The Collective’s Reza Merchant On Loneliness, Fear And How Co-Living Fared In The Pandemic
You couldn’t dream up a worse kind of crisis for co-living than the coronavirus pandemic. For a sector that sells itself on bringing people together, a virus that means we have to stay away from each other is a nightmare.
Yet pushing against the fear of other people is a factor that works in co-living’s favour: the fear of loneliness, the isolation felt by those living alone during lockdowns.
Those competing factors have been playing out in the performance of The Collective, a pioneer in co-living with operational assets and a big development pipeline in the U.S. and UK. As one of the largest global players in the sector, its fortunes in recent months and how it fares as the crisis recedes are something of a bellwether for the sector more broadly.
The Collective’s occupancy dropped by around 40% at its operational assets during the pandemic, but those figures have since recovered. In some cases, occupancy is starting to get back to 2019 norms after properties were pivoted to a different target audience.
The firm has raised £160M of new capital from investors and lenders to push on with new schemes and recently brought in hospitality veteran and former Airbnb executive Chip Conley as an investor and adviser. Conley was a mentor to Airbnb CEO Brian Chesky and helped that company to grow into the behemoth that floated this month at a value of $100B, and he is now playing the same role with The Collective’s CEO, Reza Merchant.
“It has been a difficult time, especially the first few months when there was a lot of uncertainty exacerbated by the fact that we were all in lockdown,” Merchant told Bisnow over a video call. “But I think the sector has shown its resilience. From when we’re born to when we die, we want connection. It’s in our nature to want to be around other people, and to be part of something bigger than ourselves. Even in a pandemic there has been demand for our spaces.”
In a wide-ranging and personal interview, Merchant talked Bisnow through the company’s finances and performance and how it adapted to the crisis; the stresses of isolation and leading a company through a period of uncertainty; the fate of the city in an era of pandemics; and whether it is possible to talk about your business having a higher purpose than making money in a post-Adam Neumann world.
The Collective opened its first co-living building at Old Oak Common in north London in 2016, and in late 2019 opened its second London outpost in Canary Wharf in the east. At 546 rooms and 705 rooms, respectively, they are the two largest purpose-built co-living schemes in the world.
In the U.S., it has one operational scheme, The Paper Factory in Long Island City, which focuses more on short stays and has 224 rooms.
Its development pipeline comprises seven further schemes in London, one in Dublin and five in the U.S. — three in Brooklyn, one in Chicago and one in Miami. When built out, the portfolio will total 9,000 rooms and have an estimated gross development value of $3.6B.
Co-living is a sector so new it has never seen a recession before, and the real estate world’s expectations for how co-living would perform in this downturn were not good. The Urban Land Institute and PwC’s Emerging Trends in Real Estate Europe report in autumn 2019 picked co-living as the sector with the third-best prospects for the coming year, according to hundreds of survey respondents. By autumn 2020, it had slipped to 14th out of 27.
So how has The Collective actually fared? Merchant said occupancy at its two operational UK sites is 83%, compared to occupancy in the mid-90s before the pandemic. At the bottom of the first lockdown, occupancy dropped as low as the mid-60s, he said.
At the Paper Factory in Long Island City, occupancy fell to 75% in the summer and currently stands at 55%. He said this compares favourably to the hotel market in London and Long Island City, where occupancy fell to around 30% to 35%.
In both London and Long Island City, the company boosted income by working with public authorities to house frontline workers who needed a place to stay and self-isolate during the first wave of the pandemic in the spring and summer.
At its Canary Wharf site, it housed workers from the temporary Nightingale hospital set up by the UK government to treat COVID-19 patients at the Excel centre in Docklands. In both cases, public authorities paid a discounted price to house workers in its facilities.
“People told us it was good to be able to go to work, come home and still have a support system,” Merchant said.
The drop in occupancy inevitably hit the company’s finances. Financial accounts for The Collective (Living) Limited, The Collective’s management company, said the drop in occupancy meant reduced fee income. The report was for the company’s fiscal year running to March 2019. But it was filed on 24 November and has a section addressing events after the accounting period, without providing any 2020 financial details.
The company has raised extra capital and thus can meet overheads, the report said, and it has also taken advantage of government support schemes. A company spokesman told Bisnow it raised £160M of debt and equity during the pandemic. The spokesman didn’t provide a breakdown of the capital raised but said the amount highlighted the “great sentiment” toward the company and the sector more broadly. It has not had to restructure any of its debt, the spokesman said.
Merchant said occupancy approaching pre-pandemic levels is giving the company strong operating resilience, and he believes confidence in the sector will increase with the rollout of coronavirus vaccines.
The company pivoted its model to focus more on long-stay residents — in typical times, its residents are a mixture of long-stay residents who might stay for a few months or a year, and business and leisure travellers who stay a few days. That involves different marketing and different check-in and hospitality offers for guests.
Operations at The Collective’s properties had to be adjusted amid the pandemic. Bars and cafés were shut, so a room service delivery option was brought in. Gyms and pools closed, but other common areas were kept open with social-distancing rules in place. For those areas, cleaning regimes were intensified.
