The Future of Real Estate: Co-living is the newest asset class
The Urban Land Institute and PwC recently released their latest Emerging Trends in Real Estate report for 2020. Of these trends, popular co-living concepts, such as sustainability, technology and community, are cited as important factors for the next generation of real estate investors. Multifamily housing and co-living also made the list, as they are highly favourable for the changing needs of millennials and baby boomers. This recent acknowledgement of co-living communities brings us to a realization: co-living is the newest asset class in real estate.
As the sharing economy continues to grow, it’s no surprise that the residential real estate sector found their own way to get involved. Although Airbnb is now commonplace and co-working environments are taking off, co-living is only just starting to emerge as a trend for the next generation. The widening gap between median home prices and median household incomes across America, as well as the growing loneliness epidemic, has led more people to turn to co-living as an alternative living arrangement. For investors, co-living provides a higher return investment at a time where residential cap rates rarely exceed 5%.
Real estate investing is booming. Investing in REITs is providing a stable way for investors to diversify their assets and prepare for a potential recession. To further diversify, many are looking at alternate real estate investing, including student housing, self-storage, hotels and senior housing. Co-living is another solution for alternative or niche real estate. Since the work of managing the house and finding roommates falls on the co-living provider, which is typically a company that specializes in these communities, the work for the investor is minimal. To increase profitability and to appeal to renters, many co-living providers also update or renovate the homes that they use, which increases value for the property owner.
Minimizing cost is a huge driving force behind the rise of co-living properties. The construction industry is struggling, due to the lack of available workers. Construction costs for labour and materials is also accelerating, driving up the cost of buildings and, in turn, rents. Across Canada and the U.S., residential construction costs in larger cities is increasing. Since the cost of living in cities is already high, this can drive out young renters and home buyers. Co-living can be done in any home that has a minimum of three bedrooms, which means that new buildings do not need to be built to facilitate co-living and property owners can profit regardless of rising construction costs. Existing homes can be updated to include technology and sustainability, which is an in-demand trend for renters and home buyers. This helps drive down the costs of operating the home.
Although co-living is impacting all generations, including seniors, co-living arrangements still tend to appeal to those in their 20s and 30s. Although cost savings is a primary benefit of co-living, most are seeking out co-living as an opportunity to connect with a group of peers who share common interests, values and concerns. As social media interactions replace personal interactions, co-living communities are helping young adults make new friends and genuine connections. The desire for a sense of community is growing and co-living is a way to make that happen easily through thoughtful selection of roommates and planned community events.
Real estate demands are changing. In order to keep up with these demands, co-living communities are emerging. Although co-living does take a little extra effort, the responsibilities involved in maintaining properties usually fall to the co-living providers, not the property owners. Property owners need to start looking at creative solutions to gain higher returns and appeal to a new generation of renters. Co-living benefits both investors, due to the higher return rates in a stagnant environment, and renters, who benefit by having affordable places to live and a community in some of the toughest housing markets.