The co-living investment landscape offers multiple facets that can bewilder an investor interested in a more substantial portfolio. How does one set up a successful business plan and gain confidence for a more significant commitment to an otherwise attractive market that sends mixed messages and a few warning signals?
On the one hand, it is a niche that has experienced rapid growth in the past five years and continues to attract new entrants from big hospitality players in Hong Kong to the first large private fund dedicated only to the niche. On the other hand, however, there are sobering news items such as the largest co-living company in the UK, the Collective, entering administration. Or that WeWork closed its WeLive brand. Or that venture-backed Starcity closed and transferred their 7,500 units to a competitor.
One of the clients of our co-living and student housing software here at Bidrento elucidated:
Different co-living portfolios are best served with different value offerings. The failings in our industry are due to trying to scale up concepts that are hard to scale quickly.
one of bidrento´s co-living customers
For example, a mission-driven concept that focuses on envrionmental friendliness does mostly better at smaller scale. Same holds true for more luxurious co-living properties.
Three reasons why co-living should be on your table
Cushman and Wakefield outline three practical reasons why institutional investors, family offices and other more prominent players should stay focused on this sector in their report of the co-living market, “Co-Living During COVID”:
- Rent premium. “As of Q3 2020, coliving assets increased their effective rent premium over studio rents to 22.2%.”
- Fewer delinquencies. “Whereas delinquencies for traditional products have ranged from 4.5% to 5.2%, coliving assets have stayed below 4%”
- Occupancy outperforms Class A. The occupancy for co-living fell from 96%-99% in major cities in the US to 91.2% during the first wave of COVID. However, for Class A multifamily occupancy rates fell from 94.1% to 90.0% flat.
Real estate basics still apply
While the niche continues to attract professional investors, the question remains: what is the recipe for a successful extensive portfolio? Comparing different industry players provides one answer.
Whereas WeLive charged $3,520 per month per bed for its single central Wall Street co-living location in New York City before WeLive shut down. In contrast, in the same city, one of the few surviving more significant co-living players, Common, charges an average of $1,417 across 25 different locations across NYC, according to data compiled by Bidrento in October 2021. With only two locations, in Bushwick and Williamsburg respectively, costing above $2,000 per month.
The CEO of Common put it bluntly:
“We were always affordability fundamentalists. We’ve been very straightforward that this is about affordability, this is about convenience. If you’re not able to present a really strong value proposition, I don’t think the people who looked at it as an intentional community did as well.”
Brad Hargreaves, CEO of common co-living
So how does that translate into a real-life approach in detail?
The “Must Haves” for institutional investors
Five-Step Co-Living Investment and Business Plan
- Choose locations like a value investor.
Looking at Common’s locations in NYC and elsewhere, one can spot a trend: from Long Island to Williamsburg, the company prefers middle-class neighbourhoods that still are attractive to their core audience of digital nomads and young professionals with nightlife, events and happenings. Almost like a value investor, the company has a Warren Buffett-like approach of carefully and patiently looking for “great value at a good price”.
- Price intelligently
As outlined above, thanks to the in-built efficiencies of the co-living model, where the costs of the unit or the building are divided by more tenants, institutional investors can enjoy a 20% pricing premium advantage over Class A studios.
The premium gives a crucial edge in affordability that successful large-scale coliving investors keep as their true North Star. The amenities you add and the design of your units should be conceptualised with that in mind. Are they practical? Do they meet what co-living tenants as a target group desire?
A good tip is to price by the neighbourhood to meet the expectations of tenants. A well-chosen portfolio gives the tenant the freedom to choose between from more budget-conscious area to a bit more upscale one. Tenants understand intuitively that a more upscale location offers more amenities and is a bit pricier. An intuitive pricing model that aligns with tenants’ perceptions makes your communication and marketing much more manageable. - Emphasise ease of use
So what do tenants desire? One concept: ease of use. Interviews by New York Times and other publications with co-living tenants have shown again and again that they prefer an offering that at its core provides “a safe, clean, friendly-enough space” that is straightforward to rent. You can choose amongst a few great co-living software and tenant app providers (and, yes, we are biased and recommend Bidrento) to your tenant agreements and communication.
- Prefer providing solid basics like cleanliness over luxury
A journalist who spent at WeLive commented: “.. personal space in the building was sacrificed in favour of shared luxury spaces: high-quality kitchens where guests are encouraged to cook, a cosy wood-panelled bar, a terrace with two hot tubs, a workout studio, a laundry room with an arcade and Ping-Pong table, a cocktail bar in the basement, and a lobby with distressed couches and a barista making complimentary cortados. ”
However, WeLive provided only monthly cleanings while Common provides at least bi-weekly cleanings at all of its locations, and about half even get weekly cleanings (as of October 2021). And all shared spaces get weekday cleanings. The difference is quite stark in terms of the priorities of operators. - Practical amenities and convenience over entertainment.
Think free high-speed wifi and secure bike parking over hot tubs and arcades. Most of the amenities you provide should be helpful and actively used for daily tasks such as commuting, doing remote work.
Adding flexibility to your portfolio as you grow
Increasingly, successful co-living operators have started to mix up their portfolios with studios and apartments alongside co-living spaces. As co-living operators serve more and more tenants, they become better at observing emerging trends, giving them the know-how to branch out with selected single unit offerings.
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