Back in the sunny days of 2019 the co-living concept – which sells a version of dorm life to young professional renters – was one of those ideas that seemed like it had no downside, like going to restaurants or hugging your grandparents.
Then the pandemic hit, and in a world defined by COVID-19 shacking up with 4 to 8 roommates suddenly made it seem like getting a snack from the shared kitchen might be a super-spreader event. As the crisis dragged on the economic side effects began to hammer the entire rental market and particularly in urban centres vacancy rates began to rise and rents begin to fall. In the co-living space there have been bankruptcies, restructurings and retrenchments throughout 2020.
But according to Toronto’s Core Development Group Ltd., which delayed its own planned rollout of co-living projects for nearly a year, there’s still a good business case for shared rental.
“We knew co-living was recession proof but nobody had forecasted if it was pandemic proof,” Corey Hawtin CEO of Core. “I’m on a weekly call with a co-living developers in the U.S., and the answer so far – which is counterintuitive to what we thought might happen – is that it’s outperformed multi-family assets in all the cities it’s been in.”
Cushman Wakefield published a report in November, 2020 that supported that notion: “From March, 2020 to August, 2020, average co-living effective rents have fallen 9.4 per cent compared to an 11.7 per cent drop among Class A studio rentals on a per-square-foot basis in comparable markets.” The Cushman report goes on to note occupancy in co-living fell to 91 per cent, slightly better than the 90 per cent vacancy in traditional multi-family buildings, but those who fell behind on payments in traditional rentals was 4.5-5.2 per cent compared to less than 4 per cent in co-living.
Co-living’s primary appeal to developers has been its efficiency and rental premiums: pre-COVID these projects wring as much as 25 to 50 per cent more rent from the same square footage than a traditional purpose-built rental building, while the average cost to the renter is usually 30-per-cent lower than a studio apartment rent. In some cases the operating costs are a little higher, but according to Cushman the average profit is 15 per cent per lease, and through the third quarter of 2020 co-living was managing to maintain a 23 per cent rent premium per square foot compared to traditional rental.
That helps explain the model’s rapid growth. There were fewer than 100 beds operating in the United States under the model in 2014, by 2019 there was 7,000 and there are currently close to 54,000 beds being developed across the country.
“There’s something like 15 billion in construction development in the U.S. on co-living. [In Toronto] we were well on our way to a billion dollars in development capital to build 10-plus co-living assets, but we did the prudent thing to stop and watch,” Mr. Hawtin said. Now, he said his company is restarting the fund in the spring, in the meantime the Core is moving ahead with its first co-living building at 252 Parliament St. (in Toronto’s Cabbagetown neighbourhood, just north of Shuter Street). “Our first shovel goes in the ground this fall. … We picked up a couple individual assets, with our own means on a one-off basis,” he said. Core’s thesis is that co-living is the best economic fit for expensive mid-rise buildings zoning allows for on the city’s transit-oriented avenues.
In Ottawa, Dream Unlimited Corp. has started construction on a 20-storey purpose-built co-living tower as part of the Zibi development on 34-acres of unceded Algonquin territory along the Ottawa River. Dream and Core are both partnering with Common, the largest U.S. co-living property manager that has 4,500 beds under management with another 17,600 in the works. What Common brings to the table is its tech platform expertise: everything from social events to repair requests are managed through the Common app, and it typically offers amenity-rich living spaces.
There are already some co-living startups in operation in Canada, such as Roost, SoulRooms and Sociable that are taking the approach of leasing family-sized condo units or low-rise houses and sub-leasing them as co-living assets. That smaller-scale model has hit road-bumps in the United States, with a similar startup Hubhaus announced it was closing down in September, 2020.
In January, the Berlin-based co-living company Quarters effectively ended its U.S. expansion as 10 companies associated with it filed for bankruptcy. Quarters raised $300-million in 2019 to build a global portfolio of 9,000 leased beds that it planned to sub-lease to co-living renters; it currently claims to have only 3,000 under management. Other companies, such as WeWork and its WeLive co-living subsidiary have been similarly stressed by the terms of master leases signed near the top of historic rental rates in 2019.
“Their business model was sign these master leases and clip the difference. … That model was highly exposed during the pandemic,” Mr. Hawtin said. Core’s first purpose-built co-living building is still years away, hopefully in a post-pandemic world. But even if another crippling pandemic strikes, Mr. Hawtin argues roommates have more than proven their worth in our current moment.
“We have a loneliness problem as a society, and the pandemic fuelled that,” he said. “In co-living settings, people in three-bedrooms suites are bubbling together and the community is doing a whole bunch of programs around keeping the building connected. … This element of connectedness is making people stay and causing them to re-lease.”
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