Coliving as an Affordable Option

 

(in pic) On the left, you have a San Francisco “hacker house” where $1,800 bunkbeds have proliferated. On the right, you have Carmel Place, a new micro-unit building in New York City which starts at $2,540 (That said, it’s worth noting that at least 25 percent of the building’s units are below-market-rate at $900 because of New York’s inclusionary housing regulations)


This is a project for Roam Coliving, which is building a network of communal living spaces around the world. You can read more about our approach here and here. We want to candidly explain some of the complexities of building out coliving spaces


Several months ago, a Berlin-based entrepreneur and housing journalist Joel Dullroy crashed on my couch in San Francisco’s Hayes Valley neighborhood. He was running a platform called GroupEstate, where groups of people can collectively organize to buy apartment buildings and live in them together.

It’s an online twist on an old concept in Germany, the baugruppen.

Photo of a Multi Family building in Germany
How cool is this? Collectively building and crowd-funding a multi-family building with other people in Germany. Sadly, this is largely not possible in the United States because of a combination of regulatory issues and the lack of private financing options. By the way, the portions of this project are for sale for between 200,000 and 450,000 euros

In a traditional baugruppe, the developers of a multi-family apartment building are also its owners and residents. A group of people or families will identify and acquire the land, then design the architecture to fit their needs and then finance the construction of the project through loans that are specially designed for baugruppen. This allows them to bypass the typical 15–20 percent cut of profit that a traditional real estate developer would take, shave out the marketing costs and bypass real estate agents, who would otherwise take fees.

Dullroy was hoping to bring his model to the United States. But I had to explain to him this would be nearly impossible in our country. Both our private financing systems and public regulations conspire against it.

For Newly-Constructed Coliving Developments

For one, if I wanted to buy a parcel of land in the San Francisco Bay Area that had a single-family home on it, raze it and then construct a multi-unit building to communally share and run with other families, this would almost certainly be illegal.

Most of the region is blanketed with single-family zoning, which bans all other types of housing. The United States is unique among industrialized countries in how prolifically it uses single-family zoning, according to Virginia Tech urban planning professor Sonia Hirt, who just published a comparative history called “Zoned in the USA.” By the 1920s, single-family districts covered nearly 50 percent of the land in a typical U.S. city, which gives post-war American cities their unusual decentralized, sprawling and low-density form compared to European or Asian cities. The U.S. just doesn’t have the same level of multi-family housing inventory as other European countries.

Today, single-family zoning has enormous consequences for affordability and equity as the country has re-urbanized over the past three decades. When inner-ring suburbs artificially hold the supply of their housing stock down through single-family zoning, this puts upward pricing pressure on both the central urban housing stock, causing displacement of low-income communities, and then on the exurban periphery, which is the source of a region’s most naturally affordable housing because of its lower land costs.

Here’s a nerdy chart if you need one:

A chart showing Metropolitan Sprawl from suburban downzoning

It’s from another entire book about zoning by Dartmouth economics professor William Fischel, who has spent his entire career as both a researcher and practitioner on land-use issues.

When you hold down density in the suburbs, you’ll see:
Displacement in the urban core (Check.)
Mega-commutes from the periphery (Check.)
Regional outmigration as employees either choose to leave or as employers outsource jobs that they can’t afford to pay high enough wages to match the cost of living (Check.)

However, just blindly upzoning neighborhoods isn’t the answer either. If you upzone or raise height limits on this hypothetical parcel of land, its financial value will rise to reflect its new higher capacity for more units and it will become more expensive to acquire. Much of the extra value just gets priced into the cost of the land.

This is why cities like New York and San Francisco ask for an inclusionary requirement that forces real estate developers to set aside a certain percentage of units or capital for lower or middle-income residents when they upzone or permit new development. Because federal and state support has all but disappeared for urban affordable housing over the last generation, inclusionary is one of the very last policy tools in the box for subsidizing lower-income housing.

Then if you wanted to demolish the property, that would likely cost a few hundred thousand dollars for a single-family home. Then if you wanted to build new units on top of that, construction runs $300 per square foot at the very lowest in the San Francisco Bay Area right now. For a 1,600-square foot unit, that would be close to $500,000 per unit in construction costs.

Add it all up, and it’s prohibitively expensive. This is why most new real estate projects — coliving or not — come out at a premium to pre-existing housing. It’s because you have to acquire the land at market-rate and put in the capital for either renovation or construction.

Given all of these risks and complexities in the American market, very few private individuals would want to take the entitlement or permitting risk and wait out the typical three to four years it takes to construct new residential properties in San Francisco. Remarkably, a group of seniors and babyboomers put together their own 19-unit co-housing community in Mountain View, where Google is headquartered. But this project took at least 12 years from idea to completion.

