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Could Co-Living spaces be the next big thing?

You haven’t heard of Co-living spaces, don’t worry not very many people have, but with major success stories of sharing culture, companies like WeWork, Uber, Lyft, and Airbnb, the idea may be taking hold.

The goal of addressing America’s dire need for affordable housing is something cities and politicians have been searching for, for years. For example in a city like San Francisco with a millennial-aged population of 23% and a median income of more than $120,000, the monthly rent for a one-bedroom apartment is upward of $3,500, while a two-bedroom was more than $4,700. The sky-high rents and the general cost of living are making it impossible for cities to attract and retain the best talent and new residents to the area while driving long-time residents out.

Many developers and investors have begun dipping their toes in the co-living pool. Investors are renting out entire homes, then those homes are furnished with bunk beds and turned around to rent individually by the bed. This is a common practice in the Silicon Valley area and is especially appealing to young tech talent fresh out of college, who might not have the funds to afford their own place in the market yet.

Developers in the market are looking at developing larger apartment units with more bedrooms (4-6) and large common areas like living rooms and kitchens. But this type of development may not be adaptable in all areas of the country without legislative help to change regulations. For example in a city such as Washington, DC, which also has a large millennial population co-living spaces face challenges that might make larger-scale adoption more difficult. Issues such as tax laws that call for spaces with multiple occupants to be taxed similar to hotel rooms or permit restrictions, which limit the occupancy of the building by units and not square footage could be problems for the adoption of co-living developments. Additionally, lenders just aren’t quite sure how successful co-living will be—is it just a fad or a real trend?

Outside of the U.S., co-living is definitely gaining traction. In Europe, Medici Living, a co-living company based in Berlin, raised $1.1 billion U.S. dollars to build a portfolio of as many as 35 co-living properties across Europe. It’s speculated that Medici Living is looking to raise as much—if not more—in the U.S. in 2021.

Other U.S. cities that would be potential candidates for co-living trial developments include New York because of its dense population, and affordability challenges as well as Los Angeles and Seattle, which both face similar challenges.

It’s unclear when large-scale co-living developments will enter the U.S. on the scale of co-working spaces, because it will require forward-thinking cities with a large entrepreneurial talent pool, combined with high average rents, in order for them to get on board with this trend. Cities with a high percentage of millennials and Generation Z individuals are also a key factor. Young professionals who are recent college graduates were already living in environments similar to co-living.

As this talent pool first leaves school and transitions into the work world, they will be more likely to gravitate toward experiences that they’re already familiar with, making co-living especially attractive. As for investors and developers, it all comes down to maximizing efficiency. If co-living spaces can reasonably generate reasonable square foot rents, then it should be a resilient asset class going forward.

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