With current housing prices skyrocketing in cities like San Francisco, New York, and Los Angeles, even grads with well-paying jobs are struggling to make rent on a place of their own. As a result, millennials and Gen Z’ers who don’t want to move back in with mom and dad are turning to co-living, sacrificing privacy for affordability, flexibility, and community.
While this model may remind you of communes in the 1960s and ’70s, co-living isn’t a sign of the counterculture anymore — in fact, it’s starting to become mainstream. The rise of this new type of living has sparked interest from the VC community, with a number of VCs placing bets on Common, Roomi, Bedly, and others.
But there are some obvious pitfalls when it comes to the actual economic models of these startups trying to tap into the latest generation of housing angst. Here’s what we’ve learned from talking with the founders of 15 venture-backed companies in the space, and where we think co-living is heading.
Cost is what counts. As co-living has expanded beyond the socially-focused commune model, tenants now see a lack of privacy as a disadvantage. For all their talk about forming communities and making genuine connections, at the end of the day most millennials want a space to call their own. Offering high-end amenities or a great location isn’t enough, co-living units need to be priced below market to be appealing. Co-living properties also typically can’t get away with offering a standard 12-month lease, as they are targeting tenants who don’t want to be locked down for more than a few months at a time. Successful co-living managers will have to learn how to thrive in this high-turnover environment.
The small house co-living model (<50 tenants/house) may not deliver venture returns. Small co-living houses suffer from diseconomies of scale — designing the space, paying a community manager, and organizing events have a fairly fixed cost whether you have 10 residents or 100. Signing management agreements for large new builds (like Ollie does) could be a better bet, as a startup takes on no financial or operational risk from construction but collects ongoing fees and a share of rent. Many of these larger properties market their units as “micro suites,” offering single rooms that are 50-75 percent smaller than a standard studio with shared lounges and workspaces. Tenants willing to give up some of their private space are rewarded with high-end furnishings and complimentary services like laundry and cleaning.
Millennials are open to a long-term Airbnb-type platform, but this space is tough for startups to enter. Marketplaces like Airbnb and VRBO don’t work well for longer-term stays. Listed properties are often too expensive to rent for more than a few days or are unavailable for months at a time. Most college students and recent grads use Facebook, email lists, and Craigslist to find housing, all of which are inefficient and sometimes unsafe. However, it’s tough for a startup to aggregate listings on their platform to attract potential tenants, as incumbents (like Craigslist) have significant market share and will sue startups that scrape their data (e.g. RadPad). Startups also have to tackle a number of tricky issues like insurance, rent compliance, and identity verification, which are crucial for longer-term stays.
Roommate matching is a real need but likely not a venture-scale business. We haven’t seen any large companies focused solely on roommate matching. Unless the platform charges users to sign up (which is tough with so many free options), it’s hard to make money; once a user finds a roommate, they can easily finish the process off the platform to avoid fees. A more attractive model (adopted by Wanderful and HomeShare) involves working with buildings to match roommates and refer them to properties, often increasing capacity in existing rooms via pressurized walls. This is attractive to property managers as well — many luxury buildings have recently struggled with high vacancies and are eager to expand their potential tenant base.
We’re excited by the surge of interest in the co-living space and predict that as millennials increasingly look to spend their money on travel and other experiences, residing in co-living style communities will become even more common. While we urge startups to be cautious around how they build a model that is scalable and profitable, we’re expecting to see some big winners in the space in the coming years.
Justine Moore and Olivia Moore are investors at VC firm CRV.