Co-living assets—like all of housing—have been hit hard during the pandemic. Before March, co-living properties were rising in popularity, offering a 30% discount on gross housing costs on a per-lease basis, while operators generated 15% higher NOI than the industry average due to the increased density. According to a new report on the asset class from Cushman & Wakefield, co-living will only see increased demand post-pandemic, as renters look for more affordable housing options.
First, however, the asset class has to survive the pandemic. Like the general apartment market, co-living properties have seen a decline in rents and vacancy as well as rent collections. The Cushman & Wakefield report shows that co-living properties’ savings dropped from 30% to 23.2% as a result, with average co-living rents from March to August falling 9.4%. While significant, the decline is still less than comparable studio apartments, which have seen an 11.7% decrease in rents. Overall, the impact on co-living has been less severe for co-living properties than for multifamily.
While rental rates have fallen, rent collections have actually held up better than market-rate apartments. During the pandemic, apartment owners have reported a decrease in rent collections from 4.5% to 5.2%, but in co-living properties, delinquencies have stayed below 4% through the pandemic. Class-A multifamily assets have had even higher delinquencies exceeding 8%.
This underscores the strength of the middle-income target audience of co-living properties, according to the Cushman report. During the pandemic, 73% of middle-income adults have remained up-to-date on bill payments, while only 46% of lower income adults have been able to make the same claim. This trend illustrates the potential resilience of this burgeoning asset class, even during a down cycle.
While the cost efficiency of co-living properties is a plus, there are some pandemic-related challenges for the asset class, particularly related to remote work. However, co-living operators are already pivoting to accommodate this new need in properties. According to Cushman & Wakefield, several properties are reimagining common area spaces as onsite business centers and office spaces. On the other hand, some operators have said that the majority of residents are planning to return to work full-time or part-time in the future. That is likely because the majority of residents are early in their career or in a new position, which suggests less flexibility to work from home than more senior-level roles.
The lending community has also remained bullish on the asset class. While some underwriting standards have changed, they are still funding new construction deals. For example, ELK Development recently secured $14.1 million to build an 86-unit co-living property in a Hollywood opportunity zone area. Shahin Yazdi, principal and managing director at George Smith Partners, secured the funding, and said that lenders are continuing to review co-living deals despite the market change.
“People do not know what the future holds in this space; however, there are still lenders interested in the asset class with the right dynamics at play,” he says.
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