“At times like this people, gravitate towards value,” Merchant said. “So an offer that is good value, with all your bills included, where you can pay via an app is what people want. In general that is the way products in all sectors are going.”
But it goes further than that, he argued.
“This period has shown that as people, we are not wired for isolation, we are not meant to be alone. Throughout history, people have come together in tribes, and that combination of value and the need to be together is why there has still been demand for our spaces, and why the business has been so resilient.”
Co-living is very much an urban phenomenon, and so its long-term success is predicated on the fact that, whether staying for the longer term or travelling for business or pleasure, people will want to congregate in cities.
Conley, on the call for the first half of the interview, is a firm believer that they will, and that co-living has the possibility to expand dramatically.
“Part of the reason why the organising principle of the city makes sense is because of the experiential culture,” he said, while noting the irony that he was defending the city from a house on a beach in Mexico.
“Cities are diverse cultures where you can be in proximity to interesting people and experiences and jobs. That is what people want when they travel and what they want from where they live. That diversity is a big benefit.”
A pioneer of the boutique hotel world, Conley joined Airbnb in 2013 as global head of hospitality and strategy, enticed by the potential he could see in the short-term rental model. He said co-living has the potential to be “the next big thing” and that The Collective is well-placed to capitalise. With that in mind, he became an investor in and adviser to The Collective earlier this year.
“The company is positioned to grow, but grow sensibly, and it is mission-driven growth, creating a great culture,” he said. “The sector has proved itself quite resilient this year, and that social component that attracts people isn’t going away.”
He added that a growth in “digital nomads” travelling from city to city for work, rather than staying in one place, would also benefit the sector.
Conley was brought in by Airbnb founder and CEO Brian Chesky specifically to act as a personal mentor as well as provide his expertise in helping the company grow in the world of hospitality. He is playing the same role with Merchant, and he points to some similarities in the pair.
“In the decade since Reza created The Collective, he's shown a remarkable resilience and resourcefulness,” Conley said. “He has a keen entrepreneurial sense while also being very motivated by personal growth and self-awareness. As a CEO, he's great at painting the visionary picture and helping people see their purpose. His energy and optimism are infectious and he deeply believes in the power of The Collective community. Having spent the past eight years mentoring Airbnb CEO Brian Chesky, I see many similarities between the two.”
There are also areas to work on, he said.
“An area that Reza continues to work on is the improvement of organisational processes and accountability. He's grown this company from a tiny enterprise to a large global organisation, and along the way has had to hire great people with the skills and experience to put those processes and structures in place, in a way that is scalable but also stays true to its culture and purpose.”
At 32, Merchant is young for the CEO of a company the size of The Collective, and it is his first recession.
He admits it has been difficult, as a business leader and as a person.
“It is a challenge, something I’ve never experienced before — there was a lot of fear and uncertainty in the world in those first few months,” he said. “It is definitely the most challenging period of my business career.
“I suffered that when we first went into lockdown. I was completely on my own, not interacting with anyone, just endless Zoom calls: It was eerie. Going out to buy groceries was the only time you had a real human interaction, and you really welcomed it.”
Merchant said he got through it as best he could with exercise and meditation, but it was only when full lockdown was lifted in London and he started to visit the company’s schemes again that the isolation dissipated. And what he saw there cheered him.
“We’ve seen an increased sense of altruism and cooperation from our members, as they’ve supported one another through the pandemic — and that is incredibly powerful to see,” he said.
Organic support networks have grown up in the company’s buildings, he said, with people buying groceries for those who had to stay in and self-isolate, and people coming together as best they could.
One word came up again and again during the course of the conversation: purpose. And Merchant said that, ultimately, is what helped him during the worst of the pandemic and is what drives him long term.
“Going to our schemes, you’re constantly reminded why we do what we do, which is to have a positive impact in people’s lives and enable them to find fulfilment,” he said. “It is doing something with a purpose that goes beyond money.”
Young CEOs talking about purpose over profits can spark eye-rolls from some, especially in real estate and business circles that witnessed the rise and fall of Adam Neumann, the WeWork founder who also talked about communal values, missions and purpose, but who ultimately led the company into a precarious financial position and walked away with a settlement totalling hundreds of millions of dollars. But Merchant believes his mission can withstand that criticism or any cynicism.
“It comes down to authenticity and intention,” he said. “I think if you are sincere, people can feel and sense it. I’m deeply committed to that, and I think my actions show it.”
He said he is the lowest paid person on The Collective’s executive team, and that he has made a commitment to reinvest 90% of his entitlements from The Collective back into the company. Once the company no longer needs that support, he said, he will invest 90% of his entitlements into The Collective’s charitable foundation, which invests in more than 40 social ventures around the world and has an independent board of trustees. The latest programme it is funding is an impact residency for Black social entrepreneurs in London.
“I stand behind what I believe in,” he said. “I think it is about balancing profit and purpose, and the two are complementary. If you create an environment that makes a difference to people’s lives, then people want to be a part of that and are loyal to it. I think the two things, profit and purpose, go hand in hand.”