Alternative Living Options Could Solve Housing Challenges

Co-living and micro units are changing the way that people are living. In particular, these apartment styles are providing quality middle-income housing options in urban markets. Even better, they are generating phenomenal net operating income for investors. However, construction and lending models have yet to catch up to this new way of living. At RealShare Apartments yesterday, leaders in this niche talked about the burgeoning market on the Co-Living, Micro-Units, and Vacation Rentals: Value Opportunities in Non-Traditional Apartments. Panelists included Laurie Lustig-Bower, EVP at CBRE; Shaina Li, director of real estate at Common; Zac Shore, director of development at Panoramic Interests; Jim Wiegandt, managing director of commercial real estate banking at Banc of California; John Petrov, president at Baldwin Construction; Sebastian Rein, managing director at AddaZero.

Co-living is essentially a managed united apartment. Common, a new leader in this space, works with developers to design four or five unit apartments with common living spaces. They manage the interior units, taking care of stocking basic needs, cleaning and managing utilities to create a quality shared living space. As a result, they are generating as much as 40% NOI compared to a standard apartment building. “This isn’t an innovative concept,” said Li on the panel, explaining that people in urban markets have lived in shared spaces as a way to curb costs. “What is different is the services. We are thinking about how to making city living better when you share spaces.”

Panoramic Interests has also found the co-living space to be profitable. It began focusing on micro-units, but realized that—since most of the budget is spent on kitchens and bathrooms—co-living was a better business model. To enhance the profits, Panoramic Interests has utilized modular construction concepts, and is able to build co-living and micro apartment buildings for $80 less per square foot than standard construction costs. “That is a significant delta, not to mention you can build it in a third of the time,” Shore said. The firm uses modular construction on all of its projects, and likens the method to automated car manufacturing, which allows for cars to be produced at an affordable price.

Despite the benefits and proven success of co-living concepts, lenders are still not willing to give full credit to these projects. Instead, they are lending in the same way that they would a conventional five-bedroom apartment unit. “We look at what the property would get if it was a standard five-bedroom apartment, so you are going to get a similar LTV,” said Wiegandt. “We are standoffish on giving full credit for full rent on these products.” Lenders, he added, are looking at the full life of the investment. “Bankers are born pessimists, so until we see it go through a couple of cycles, this is where we are at.”

From the development perspective, Petrov says that the concept could work in specific locations, both where there is demand and where cities will allow for the concept. “The right location could really do well,” he said. “There is a need for this, but it depends on the cities that will allow it.”

In the interim, companies like Common and Panoramic Interests are forging ahead, proving out the model and finding ways to make the model work—whether through modular construction or by testing the market with individual properties. Common plans to open its first Los Angeles property at the end of the year, and Panoramic Interests is using the model to serve the student housing space, as well as finding opportunities in supportive housing and homeless housing.