Real estate investors, owners and developers have historically cut across clear lines. Office was office. Hospitality was hospitality. Multifamily and single-family were their own things. And retail was totally distinct from everything.
Beginning in the 1990s, however, mixed-use developments gained traction and asset classes started to partner up. Offices and apartments got ground floor retail. Hotels co-located with shopping malls and added residential units to the mix. Town centers anchored traditional residential neighborhoods. And live-work developments became popular.
Now, the lines are once again shifting as new real estate models are emerging and tearing down, literally and figuratively, the walls between asset classes. As we move from mixed-use to “mixed-up use,” as I heard one executive recently say, these changes are set to have serious implications for real estate writ large—from financing to design to construction and beyond.
At the heart of this transformation is the new consumer. Internet-based and mobile technology has not only given today’s consumer nearly infinite choices but also untethered them. As a result, today’s hyper-connected consumer values flexibility, convenience and personalization—all things that go against the grain of traditional real estate, which is deeply rooted in location, long-term commitments and scale.
While real estate arguably has not been on the leading edge of this transformation, it is now taking in the changes. New models are emerging, fueled by a wave of venture capital and disrupting the traditional tranches of the real estate spectrum.
Coworking is one of the best examples of this shift. Unlike the traditional office market, which relied on long-term leases of five, seven or even 10 years, coworking provides professionals like freelancers, entrepreneurs, startups and small companies highly amenitized shared workspaces that can be accessed on a short-term or subscription basis.
This sector has been on a tear, led by companies like WeWork (recently rebranded as The We Company), Knotel, Industrious Office and Spaces, to name a few. According to Inc. Magazine, nearly 2,200 coworking spaces opened up globally in 2018, with roughly half of those in the United States. Moreover, it’s estimated that by 2020, there will likely be more than 25,000 of these spaces around the world. The We Company is the giant leading this global expansion, closing $6 billion in funding from Japanese conglomerate Softbank this past January.
New models emerge
There’s a similar shift happening in multifamily as co-living companies like Common, Ollie, Quarters and X Social Communities, among others, garner headlines and the attention of venture capitalists worldwide. German co-living company Medici Living Group, for example, secured more than $1 billion in funding for its expansion in Europe earlier this year, along with a $300 million joint venture raise to develop 1,500 units in the U.S. under its Quarters brand.
Co-living is even reaching into the single-family realm with the growth of companies like PadSplit and Bungalow, which promise more affordable rents, flexible leases and hassle-free living in a more traditional neighborhood setting.
It’s difficult to talk about co-living in any context without also considering its cousin, short-term rentals (STRs). The sector’s promise of providing convenient, flexible and arguably affordable lodging/housing options is a double punch of disruption to both the hotel and apartment industries.
Over the last handful of years, capital has been pouring into this market. The big players like Airbnb continue to attract major dollars—according to Crunchbase, Airbnb has raised $4.4 billion in 16 rounds of funding—and it’s beginning to drive consolidation in the market. Point in case is Expedia, which purchased market mainstay HomeAway for $3.9 billion in 2015 and, more recently, startups Pillow and ApartmentJet.
At the same time, venture capital is also supporting the emergence of new players—Sonder, Lyric, Stay Alfred, Vacasa and more—each with its own spin on the model. The market has also expanded beyond these platforms that effectively repurpose existing space into the development world with companies like WhyHotel and Niido beginning to do purpose-built STR communities.
Leaders in the multifamily sector have been watching the growth of the STR sector closely, with some dipping their toes gently into the waters through pilot programs and creative partnerships where a set number of units or floors are put on the platforms. Hotels, too, have taken note as Airbnb’s room listings eclipsed the inventory of the top five hotel brands combined. In fact, hotel giant Marriott recently announced the launch of its own short-term rental platform in a play to stay competitive.
Fast forward to the future
The newfound success of coworking, co-living and short-term rentals, along with the rise of things like pop-up and experiential retail, is challenging existing paradigms. We only need to look at innovative projects like RXR’s 75 Rockefeller Plaza in New York to get an idea of how our asset classifications might be turned inside out as space becomes less about square feet and more about services. The development will layer coworking space, short-term rentals and meeting/event space-cum-member lounge over traditional office space. Similarly, Related Companies’ Hudson Yards condo towers are mixing residential with hotel, fitness, office and even coworking.
With this type of innovation, there are certainly some challenges. Underwriting projects with such a mélange of income streams is just a start. The regulatory environment is likely to get thornier as local jurisdictions grapple with how these dense multiuse spaces fit into the existing community plan. Moreover, building codes will be under pressure to adapt more quickly to keep up with development changes.
But growing pains aside, this is undoubtably exciting for the future of real estate development. Space is being reimagined. Rigid divides between asset classes are yielding. The decades ahead will deliver new answers to the question of how people will live, work and play in the future.
Sarah Yaussi is the vice president of business strategy at the National Multifamily Housing Council in Washington, D.C. She can be reached at [email protected].