“Schlep blindness.”
That’s what Common CEO Brad Hargreaves said is needed to bring about change in the U.S. multifamily industry, which is valued at more than $250 billion but operationally hasn’t innovated in decades. The pandemic’s tolls on the rental market’s margins and occupancy, however, have made landlords much more willing to adapt. And it’s also led them to consider more creative uses of their assets.
In September, Common closed on a $50 million Series D funding round, cementing its position as the most well-capitalized co-living startup (Let’s leave WeLive out of this). But co-living is just one arm of its business: Common has expanded into property management for workforce housing, a family-focused co-living service called Kin, and a product catered to remote workers. It now manages over 3,500 units across 10 U.S. cities and has partnered with big institutional players such as Nuveen and Tishman Speyer.
In an extended conversation with The Real Deal, Hargreaves laid out his philosophy on building community in multifamily, the challenges of repositioning assets, and lessons he’s learned from Airbnb and WeWork.
Lizzie Widdicombe of the New Yorker had this great phrase about Common targeting this period of “extended adolescence,” which everyone in New York knows. But it’s safe to say that you’ve gone beyond that.
Community is always a really important part of what we’ve done. I think we’ve expanded the definition of what that means. Originally it was very narrow, focused on “roommates done better.” So, sharing apartments, and really fixing the experience of sharing an apartment, keeping the affordability, keeping the social environment, but making it much more high-quality.
But now we have three brands under our umbrella. One of those is Kin, which is focused on families with young children. When you do look at who is leaving cities, a lot of it is families. It was already hard. The pandemic made it harder. With Kin, it’s, “how do you create something that a young family — who loves the urban environment, loves the amenities, loves the togetherness … [and] doesn’t want to go live in a single-family detached home — how do you provide all those good things but just make it easier to be a family in an urban environment?”
The value proposition for a family in New York was always on the edge. A little bit more yard space, and someone would take flight.
So much of it is wrapped up in identity, too. I grew up in a rural area, and we love being residents of the greatest city on Earth, New York. That is part of our identity and the idea that “we’re going to give up, we’re going to move out to a suburb, we’re going to move to a smaller city,” is challenging to a lot of people.
When everyone’s hitting their pro formas, there’s no incentive to try anything else.
What is the Kin equivalent of the white picket fence?
Bringing families together in ways that are both utilitarian as well as fun. Like date night drop-off — everyone wants to go out on Friday night, it’s kind of silly for everyone to go hire their own babysitter, so this is a place, a program where you can drop your kid off, with someone provided by the building. Makes that date night so much easier. There’s also just fun programming for kids. Story time is something we run at both Jackson Park and Kin on Union.
And it’s a revenue sharing agreement with the landlords?
Property management. We do that because it’s not just a layer on top … It’s not as fun to talk about, but the core of our business is a layer of technology and automation that lets us do a lot of things that save money and add value on the property-management side.
Right, it’s also waste disposal, etc. That’s the stuff where landlords really will need to start saving now. Because they were building into a rising market, with rents steadily creeping up, but if rents are flat, they will have to find the savings elsewhere to make the numbers work.
That’s been actually the biggest driver of our growth this year. So far this year we’ve [tripled] our number of units under management, going from around 1,500 to around 4,000 units. What Common does across all of our brands is centralize a lot of operations. When a lead comes in, that lead doesn’t go to an on-site leasing agent, it actually goes to a central call center. That lets us respond to that lead immediately.
The faster you respond to a lead, conversion rate increases — not by 10 percent or 20 percent, but by 3 times or by 5 times if you can get back to that lead within 30 minutes, ideally within 10 minutes. It lets us either schedule an in-person tour with an on-site leasing agent, or a virtual tour. Pre-Covid, about 30 percent of our members converted from a virtual tour alone. They never stepped foot in the building.
Initially, I’m assuming there was a lot of you going to pitch landlords, “Hey look, we can come in and do this better for you.” Now, given what’s happened in the market, I’m guessing they’re coming to you as well? Help me understand the level of anxiety.
It runs the gamut. We have some wonderful partnerships with owners who see the value in the centralized operating model and are looking to really create something more tech-enabled for their buildings. So a great example of that is Nuveen. They’re one of the 10 largest real estate asset owners globally, very institutional [a subsidiary of TIAA]. But they really love the technology side, the centralized operations, the standardization. It’s less about co-living or any specific real estate product.
On the flip side, we have owners who come to us and say, “Hey, I have a hospitality asset, I don’t know what to do with it, we hear you guys are really good with micro apartments.” We manage a lot of micro apartments, in addition to co-living, they’re really two sides of the same affordability coin. When we speak to new owners, we often ask them to send us their stuff that’s not doing too well to underwrite.
Let’s say I take the train into Manhattan, to Hudson Yards or Grand Central. When you go there now as a landlord, it’s terrifying. These hulking buildings, some of them brand new. A lot of that space is just not going to be used as office anymore. How do you reposition that space, both from a technical sense and a philosophical sense? If you have a million-square-foot building, and you’re taking over 150,000 square feet, how do you make sure it doesn’t feel like a hulking office skyscraper once you’re done with it?
