Co-Living Fights To Survive As Shared Spaces Remain Restricted
The coronavirus pandemic has hampered most co-living companies, Starcity CEO Jon Dishotsky said, but the pain has so far been much worse for some than others.
Among the most severely impacted operators is HubHaus, which announced last month that it will shutter permanently. The Los Altos-based company came to manage over 1,000 bedrooms, many of which were in the Bay Area, but it told tenants and homeowners in September it couldn’t pay October rent and was shutting down, multiple outlets reported.
The closure of HubHaus, which master-leased single-family homes in a co-housing model, and the contrasting resilience of co-living developers and owners may mean more of the latter lasts through the pandemic, despite immense challenges for both parts of the industry.
“The master-lease model is extraordinarily difficult to make work because you take on a lot of obligation, and if you put [capital expenditures] into the building that is not an investment. It is just an expense,” Dishotsky said.
HubHaus did not respond to a request for comment.
Dishotsky said Starcity’s ownership model means it will fare better during downturns than co-living companies with myriad lease obligations. Even so, the co-living model presents its own set of challenges beyond falling rents in the urban metros in which most co-living companies operate.
Rooms in the industry are as small as 100 or so SF, granting owners more revenue per SF than traditional multifamily but also much less space for social distancing. The use of shared kitchens and other abundant common areas can make interaction difficult to avoid. Dishotsky said Starcity has seen over a dozen but less than 20 positive COVID-19 cases at its communities. It has instituted a detailed playbook for when a resident contracts the virus, including notifying the community, beginning daily disinfecting and offering all residents coronavirus tests.
Starcity asks residents who test positive to isolate in their room and avoid common areas, provides them with a DoorDash gift card and mails them nitrile gloves. If the affected member isn’t following protocol, which has happened once, Starcity asks the resident to quarantine off-site and helps foot the bill.
It has taken “a lot more hand-holding for potential new members,” but he said rents have started to rebound from 10% to 15% year-over-year reductions in each of its markets except San Francisco, which continues to see slackened demand but an occupancy rate of 92%. Plummeting rents in San Francisco as a whole have also been most pronounced for smaller units. Studio rents last month were down 31% year-over-year, according to Realtor, which has one-bedrooms and two-bedrooms in the city down 24.2% and 21.3%, respectively.
CoStar shows less severe drops in rent for the S.F. metro area but is following the same downward trend, with studios down 13% from their pre-pandemic peak and three-bedrooms down 7%, according to CoStar Bay Area Director of Market Analytics Jesse Gundersheim.
“We are seeing, across the board, demand flow moving away from studios and into larger unit sizes,” he said. “It makes sense that there may be some renter outflow from co-living areas right now being that people don’t want to be in close quarters with each other.”
Marcus & Millichap First Vice President Ramon Kochavi said he was very surprised Starcity's occupancy in S.F. is still above 90%, but added that he is a long-term believer in co-living's economics for owners and as a housing option for younger people.
"I think it does have legs, and I am bullish on the idea of more people co-living," he said. "But right now, under the pandemic situation, I'm surprised [Starcity is] still operational at such a level."
Dishotsky said he thinks Starcity will be able to withstand its current drop in rent lasting beyond this year because its properties were already designed to be more affordable, including a 30% discount to a new construction studio apartment. Even after the drop, traditional studios, with a median rent of almost $2,300, are not affordable to many in S.F., where the area median income is just under $90K.
For one of its upcoming projects, 457 Minna St. in San Francisco, Starcity is anticipating rents coming in at about where the market is now, Dishotsky said. “Essentially, the development that’s breaking ground next year assumes zero rent growth over the next three years," Dishotsky said.
Even so, Dishotsky said he expects the master-lease co-living companies to take the brunt of the impact to the industry.
Bungalow, another Bay Area-based co-housing company, warned some of its landlords in September it didn't intend to pay October rent, The Information reported last month. Bungalow CEO Andrew Collins said in a statement to Bisnow that the company is in a "meaningfully better position than HubHaus" but still looking to renegotiate most of its leases.
"We have seen substantial declines in the residential real estate market in our major cities: in New York, San Francisco, Los Angeles, and Washington, DC, rents are down between 15% and 25% versus their peak last year," Collins said. "As a result, we are asking a majority of homeowners to reformat our leases in a way that enables us to get through these difficult times together and provides additional upside for landlords once the markets rebound."
Dishotsky, who said he thinks co-living has a long-term place as an affordable option for workers in urban cores, said he is less sure about the stability of the master-lease model compared with the ownership one. Both kinds have raised tens of millions in venture capital: Bungalow raised $47M last year, while Starcity closed on a $30M fundraising round weeks into the pandemic.
“You can certainly scale fast and create a quick pop in valuation in the good times, but long term that will catch up to you," he said. "And I think that that’s, largely speaking, what happened.”