The Real Deal New York

Is co-living’s awkward
phase permanent?

The niche rental housing sector is eyeing the big leagues, but its bedding average is nothing to brag about
By Konrad Putzier | July 01, 2017 01:00PM

(Illustration by Hanna Barczyk)

The nondescript, three-story brick apartment building on Marcy Avenue, between Vernon and Myrtle Avenues, in Bedford-Stuyvesant might seem like a youth hostel to the untrained eye. In a shared kitchen, two 20-somethings sit glued to their laptops, surrounded by used furniture, while an unfinished puzzle canopies a nearby table. Upstairs, open bedroom doors reveal drab wooden bunk beds, and out front, a police detective surveys the scene of a reported crime.

Two and a half miles west, 595 Baltic Street in Boerum Hill looks like many of the luxury rental buildings popping up in Brooklyn these days. The nine-story property contains immaculately furnished studios with hardwood floors and shiny kitchen countertops, a modern gym and a rooftop with potted plants, garden chairs and views of more than a dozen skyscrapers.

But as different as they may look, the two properties share a distinct purpose. They are both part of the real estate industry’s least glamorous and perhaps most entertaining experiment: co-living.

In 2017, the niche rental housing sector is no longer a novelty. Consumer and business publications, from the New Yorker to Wired, have published lengthy reports on what co-living is (shared furnished apartments managed by specialized companies) and the renters it targets (millennials who dislike buying furniture). And most of the pioneering ventures such as Common, Ollie, Founder House and WeLive are reaching kindergarten age, while the list of developers that have partnered with or invested in those companies includes Boston Properties, Vornado Realty Trust and Rudin Management, among others.

Yet despite all the media attention and high-profile partnerships, co-living has struggled to come into its own in New York City.

Related: Roommates aren’t just for millennials 

Paul Henry, head of the real estate investment firm Patoma and owner of Common’s Williamsburg location, said he is not surprised that startups are having a harder time in the apartment business than the office market. “There’s more stakeholders, more rules, and it’s more difficult to do things a little bit differently because of how entrenched the real estate industry is,” he said.

Arrested development

While co-working spaces continue to multiply throughout the city — the Flatiron District and NoMad, alone, are home to dozens — co-living spaces remain few and far between.

WeWork’s WeLive division, for instance, offers a stark example of how the business model is struggling to gain a foothold in New York. The company has added 25 shared office spaces since June 2015, more than doubling its location count in the Big Apple to 40. But it has only opened a single co-living location — at 110 Wall Street in early 2016 — and there is no indication of a second in the works. Back in 2014, the co-working giant predicted that WeLive would have 6,500 residents and account for 11.6 percent of the company’s revenue by the end of 2016. That goal, to say the least, was widely missed.

A handful of competing firms have added more new locations than WeLive, but the bulk of them are small and largely overshadowed by the more than 2 million rental apartment units in the five boroughs. And virtually none of the co-living companies own the buildings they use.

That leaves plenty of room for skeptics — and the jabs are often directed at the user base as much as the platform.

“If you are a 35-year-old and you live in [WeLive or Common], you are a loser,” Stonehenge Partners CEO Ofer Yardeni declared at a panel on the city’s multifamily market in February. “I’m sorry, but if you live with 10 people and you share breakfast or lunch … where do you go with your girlfriend?”

Yardeni did not respond to an interview request for this article.

And the snarky news website Gizmodo, citing a December 2016 report by The Real Deal that WeLive was raising the rent at its 110 Wall Street location, called the business model “absurd.”

The big question now is whether New York’s co-living entrepreneurs can prove the haters wrong and build a multibillion-dollar industry.

Slate Property Group’s David Schwartz has held talks with co-living firms about potential partnerships but said he wants to wait and see how the business model develops before teaming up with them.

“Right now, these companies are getting a higher price per square foot because there’s not that many co-living apartments available,” he said. “The fear is what will happen when there’s a lot of competition.”