At the same time, it’s also not entirely the government’s fault either. On the private financing side, there are risk premiums associated with communal living. Unlike in certain continental European markets, there aren’t really standard out-of-the-box financing products for communal living. Tenancies-in-common exist in San Francisco, but these legal arrangements weren’t really created in the spirit of communal living. They became popular as a way to circumvent condo conversion laws, which in turn were put in place to dis-incentivize landlords from cannibalizing the city’s rent-controlled housing stock.

For real estate developers experimenting with coliving concepts, their lenders typically want 0.25–0.5% extra in borrowing costs because communal living is perceived as a risky, unproven product relative to conventional studio or 1-bedroom apartments. In many cases, that extra risk premium spread over an eight- or even nine-figure real estate project makes it financially unfeasible altogether.

This is what happened to a project in San Francisco last year, when Build Inc. wanted to move forward group housing concept on Harrison St.

At the time, group housing was effectively exempt from certain affordable housing requirements, which raised concerns that this would become a loophole that developers would use to sidestep affordability requirements when constructing market-rate micro-unit buildings. So some of the city’s supervisors backed off from the issue, a decision that was totally understandable from a political perspective. But the combination of those affordability requirements along with the financing premium from private lenders ask for effectively killed the project as a coliving one. Today, this project is opening as a more standard 1-bedroom and studio rental building with 136 units instead of a coliving space with 235 suites and shared common areas.

The private and public sector are unsurprisingly demanding two entirely different, contradictory outcomes. The private financing side wants to see that consumers are willing to pay a premium to cover the risk of forwarding a new, untested concept in order to scale it.

But the public side wants to see a product that is socioeconomically inclusive, politically defensible and that won’t crowd out construction of family housing in urban areas in a time of increased anxiety about affordability and wealth inequality.

Adaptive Re-Use of Existing Real Estate

What about existing houses and real estate?

There are at least four to five dozen known communal houses — operating in existing Victorians and warehouses — across the San Francisco Bay Area. Most are operating on a breakeven or not-for-profit basis (And honestly, we like people forming their own intentional communities according to whatever their values are.)

Many of them get close to or below market-rate. Sometimes this is because their lease is older and behind the market. Other houses use short-term rentals when residents are away to subsidize the cost for longer-term members like The Embassy Network.

Some houses are charitably subsidized. One new one, The Growlery, is for artists and its below-market-rates are subsidized by the house’s owner, who is a math teacher.

Others stick bunkbeds in rooms, and do either aggressive overcrowding or subdividing. Overcrowding is not a new phenomenon; lower-income residents of high-land value cities have long resorted to overcrowding to keep up with the cost of housing.

But what’s interesting (and disconcerting for some) is that in this real estate cycle, overcrowding is spreading to higher-income levels and is being re-packaged as something attractive to do. (We have a strong perspective at Roam Coliving that we prefer a model with bedrooms and private bathrooms, although 1 or 2 community members have actually asked for bunkbeds.)

A photo of the rooms in Roam Ubud
Our perspective is that we’d like to provide coliving at a high quality level with private bedrooms and private bathrooms

Who bears the risk?

The last question you need to ask around coliving is about risk.

Leases or purchases of larger buildings and living spaces require bigger security deposits or down payments. Not only that, monthly payments are much higher than a standard apartment rental. Someone has to manage that.

Who handles the risk? A master tenant? Multiple tenants? Does a coliving provider or company take on the risk themselves? Or do they have a management fee structure where the property owner bears the risk?

On top of that, there is a ton of community and property management work involved to make sure that people get along and support each other and that there aren’t rooms left vacant. Some co-ops and self-organized, coliving spaces have complex governance systems for how decisions are made. Countless hours of unpaid labor and energy go into this.

Venture-backed or for-profit companies in this space either take on the risk of managing or operating the space themselves or have a fee structure where the property owner pays them for operating the space. They essentially charge a premium for bearing the risk and in return, give residents flexibility instead of requiring a one-year lease. That’s partly why their offerings can come out at a premium to local neighborhood prices.

Even in the German baugruppen model, when people come together to finance, design and build their own multi-family building, they are all liable for each other’s payments until the building is completed, Dullroy told me. Only when the building is finished does it transition to a more condo-like model, where you are responsible for and can sell your individual portion of the building.

So let’s throw the question back to you.

In truly desirable cities and destinations, real estate markets are fairly efficient. So like any individual decision you’d make around where to live, coliving also involves the exact same trade-offs around location, price, quality and other amenities — just multiplied by a dozen or 50 people.

The question is — if the idea of living and collaborating with a dozen or more people in a single building or house is appealing to you — what’s the balance of quality, price, location, flexibility and risk that’s right for you?

And between our spaces in Bali, Indonesia, Miami and Madrid, how can we help you get there?

Make this life a wonderful adventure.

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