around the world to address the growing demand for more flexible, affordable, and better roommate-style experiences.
What is co-living and why is it the solution?
Co-living is sharing space with roommates, trading private space for common amenities, and typically comes with an ‘all inclusive’ rent. In essence, when you come home, you share an apartment unit with others, your rent includes utilities, supplies, sometimes furniture, cleaning, and other amenities. Your rent is also typically 20-40 percent cheaper than a studio or one-bedroom apartment in the same neighborhood. Simply put, you get to live where you want, for less. As an example, in Shaw, a popular neighborhood in Washington D.C., you can live in ‘all inclusive’ co-living for $1500-$1600 per month, where a studio in a new building can cost anywhere from $1,900-$2,600 (Rent Café). That’s somewhere between 27-63 percent less, and on top of that you don’t have to pay for furniture, utilities, cable, internet, or cleaning.
Now, instead of spending more on rent, residents can save more, or spend more on the experiences they care about, like traveling. A recent report from INC cited that seven percent of Millennials would rather spend money on experiences than physical things. That trend, compounded with people staying single longer (the average age for marriage is 27 for men and 29 for women), changing jobs more (average 12x versus 2x), and freelancing more (50 percent of the workforce by 2025) means co-living is not only here to stay, but will become even more popular (Forbes).
Real estate investors should take note.
This is an opportunity to invest in either a brand, or a physical building. This is an opportunity to turn one of your multifamily developments into co-living, or a single-family house into co-living. Investigate the thesis, whether it is happening where you are investing; if not, why not? If it is happening, is there room for more? Real estate continues to change and respond to demands of customers. While co-living is a new sector in real estate, it is sure to be an institutional asset class in the coming years — similar to the start of Self Storage, which began in the 1960s, and today there are more than 2.3 billion square feet of self-storage around the country (Neighbor.com).
Investors and developers today have the opportunity to take advantage of a nascent asset class and not only fulfill growing demand but participate in cap rate compression in the future as larger investors begin investing in the space.
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