The first crop

What makes it so hard to assess the future of co-living is that there’s no unified co-living concept, and the term can have entirely different meanings depending on whom you talk to.

On one end of the spectrum is Brooklyn-based Founder House, started by former Bain Capital analyst James Ingallinera and his partner Ben Smith in 2015. The firm’s six locations are mostly in cheaper neighborhoods, with prices ranging from $800 a month for a bed in a shared room to $1,450 a month for a private room.

Founder House targets young creative professionals as members and sees its houses as “an alternative path to entrepreneurship” for those who choose to skip college, Ingallinera told TRD.

The company rents all its buildings, and claims to achieve 30 to 40 percent profit margins depending on occupancy.  “We can appeal to all those people who can’t afford Common,” Ingallinera said, referencing one of his primary competitors.

Common, which has raised more than $23 million in venture funding and counts the LeFrak, Mack and Milstein families among its backers, operates several co-living locations in Brooklyn and recently announced its first Queens location in Ridgewood. It also signed a management agreement to run Adam America Real Estate’s 69-unit rental at 595 Baltic Street as a co-living building.

Prices at Common range from $1,340 for a room in a shared apartment in Crown Heights to $3,990 for a two-bedroom pad at 595 Baltic Street.

“We didn’t start Common as a co-living company. We started Common because we thought the rental experience was really poor,” the Brooklyn-based company’s founder Brad Hargreaves noted.

Also on the pricier end of the spectrum is Manhattan-based Ollie, a company more akin to Marriott in ways. At Carmel Place in Kips Bay, one of the company’s two properties, fully furnished micro-studios on one- or two-year leases cost between $2,600 and $3,200 per month.

The company — founded by brothers Chris and Andrew Bledsoe and backed by Simon Baron Development’s Jonathan Simon and Matthew Baron — is in talks with several developers about openings locations in new buildings at an average of 300 beds per property. At Simon Baron’s 29-26 Northern Boulevard development in Long Island City, for instance, Ollie will manage micro-units in the bottom third of the building. The top two-thirds will be conventional apartments where renters will have the option to sign up for Ollie’s services and amenities or opt out and get a standard unfurnished unit, Chris Bledsoe told TRD.

The company also offers landlords management agreements, which give them a share of revenues instead of monthly lease payments. The incentive for landlords is a recurring crop of fresh tenants who pay a premium, Bledsoe said.

At WeLive’s 110 Wall Street, a room in a shared three-bedroom apartment costs $2,450 a month. (Photo courtesy of WeLive)

“This is a more transient demographic that is just not looking to own a lot of stuff and commit to a space for more than a couple of years,” he noted.

In addition to WeLive, Common, Founder House and Ollie, there is a growing number of co-living startups chasing the transient renter. Germany-based Medici Living recently opened its first New York location in the Lower East Side, while the British startup Node operates a location in Bushwick, Brooklyn.

Craig’s shadow

The appeal of most co-living spaces is a furnished room that gets cleaned once a week in addition to more flexibility and a less tedious leasing process. In that sense, the niche sector is not much different from co-working.

But co-living companies face a major obstacle that their office peers don’t: Serious competition from Craigslist and Facebook, along with other social media sites and message boards.

Craigslist’s roommate market may not be polished, but it works and it’s cheap. Meanwhile, startups such as Roomi are trying to more efficiently match roommates via mobile apps. None of these offerings necessarily make co-living spaces superfluous. But they make it harder to charge the kinds of rents needed to cut a profit, since customers have cheaper alternatives.

Last year, for example, Brooklyn-based Pure House shuttered after it struggled to make money off the rent it paid and the fees it charged its members. At one point the company had operated 25 locations in New York City.

“There’s a period of thrashing and instability and [figuring out] how to make the model work,” Pure House founder Ryan Fix, who has since moved on to launch a “do tank” for the industry, told TRD in December. “Even today co-working as a business still faces significant challenges.”

Campus, a San Francisco-based co-living startup that once operated several Manhattan locations, went out of business in 2015.

