Co-Living Grows Up: Scrappy Startups Preparing To Disrupt Housing On Massive Scale

The co-living industry — or housing built with smaller private spaces in exchange for lower rents, more convenience, larger shared spaces and a sense of community — is at a crucial moment in its infancy.

As the country’s growing need for affordable housing coincides with its oversupplied rental market, co-living has emerged as a possible bridge for that fundamental divide, and it could shake the multitrillion-dollar housing industry to its core.

Early stage startups are fundraising, hungry to become to co-living what WeWork is to co-working — that is, a company valued at $17B with more than 100 locations in more than a dozen countries. But complicating matters is their inspiration itself: WeWork launched its WeLive residential concept with hundreds of apartments in two converted office buildings in 2016, one in Manhattan and one in Arlington, Virginia, but it has not lived up to that strong beginning.

It had once planned to open dozens more WeLives in 2017 alone. But after a tumultuous 2016 in which it grew exponentially while simultaneously slashing profit projections, WeWork scrapped its expansion plans for WeLive. Its planned locations in Seattle and Jersey City are on ice and James Woods, who was hired from the Brooklyn Bowl to lead the company’s WeLive division at the beginning of the year, said he could not discuss specific plans for future locations.

“I would just say that we as a company want to take the time to refine this product and get it right,” Woods said. “We’re just taking a deliberate approach to this, we’re being very strategic in how we grow this brand. We have a great team and we want to make sure that we do it right and thoughtfully.”

Paradigm-Breaking New Developments

Last week, Ollie, a co-living company with 10 locations in its pipeline and “67 projects that we’re evaluating,” Ollie CEO Chris Bledsoe said, announced what it called the biggest co-living project in North America: 426 beds across 14 floors in a 43-tower apartment development in Long Island City.

Simon Baron Development and Quadrum Global are developing the building, but Ollie will manage, lease and maintain floors 2-14, and its co-living residents will have access to the higher-end amenities that define new construction in New York City, including an indoor pool.

Ollie signed this deal in 2014, Bledsoe said, despite having announced it three years later. (The partnership expects it to open in January 2018.) In the meantime, co-living has grown in spaces too small to make an impact on the broader housing market: It started in converted bed-and-breakfasts on the West Coast and in locations with a dozen units or so in New York City.

Earlier this year, co-living provider Common opened its biggest location yet, Common Baltic in Brooklyn’s Boerum Hill. The project was a ground-up development, just like Ollie’s project at 29-26 Northern Blvd., and had 70 co-living beds and 67 studios and one-bedrooms. The co-living beds have leased up at the same rate as the traditional apartments, which surprised Common CEO Brad Hargreaves.

“We’re seeing the demand for those units and leasing a little faster than I expected,” he said. “You also get the community, but they’re priced like any other unit, there’s not a premium there. A studio at Common Baltic is $2,600, $2,700. That’s the same as a nice studio in a new building in Downtown Brooklyn.”

The Cash Is Coming 

Common took on a $16M round of venture capital last summer, bringing its total fundraise to $25M. Among its investors are prominent real estate businesses like the LeFrak Organization and the Milstein family. Hargreaves said most of that money is still in the bank, but the company has used it to build out technology and market its brand. He said his company is already planning a new project bigger than Common Baltic, but he would not elaborate.

Ollie, self-funded so far by Bledsoe and his brother and co-founder, Andrew, is preparing to seek its first investment. The company is at a crucial juncture, and Chris Bledsoe it could take one of two paths as it seeks investment. It could take a modest investment, grow slowly, and take more investment down the road, or, as Bledsoe calls it, it could take the “go big or go home” path.

“There are benefits in this space to the group that builds the strongest momentum early,” Bledsoe said. “By raising more today, even if it’s more dilutive percentage-wise, you’ll make the pie bigger in the long run because you’ll secure your space in the category.”

Among Ollie’s prospective investors are multifamily developers, suddenly eager to profit from, rather than be hurt by, disruption in their space. As recently as two years ago, there was healthy skepticism about whether co-living was simply a fad, but the key stakeholders in the space have started to come around.

