Co-Living Providers Feeling Short-Term Pain, But Still Confident In Sector's Future
Co-living providers like Common and Quarters have been expanding rapidly across the U.S., betting on the idea that people want to live in apartments with multiple roommates and large socializing spaces.
These co-living companies now must navigate a pandemic that is forcing people to practice social distancing and an economic crisis that is leaving millions unemployed, challenging their business models and their growth prospects.
The CEOs of Common and Quarters, in interviews with Bisnow this week, said they are experiencing short-term challenges from existing tenants seeking to break leases to slowing demand for their new spaces. Their expansion plans this year will likely slow down as construction projects are delayed and partners rethink new deals, but both CEOs remain bullish on their future growth prospects and the resiliency of the co-living sector.
"It doesn't change my view about co-living," Common CEO Brad Hargreaves said of the coronavirus crisis. "The people who are dropping are not dropping because they got skittish about co-living, they're dropping because they lost their job, they decided not to move or there was some fundamental change in circumstance."
Of the roughly 2,000 residents in Common's properties, Hargreaves said about 20 of them have requested to break their lease and about 40 have requested payment plans because they can't afford their rent for the month. He said the company charges a fee for lease breaks and hasn't changed that policy, but it is offering flexible payment plans for tenants to spread this month's rent out over a period of time.
A majority of Common's residents are on 12-month leases, Hargreaves said, but it has some leases as short as three months. He said this gives it less exposure to transient renters moving out during this crisis, and it also makes residents feel more comfortable because they have developed relationships with their roommates.
Common has seen a drop in the pace of new people signing leases, Hargreaves said. The co-living provider is offering virtual tours, and the number of people filling out applications has remained steady, but he said the conversion rate from applications to signed leases has dropped from 80% to 50%.
"Some people will apply Monday and by Wednesday they lost their job," Hargreaves said. "That's where we're seeing an impact."
Quarters CEO Rui Barros said the company is also seeing leasing demand for its co-living space slowing down.
"Our occupancy as a company has been in the high-90s, we're seeing a bit of a dip, but it's still holding pretty high for us," Barros said. "I do think our business model can weather a big downturn, and this is the mother of all downturns."
The German co-living company has more than 12,000 residents across 15 cities, and it raised $300M last year to launch a major U.S. expansion. It has now opened or announced plans in several U.S. cities including New York, Philadelphia, Chicago and D.C. The company has called itself the "WeWork of co-living," and in February it named Barros, a former WeWork executive, as its CEO.
Lease terms for Quarters' tenants range from three to 12 months, with an average of about nine months, Barros said. He said it has seen some recent attrition of tenants leaving when their leases expire, but it is also seeing some tenants extend their lease terms because they don't feel comfortable moving.
Barros said that he understands people are losing their jobs and may have trouble paying the rent this month. He said Quarters doesn't have a blanket policy on rent flexibility, but it is having conversations with residents and evaluating each situation individually.
"We, of course, are worried. We are worried for everyone, not just our tenants. The numbers are staggering," Barros said. "The intent is to work with members in a proactive way to address their circumstances."
Not only does the economic crisis present a challenge for attracting and retaining tenants, the public health crisis of a spreading pandemic is forcing co-living providers to take new precautions to keep their residents safe.
With an average of four people living in each unit and many of the leases spanning 12 months, Hargreaves said Common's tenants are comfortable sharing kitchens and living spaces with their roommates. The building-wide amenity spaces offer more of a challenge.
Common has closed some gyms, yoga studios and lounges, but it has not closed all gathering places. Some of the coworking-style amenity spaces with desks have been valuable for people working from home, Hargreaves said, and they are safe as long as they keep distance from other remote workers.
"They’re not used for parties, they’re used for working, they’re used for people going in there to get out of their suite," Hargreaves said. "We believe that can be a positive thing for social distancing. It’s really about how do you, in a co-living environment when people are sheltering in place, ensure people can be as separate from each other as possible, and how do you give them space to do that."
The company is cleaning amenities and other shared spaces like hallways at least once a week, Hargreaves said, and it is giving personal protective equipment to the cleaning staff. Common is also increasing its spending on shared goods like toilet paper, paper towels and soap by about $14K/month as people spend more time at home and use the necessities faster, he said.
Quarters has closed some amenity spaces, increased its cleaning of common areas, and it has shifted social events to virtual meetings, said Quarters North American General Manager Bobby Condon, another recent hire from WeWork.
"We're trying to find that balance between safety and the community piece," Condon said. "We obviously changed our operations to make sure we're aligned with the guidance of the health authorities, but also where we've had to come down in terms of our programming we've altered that with virtual programming, and we're seeing a lot of our members wanting to be together as a family and go through this together."
WeWork, which operates two WeLive coworking spaces in New York and Arlington, Virginia, is taking similar health precautions to keep its members safe.
"As we continue to monitor the Coronavirus (COVID-19) outbreak and follow guidance from the CDC, WHO and local officials, we have implemented a number of precautionary measures to protect our community, including enhanced daily cleaning measures, the closure of shared amenity spaces, and the suspension of in-person events," A WeWork spokesperson told Bisnow in an emailed statement. "We have also created daily virtual activities and events so that our members can stay connected during this challenging time.”
In addition to handling rent issues and managing their existing properties, these co-living companies are also having to assess the viability of the expansion plans they have already set in motion.
Common and Quarters have each previously outlined ambitious growth plans and have new spaces in various stages of planning and development across the globe.
The under-construction properties that were expected to open this year are going to experience delays as some jurisdictions have halted construction entirely, and others have slowed their pace of issuing permits, Hargreaves said. Common has recently been on a pace of opening one building every week or two, and it has spaces totaling about 15,000 beds in its pipeline.
"We have a lot of stuff in the process of opening, and some of that is being delayed," Hargreaves said. "There are a lot of logistical things that are challenging right now. It is definitely slowing near-term openings."
These co-living providers also have many spaces for which they were in negotiations with property owners but had not yet made a firm committment. Barros said Quarters is sitting down with each partner and discussing their circumstances, and in some cases projects may be put on hold.
"Will growth slow? Probably, at least in the short term, because nobody's certain on what's going to happen," Barros said. "Until we have a better sense of what the recovery timeline looks like, there is probably going to be slowed growth ... pre-pandemic was a much different environment than what we're in now, for both our partners and us."
While leasing and portfolio expansions are showing signs of a near-term slowdown, Hargreaves and Barros said the growth prospects of co-living once the crisis has passed haven't dimmed.
The economic downturn may last longer than the pandemic, but Hargreaves said co-living is well-positioned to weather a recession. He does not think the pandemic will change renters' attitudes around having roommates, and he said people will be looking for more ways to save money.
"People are coming to co-living primarily because it's an affordable way to find a high-quality place to live in the city," Hargreaves said. "I don't think that's going to change on the other side of this. That is still going to be something people want."
For Barros, his confidence in co-living has been bolstered by what he has seen during the pandemic. While people may be sheltering in their homes, they have found new ways of communicating with friends and family through video calls, and many have kept in closer contact than they would have previously. He said this proves the value of community that co-living offers.
"We believe that coming out of this crisis, the desire to connect will be stronger than ever," Barros said. "The concept of co-living and community and bringing people together will be stronger than ever at the tail end of this."
Before joining Quarters, Barros spent over two years with leading coworking provider WeWork as senior vice president. He said he thinks co-living is much better positioned to weather a recession than coworking.
"There are a variety of different ways you can keep your business going without having the cost of office space," Barros said. "In our world that's different. What we're providing is a home. What we're providing is much more of a necessity."