Common’s Hargreaves argued that Campus made the mistake of renting in expensive neighborhoods, such as Murray Hill or the Upper East Side, and not charging its members enough in fees.

“We certainly have better margins than Campus did and make money on every single home,” he said, noting that Common brings in several hundred dollars per room each month.

At the company’s Pacific Street location in Crown Heights, a room goes for at least $1,455 a month — or around 40 percent more than the neighborhood’s Craigslist rate.

Meanwhile, at WeLive’s 110 Wall Street location, a room in a shared three-bedroom apartment costs a hefty $2,450 per month.

But charging a big premium over the neighborhood rent almost inevitably limits the mass appeal of a product that is clearly price-sensitive. Ingallinera of Founder House said he has noticed demand for the company’s rooms rise dramatically in neighborhoods where rents (and by extension membership fees) are cheaper.

Some observers argue that the appeal of not having to sign a lease, or worry about cable, internet, cleaning or purchasing furniture more than makes up for the higher price.

“Are co-living spaces more expensive than getting a shared room? Probably,” said Ben Thypin, co-founder of real estate firm Quantierra and Common’s landlord at one of its Crown Heights locations. But factoring in all the included services “makes it a more compelling opportunity than the headline rent might indicate,” he added.

The biggest challenge facing the co-living industry is zoning, according to Thypin. “I would point the finger at regulators, not co-living companies,” he said. While startups “would love to rent units at a lower price,” he noted, zoning and building codes mandate minimum average unit sizes and ban the construction of single room occupancy buildings, which prevent that.

Demographic shifts

The lack of usable housing stock may help explain WeLive’s stalled growth. The company started out by converting office space into apartments, but the practice is expensive and has its challenges. “Office floor plates tend to be pretty deep and have more floor area relative to the legal bed limit,” Bledsoe said. “Once you realize that, it forces you to one conclusion: New construction.”

WeWork has held talks with several developers in New York, sources say, but no deal has been announced, and the company has backed off plans to include a WeLive component in Kushner Companies’ One Journal Square project in Jersey City. James Woods, the former president of Brooklyn Bowl who took over as the head of WeLive in February, was not available for comment.

At Ollie’s Carmel Place in Kips Bay, micro-studios cost between $2,600 and $3,200 a month. (Photo courtesy of Mekko Harjo)

But Sam Chandan, an economist and associate dean at NYU’s School of Professional Studies, pointed to an entirely different obstacle for co-living companies than city planning.

“I think we’re at the tail end of this, because millennials are aging,” he said. Co-living is part of the broader problem of developers “assuming static demographics” and building too many units for young adults without children even though their number is set to diminish in the future, Chandan added. “I don’t see co-living becoming a major product,” he said.

The business model of shared units managed by a specialized company isn’t just a solution for lonely yuppies, Thypin noted. It could also lead to better homeless shelters, three-quarter homes and other supportive housing — especially as those services get cut for political reasons. In that regard, there is plenty of room for co-living companies, he said.

Ingallinera said he believes Founder House’s brand of co-living is part of a long-term trend. As technology continues to replace 9-to-5 jobs, more people will choose entrepreneurship and more will choose to live with like-minded peers, he argued.

“Even if that huge shift doesn’t happen, I’ll be totally fine,” Ingallinera said. “I could do a few dozen properties, no problem.”

While New York’s co-living startups may never rise to become billion-dollar global corporations, they can already point to an encouraging development: Fewer banks and landlords are afraid of partnering with them.

Reluctance among lenders to fund projects deemed risky has been one impediment to the co-living industry’s growth. Henry of Patoma said that while he was able to get a mortgage for Common’s Williamsburg space, the pool of lenders was smaller than usual. “Some banks would not do it because of the master lease [to Common],” he explained.

But observers say that reluctance is fraying as more co-living spaces open and landlords and investors warm up to the idea.

“A few years ago, the first question we got was ‘Is this illegal?’” Hargreaves said. “Fortunately, we don’t get that question a lot anymore.”