When Ollie was founded in 2011, Bledsoe, who was a financial analyst at the time, lamented the lack of investment appetite from the two pools that made sense: the Silicon Valley firms that back the growth of tech startups did not have an appetite for housing companies, and real estate firms were earning their reputation of being slow to adapt to new technologies.

“If you’re investing in multifamily, you’re a conservative investor,” Bledsoe said. “If you’re a lender in the capital stack, you’re an even more conservative capital source. We had to appeal to the most risk-averse denominator of investor.”

Since then, real estate technology has exploded. There are incubators and venture capital groups dedicated solely to PropTech, including MetaProp NYC. An increasing share of real estate companies has either acquired or invested in a technology company innovating in its space, be it property management, brokerage or construction. Later this year, Real Estate Tech Week is returning for a third straight year in New York City.

The Next Step

Although running a co-living company is not the same business model as a tech startup, the ethos of embracing the sharing economy to disrupt an industry gives them an unmistakable common thread. Capital’s embrace took years, but it has begun.

“From my perspective, I see it as one big shift mid-last year,” Hargreaves said.

The years of apartment construction in America’s major cities finally caught up to, and passed, the demand for new multifamily buildings. Rent growth is stagnant, developers are offering a month or more free to entice tenants and the construction pipeline is still full: more than 360,000 new units are expected to deliver nationwide this year.

Many of these new apartments have few things to differentiate themselves from one another. They come with fitness centers, package rooms, rooftop decks, concierge services and other amenities that have become standard. In a time of oversupply, anything a building can do to stand out becomes critical. Co-living is a sensible way for developers to hedge their bets.

“If you can provide a better product or better mousetrap and attract people to want to live in your building for a variety of reasons, then you stay stable during a downturn,” Quadrum Global head of U.S. investments Seth Schumer said. “In a downturn, there are always places that seem to perform.”

While Quadrum is exploring other projects where it can open a new Ollie location, including a project with more than 1,000 apartments being planned in Jersey City, it declined to invest directly in the company. Schumer said Quadrum wants to avoid potential conflicts of interest for its investors; funding Ollie could make future projects with co-living seem like a way to justify the investment, rather than doing it because it makes sense for a project.

But Schumer said that does not mean he is bearish on the product. When he moved to New York City, he and his college friends erected an illegal wall in their apartment building, improvising their own co-living setup before the term even existed. 

The same thing happens in every major city in America; young, cash-strapped professionals take to Craigslist to find roommates to share space and cost with. Providers like Ollie, Common and The Nook in San Francisco have found a way to tap into that underground market, but legally, at scale and with savings for renters and more profits for landlords.

It is the same situation WeWork took advantage of in 2010, when the freelancers who were working in basements and coffee shops suddenly found a space they could enter affordably, share and mingle with their peers.

As co-living hits its stride, WeWork is still looking for the right way to enter the housing space with the same force with which it broke into office leasing. WeLive may be on pause, but its new leader said it is just gearing up for Phase 2.

“We have organized the company in such a way that WeLive is now one of the two main business lines,” Woods said. “We have dedicated resources now.”

With a sleeping giant biding its time on the sidelines, conventional wisdom might suggest WeLive’s competitors are salivating at the chance to grow in the sunlight, rather than in its shadow.

But having such a major player active is far better than having it seemingly dormant, Hargreaves said. The ultimate gatekeepers are the banks and financial institutions that have to sign off on co-living before lending hundreds of millions of dollars to a developer who wants to build it.

“Chris can have confidence that he’s going to fill his 450 beds. Ultimately, our confidence doesn’t matter,” Hargreaves said. “What matters is a bank’s confidence, a construction lender’s confidence. That’s what matters.”

And for those banks, WeLive’s dormancy is a red flag, despite its rivals’ explosive growth.

“At this stage of the space, the more people who are doing things at scale, the better,” Hargreaves said. “We miss them.”