The Long View on Co-Living
Co-living is here to stay despite short-term concerns about the need for social distancing, say Jonathan Lee and Shahin Yadzi of George Smith Partners.
Co-living assets have become a hot topic in California. At the peak of a housing shortage, co-living offers supply of upscale housing at an attractive price point. Target tenants range from recently graduated students looking for accessibility and community in a new city to those looking to live in class-A markets without a high price tag. Yet over the last month, there has been more unpredictability with interest rates and lenders than ever before. Traditional multifamily, an asset class understood to be recession-proof, has drawn greater underwriting scrutiny as the U.S. experiences the largest level of job loss per week in the nation’s history. Unfortunately, just as lenders begin to appreciate the co-living asset class—with its own unique underwriting standards—COVID-19 has presented new challenges.
These are only concerns in the short term, however. As California has become increasingly unaffordable for the average person, the lack of apartment construction has failed to meet the needs of a rising population. The apartment markets have been at odds with California’s economic demands for the last 10 years, with a glut of institutional influences constraining new supply. Restrictive zoning in California is limiting apartment buildings to less than a quarter of the land share. This, in conjunction with regulations on building densities, heights, and other development hurdles is suppressing the creation of new supply. Even during the depths of the 2008 Great Recession, multifamily vacancies did not rise above 5 percent in major California cities. While there may be a temporary decline of co-living renter interest, any change in demand elasticities will likely dissipate after the initial uprooting.
New unit construction is difficult to finance in the current environment causing construction to slow down or stop, indicating an even scarcer housing market. If a “hospitality and retail apocalypse” does unfold, there will be an increasing number of homeowners and regular apartment renters looking to cut back, amplifying multifamily’s “musical chairs” act.
Back to School
Looking at previous times of economic uncertainty, student housing, which is often compared to co-living, saw periods of expansion uncorrelated with other asset classes. Consideration should be given to co-living areas located near colleges, as increases in enrollment—particularly from age groups outside of the typical dorm student—will drive interest. Similarly, it’s also possible that those who recently experienced a long period of confinement will find a new appreciation for co-living’s community lifestyle.
Ultimately, the primary factor for co-living has always been creating affordable housing, and such demand will only increase in a period of limited housing supply. Lenders are still actively looking at co-living, but with the stipulation that the deal can also pencil as apartments. As the pandemic continues to act as a torrent of financial undoing, investors with deep pockets and a healthy risk tolerance should consider co-living as a long-term investment strategy.
Jonathan Lee and Shahin Yazdi are principals/managing directors of George Smith Partners.