An Assessment of Co-Living's Long-Term Resiliency by Sam
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Co-Living as an Emerging Market: An Assessment of Co-Living’s Long-Term Resiliency by Sam Pepper B.S., Architecture, 2011 University of Virginia and Aaron Manji B.S., Mechanical Engineering, 2010 University of California, Los Angeles Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development at the Massachusetts Institute of Technology September 2019 ©2019 Aaron Manji and Sam Pepper All rights reserved The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author_________________________________________________________ Center for Real Estate July 26, 2019 Signature of Author_________________________________________________________ Center for Real Estate July 26, 2019 Certified by_______________________________________________________________ Jennifer Cookke Lecturer, Center for Real Estate Thesis Supervisor Accepted by______________________________________________________________ Professor Dennis Frenchman Class of 1922 Professor of Urban Design and Planning, Director, Center for Real Estate School of Architecture and Planning This page is intentionally left blank. 2 Co-Living as an Emerging Market: An Assessment of Co-Living’s Long-Term Resiliency by Sam Pepper and Aaron Manji Submitted to the Program in Real Estate Development in Conjunction with the Center for Real Estate on July 26, 2019 in Partial Fulfillment of the Requirements for the Degree of Master of Science in Real Estate Development. ABSTRACT Co-living, while a relatively new concept for the real estate industry, has become increasingly pervasive within the United States over the past decade. This form of communal rental housing offers reduced personal and private space in exchange for certain benefits, including a 15-30% reduced rental rate when compared to studio units. Changing social and economic factors have led to an increased interest in this type of residential product among both real estate developers and tenants alike. Today, there are approximately 30 co-living companies operating in the United States with close to 3,500 rooms in operation (JLL 2019a). Furthermore, this growth is expected to accelerate as global funding for co-living has increased by more than 210% since 2015 and around 7,000 rooms are planned to open in the United States over the next two years (JLL 2019a). However, while the concept has gained traction, it remains a nascent product type within real estate. Even with high growth, co-living’s long-term sustainability remains to be proven. This thesis uses a mixed-methods approach to evaluate the long-term resiliency of co-living as a product type. Our research provides insight into the various types of co-living business models currently active in the United States, and we conduct a thorough review of the international and domestic co-living markets. Financial models are utilized to assess the financial resiliency of co- living given potential changes to certain market conditions and demand drivers. We investigate the planning policies affecting co-living in targeted markets in the United States. The thesis concludes with a report on the market perception of co-living from real estate professionals and the general populous. Thesis Supervisor: Jennifer Cookke Title: Lecturer, Center for Real Estate 3 Acknowledgements We would like to thank the following people. Your input was essential for our research. Jeremiah Adler Roy Alpert Elvina Beck Samantha Gajewski Charles Kuntz Brian Lee Edward Laurence Christine McDannell Jeffrey Munger Tanin Paisarnsrisin Mo Sakrani Jacob Shapiro Eli Sokol Shawn Tsai Ted Tye Lucas Umbreit Steve Weikal Brian Wang This thesis would not have been possible without the support of our Advisor. Thank you for giving so much of your time and energy to this project. Jennifer Cookke 4 Table of Contents Acknowledgements ......................................................................................................... 4 Table of Contents ............................................................................................................ 5 Introduction ..................................................................................................................... 8 Chapter 1: What is Co-Living? ...................................................................................... 11 1.1 Co-Living Defined ................................................................................................ 11 1.2 History of Shared Housing ................................................................................... 14 1.3 Comparable Product Types ................................................................................. 16 1.3.1 Communes .................................................................................................... 17 1.3.2 Cohousing ...................................................................................................... 18 1.3.3 Micro Units ..................................................................................................... 19 1.3.4 Hostels ........................................................................................................... 20 Chapter 2: Co-Living Supply and Demand Drivers ........................................................ 22 Chapter 2.1 Reasons for Demand ............................................................................. 22 2.1.1 Urbanization ................................................................................................... 22 2.1.2 Economics ..................................................................................................... 25 2.1.3 Social Factors ................................................................................................ 30 Chapter 2.2 Reasons for Supply ................................................................................ 36 2.2.1 Higher Returns ............................................................................................... 36 2.2.2 Public Partner Support ................................................................................... 39 2.2.3 More Capital Seeking Opportunities .............................................................. 40 Chapter 3: Co-Living Business Models ......................................................................... 44 3.1 Owner Operator ................................................................................................... 44 3.2 Operator ............................................................................................................... 46 3.2.1 Management Agreement ............................................................................... 47 3.2.2 Master lease .................................................................................................. 49 3.3 Profiles of Co-Living Companies in the US .......................................................... 50 Chapter 4: Market Review ............................................................................................. 72 4.1 Co-Living Around the Globe ................................................................................. 72 4.2 Co-Living in the US .............................................................................................. 78 4.2.1 New York City ................................................................................................ 81 5 4.2.2 San Francisco ................................................................................................ 84 4.2.3 Los Angeles ................................................................................................... 87 Chapter 5: A Financial Assessment of Co-living ........................................................... 89 5.1 Purpose ................................................................................................................ 89 5.2 Assessment Methodology .................................................................................... 90 5.3 Assumptions ........................................................................................................ 94 5.3.1 Physical Characteristics ................................................................................. 94 5.3.2 Location ......................................................................................................... 94 5.3.3 Building .......................................................................................................... 95 5.3.4 Unit Mix .......................................................................................................... 96 5.3.5 Hard and Soft Costs ...................................................................................... 97 5.3.6 Financing ..................................................................................................... 100 5.3.7 Rental Revenues ......................................................................................... 101 5.3.8 Leases and Vacancy ................................................................................... 103 5.3.9 Operating Expenses .................................................................................... 104 5.3.10 Capital Expenditures .................................................................................. 106 5.3.11 Capitalization Rate ....................................................................................