The answer is usually you have to scrape and start from scratch. Not to get too technical, but…
Our readers are real estate people, so definitely get technical.
With commercial office buildings, converting [to co-living] does not work 95 percent of the time. You end up with a really, really high loss factor. You also have to run additional mechanical [systems] up the building: gas, water, sewer, electric. The needs of a residential building are quite different. Once you’re talking about ripping out and replacing all those systems, really all you have left is the steel and the concrete structure, which is in many cases more of an impediment than a benefit.
The majority of stuff that we’re taking a look at is existing residential. It’s an existing workforce housing asset, and we’re going to make it operate better. It’s an existing Class A multifamily asset, where maybe the units are too big. We convert those to co-living and are able to bump NOI significantly.
Ownership is not in the cards at all for you guys?
No aspirations. We’d be competing with our clients. That’s not what we want to do.
Just going back to the type of assets we see … We’ve converted a number of churches, hospitals, schools.
That’s what I find most interesting about your business – you’re blurring the lines between assets. Let’s say you have a property that you can convert successfully. How do you add community in a building that previously didn’t have any?
The first thing is just breaking down the walls and encouraging people that this is a friendly place to live, we don’t want to all be anonymous here. And then giving forums for people to connect around very specific interests. Our philosophy on building community is that it has to start interest-based, and that also takes the burden off of us to run every single event and be the cruise director of the building. So if one resident says, “Hey, I go for a run at 7:00 a.m. every Saturday, I’m going to have to start a running club for everyone in the building.” They can do that and we don’t have to staff or organize that. When the property manager is too hands-on, and too involved in curating that community, it actually creates a watering down of the events. So there you get the wine and cheese night at 6:30.
In a world where workers are choosing where they go, economic development becomes less of a B2B activity, and more of a B2C activity.
(Related: Real estate’s biggest VC on the industry’s existential shifts)
I’ve been to an event like that, and I took the glass of wine, and I went and became antisocial again. Whereas here, there’s a lot happening behind the scenes that you’re not even part of, you don’t have to invest any money in, but it’s happening.
We looked at renewal rate, and one of the things it correlates most highly with is, “are you friends with three or more people in the building?” Living in the same building is not necessarily enough to break the ice. Make people social with each other in the way that, “Hey, we all like to watch Schitt’s Creek” or “we all like to go running” would. Those are reasons why someone would form a relationship. … Our job is not to get people hanging out just because they live in the building and get them talking about how awesome the building is. So if we could just connect people with shared interests, it makes our job a lot easier.
Are landlords getting that? Because they’ve done things a certain way quite successfully for a long time.
I would say it’s particularly powerful now. Since the pandemic, people are feeling some pain and they’re looking for new ways to do things. When everyone’s hitting their pro formas, there’s no incentive to try anything else.
Perhaps more importantly, our way of doing community can be scaled outside of Class A [buildings]. Because it’s a lower cost, lower touch way of doing it.
I’m fascinated by the other bet you’ve taken, on remote work.
Back in the spring we started seeing more and more companies, particularly West Coast tech firms, but also creative firms, say, “Hey, we’re never coming back to the office. People can work remotely forever.” I think it raises a lot of really interesting questions: Where do these people go? How do cities approach this new world of competing for talent? If I’m an economic development officer of a city, the way I’ve always worked is through brokers, through public RFPs, to recruit headquarters, to recruit factories, to recruit new offices that each bring a chunk of 300 [jobs] here, 500 here, 5,000 there, to my city. Suddenly, in a world where workers are choosing where they go, economic development becomes less of a B2B activity, and more of a B2C activity.
So we released this remote-work hub RFP, which is really for people who can choose to live and work wherever they want. It could be a freelancer who wants to move from place to place, or someone who’s really looking to pick a new home and settle down, but wants a lot of the comforts and trappings of the density they perhaps left. We think that people are going to migrate primarily to less expensive secondary and tertiary cities. It’s not going to be about people going into the wilderness in Wyoming — people are going to get tired of that pretty quickly. But they don’t necessarily want to go back to the super expensive hubs of New York, San Francisco, L.A.
(Related: Multifamily’s next frontiers)
We’re bullish on that middle range of cities that have density, have good amenities, but have real affordability. And in many cases, these cities really weren’t able to participate in the evolution of the tech ecosystem. So the remote work hub is not about attracting any one specific company. And it’s also not about tax incentives. It’s about: “Is there a site that makes sense for this, and how do we make the permitting process, the entitlement process super easy?”
You’ve said the most exciting thing for you would be if a Common member in one city goes and lives in a Common [space] in another city, sort of ping-ponging around. Have you seen that happen yet?
I would say it’s under 5 percent of our market right now, but we do allow people to transfer seamlessly within any of our brands.
What does seamlessly mean?
Means two weeks’ notice. You don’t have to break your lease, you can just transfer it to a new lease in a new city. There are obviously certain restrictions around that — you can’t, for instance, stay in a unit for under 30 days. You can’t use it as a hotel.
