Co-living Valuations Exceed Multifamily in Many Cities

Prior to March 2020, co-living properties were rising in popularity, offering a 30% discount on gross housing costs on a per-lease basis. At the same time, operators generated 15% higher NOI than the industry average due to increased density. And as renters look for more affordable housing options, co-living will likely garner increased demand post-pandemic, according to a co-living report from Cushman & Wakefield. As a result, most industry experts believe the overall valuation impact has been less severe for co-living properties than for multifamily. Indeed, the sector was outpacing multifamily valuations pre-pandemic and seems poised to continue.

But that is speaking generally. When conducting such an analysis, It is important to distinguish between the different methods of valuing co-living arrangements versus traditional multifamily developments. Participants in CBRE’s weekly podcast tackled this subject recently.

Co-living concepts typically sit in the established range of yields for predominantly long-stay schemes. An important caveat to note is that in many cases, co-living has slightly different and shorter-term lease structures and if there is an element of short stay, that needs to be treated slightly differently, according to Jo Winchester, CBRE executive director. That type of long stay would impact the valuation of a co-living arrangement, she said, adding that long income is co-living’s core income. This was more apparent during the past year where corporate demand, i.e., office building occupancies and overseas travel, has been impacted by Covid.

“What we’ve seen is the short-term income becoming a less important part, while long-stay income being the core attraction for investors,” Winchester said. “We have also developed kind of a hybrid model. So you have one set of drivers and then you get to a kind of blended value with the two income streams. There are many operational models out there in the market and we have to look at them all individually based on their locations and how they actually are operated in practice.”

In practical terms, lenders want co-living deals to pencil as multifamily transactions, which isn’t a major divergence from lender requirements prior to the pandemic. Lenders also want to see the value of the co-living model in the property. Usually, this entails below-market rents for a comparable market-rate unit.

Other dynamics at play include bathrooms for each bedroom at the very least. Along with private bathrooms, some developments have kitchenettes in every unit. This notion of a micro-unit configuration also helps to solidify lender interest.

At the end of the day, of course, it comes down to the numbers. Simply put, the math needs to make sense.

The economics are indeed making sense in cities that can accommodate a growing need for more attainable housing and connected communities, Adina David, director of Flexible Housing at Greystar said on the podcast. She noted that co-living is an emerging segment of the market within Greystar.

“We actually refer to it as urban living, and we do see it as having evolved from many other emerging concepts within rental housing globally,” David said. “It is aimed primarily at single person households living in cities to provide a more attainable dwelling type with an activated sense of community and convenience added to that. So you get a private unit to yourself, but also the ability to interact with lots of other people around you as well as work near your place of residence in a large city.”