Why investors are signing up for coliving

Funding to coliving has increased by more than 210 percent annually as rising housing costs in cities fuel the trend

June 17, 2019

Rising prices in America’s major cities have seen dorm-like communal living become more commonplace well into adulthood, and investors are taking note.

Global funding in the coliving space has increased by more than 210 percent annually since 2015, totaling more than US$3.2 billion, according to JLL. So far this year, $800 million has been secured, with $283 million in the pipeline, the data shows. 

The coliving concept has moved from a small group of apartments with rooms and common areas, to an asset class with amenities that resemble conventional Class-A multifamily or student-housing sectors.

“In a very short period of time, a whole new class of multifamily residential assets entered the market,” says David Martin, who co-leads JLL’s U.S. multifamily investment sales platform. “The sector is receiving a lot of interest.”

The housing connection

Although coliving is deemed most suitable for young professionals, operators target a wide demographic. Ideally, tenants are between the ages of 25 and 50 and earn $40,000 to $90,000 a year, says Shawn Lambert, an analyst focused on investor research at JLL.

Crucially, they also may not be able to afford their own one-bedroom apartments in America’s increasingly expensive cities.

“The coliving trend is absolutely tied to affordability in major markets,” says Martin. “We see rapid growth in cities that are economically prosperous, particularly gateway and unaffordable markets. There’s a change in the ideology of residents there.”

The lack of affordability is typically more acute for younger generations, the target demographic for coliving operators, Martin says.  “They connect with the ideology that you don’t need to sacrifice nice finishes and location, just change the way you’re living.”

Coliving operators are expanding in cities where average rents are far above average incomes. In the U.S., established operators like Common, Ollie, and Medici specialize in denser communities of comparable quality to the kind of Class-A multifamily buildings in the same neighborhoods that can cost up to three times as much.

“The established multifamily markets lacking affordability are not only found in the U.S., but also Germany, the UK, Hong Kong, and India, meaning that coliving space is set for rapid expansion globally,” Martin says.

Developing for the market

Tenants have shown they are willing to pay a premium for the convenience of flexible lease terms, furnished units, housekeeping, fitness centers and coworking spaces, all one place and for  one price. This means that floorplates are increasingly dense – bedrooms can be as small as 100 square feet, Martin says.

And investors are seeing the benefits of the economy of scale.

“The trend is spurring both ground-up development and leaseholds of large multifamily or office buildings in city centers,” he says.

At the moment, new ground-up coliving development accounts for about 60 percent of the market. That’s expected to rise given recent investments and desirability to build coliving at scale.

“Just a couple of years ago, investors weren’t willing to pour $100 million into an untested asset class, and that volume of capital is needed to get a large-scale coliving asset off the ground in gateway markets,” Lambert says.

But as coliving demand rises, “more tested coliving operators can get to the table with major developers in early stages of development and discuss what tenancy, floorplates and returns would look like,” Lambert says.

“This is truly a consolidated market for investment grade product,” he says. “Investors are beginning to see coliving as a tested niche subsector, comparable to student housing.”

Like what you read?

You may also like