Would you take into account that someone who may choose to live in one of these buildings would also maybe want to go to South America 90 days later? You’re going to be dealing with a bit of a mobility problem. The type of people who are going to live in this complex are also flighty – they have the economic ability and mindset to jump.
Right now we certainly let people transfer within the network.
I just meant buildings like that would have higher attrition than a standard complex.
We just have to plan and underwrite for that. If the rents support it, if the staffing supports it, it’s totally okay to have some segment of people on three- or six-month leases.
Are you hiring, for example, people who are experts in urban mobility? I’m interested in your hiring, because that’ll tell people where you’re going as a company.
I wish I had some sexy answer for you. But it’s software engineers to build more automations, to improve our platform, because we’re rolling out software that makes everyone more efficient.
Where it gets exciting is we’re hiring a PR and partnerships manager to work with major brands that want to do product placements, and partnerships to access the Common audience. And some of it might be more digital partnerships as well, so partnerships with a financial organization to help our members work through financial issues, or consolidate their debt or what have you. Those kinds of partnerships get me really excited about the future and what we can do at scale. We’re also really leveling up the size of our real estate and our underwriting team. The people who go out and win deals and do new projects for us.
Your business actively tinkers with people’s lifestyles — that’s maybe an inelegant way to put it. Would the next evolution of it be something like providing healthcare [for building residents]?
There’s always a build-versus-buy question, or a build-versus-partner question. Certainly for something like healthcare, I think we can only tackle one incredibly complex legacy industry at a time. So it could be a partnership, where we say, “Okay, we’re working with One Medical, or HealthJoy, to offer this service to our members for a discounted rate.” Particularly if we have a lot of freelancers that gets really interesting.
One area we’re really going to expand into in the coming years is cleaning upsells, allowing people to book any cleaning at any time. That, we’re probably going to do ourselves.
You’ve talked about residential rentals being a $250 billion industry. You are going after the whole thing, as opposed to a chunk of the thing.
One of the challenges, but also the big opportunity here, is that we’re full stack. We’re not just an app, we’re not just a brand, we’re not just a property-management platform or a property manager. We’re all of the above.
We looked at every step along the way and we said, “There’s nowhere we can just kind of insert ourselves in one layer of the value chain and build a big business there.” I think there’s a reason you’ve seen a lot of the roommate matching apps fail. There’s been a thousand of them and none of them have worked. I don’t think it’s because Roomi was profligate in spending money, I think it was an unworkable business model, and they just got noticed because they spent a lot of money. I think if you had run a lean roommate matching startup, it still would have failed because the business model doesn’t make any sense. Because you’re just dumping people into the same broken system, in the same broken buildings that have always existed. So if you actually want to add value there, you really have to get in the weeds of it and replace multiple parts of the stack, which unfortunately is expensive.
You came up among a breed of glamorous — some would say overheated — startups. I wonder how you resisted the lure of spending money too quickly.
Obviously there are a lot of places where we wasted money. We had beautiful furniture that was way too expensive.
The Scandinavian stuff.
We shouldn’t have gone all the way down to IKEA, that would have been a mistake, but we didn’t really understand our audience and how much they needed all that. The truth is they really didn’t. It had to look beautiful, it had to photograph well, but you can make a beautiful building, a beautiful furnished unit that photographs well, spending well less than $20,000.
Did you take anything away from the whole crazy rise and fall of WeWork?
I think to defend Adam and WeWork for a second: There’s some things they did which, to a tech audience, were unforgivable conflicts of interest, but to a real estate audience were totally normal, run-of-the mill stuff. Like you’ve got your propco over here, you’ve got some investors in that, you’ve got your opco here, you’ve got some investors in that, they’re dealing with each other. Personally invest in a few of the deals too, and it all just kind of works. And as long as everyone makes money everyone’s fine. That is totally normal in real estate.
(Related: Reeves Wiedeman on the manic rise and fall of Adam Neumann and WeWork)
That is the culture of real estate.
I feel like one of the things that got WeWork in trouble was they were trying to combine this world of big-company tech, public markets, with private, tightly held New York real estate. There are some things that are okay in the world of tightly held New York real estate that would never fly in the growth-stage public markets. There’s different cultures out there, and I think you have to be super cognizant of your audience.
You’ve probably learned a lot from Airbnb. They were faced with this existential challenge at the beginning of the pandemic. Brian Chesky said, “I woke up one day, and essentially 80 percent of our revenue stream was frozen.”
One thing they did really well is they really doubled down and focused on stabilizing the supply side. Their community of hosts, that is their asset. So the shift toward long-term stays, anything to get dollars in the pockets of hosts. And they started a bailout fund for their hosts. That shift in focus was extraordinarily smart. If those hosts were to disappear or go under, it would take Airbnb years to recover that community.
What is your life blood in that sense? If you had to define your main asset, what would it be?
It’s really our relationships with our real estate owners and our clients. Without that community, we’re nowhere.
This interview has been condensed and edited for clarity.
(Write to Hiten at hs@therealdeal.com. To check out more of The REInterview, a series of in-depth conversations with real estate leaders and newsmakers hosted by Hiten, click here.)