Why some renters are turning to co-living startups
For co-living company SoulRooms, an algorithm helps match roommates based on compatible personality traits to avoid conflict over things like dishes and tolerance for noise (Illustration by Leeandra Cianci)
When Gaurav Madani graduated from the MBA program at York University’s Schulich School of Business in 2019, he, like many young professionals, struggled to find an affordable place to rent in downtown Toronto. “I was paying $800 a month to sublet a room near Schulich,” he says. “Suddenly, I was facing the prospect of paying over $2,000 for a one bedroom in the core.”
Instead of packing up and moving somewhere cheaper, Madani teamed up with his classmate Arnab Dastidar to found a co-living business. Called SoulRooms, the company establishes management contracts with the landlords of large homes and condos in desirable Toronto neighbourhoods—the leafy Junction or the lively, restaurant-filled Liberty Village—and lease them by the bedroom. (He and Dastidar were among the first tenants.) Sleeping spaces are private but kitchens and living areas are shared; an algorithm helps match roommates based on compatible personality traits to avoid conflict over things like dishes and tolerance for noise. Monthly fees start at $1,290 and average $1,490, which covers utilities, Wi-Fi and common cleaning supplies.
Other than the algorithm and the Wi-Fi, co-living isn’t new. You can find descriptions of rooming houses in most Charles Dickens novels. Enterprises such as SoulRooms are different because they appeal to young, high-income professionals such as tech entrepreneurs and CPAs. Their apartments are fitted with sleek Scandinavian-style furnishings and include perks like group yoga classes and mixer nights. “This is co-living 2.0,” says Madani.
Although the market is nascent—as of 2019, there were a scant 3,000 co-living beds in the U.S., according to property managers Cushman & Wakefield—that number is expected to triple over the next two years as millennials continue to struggle to find affordable housing. Investors are lining up to cash in, with global funding for co-living ventures reaching US$2.2 billion in 2018, up from just US$200 million the previous year.
One of America’s biggest co-living brands, Common, accounts for $65 million of that venture funding. Some of it will be funnelled into a new project in Ottawa called Common Zibi, containing 252 beds spread over 60 co-living apartments in a new, 24-storey tower being developed by Toronto’s Dream Ltd. SoulRooms, meanwhile, is backed by a large Canadian real estate firm called Zahra Properties, which is helping the startup jump from 85 to 2,000 beds across the Greater Toronto Area over the next year or two.
Despite current growth, big questions surround co-living’s long-term viability. Is this a smart solution to a long-term housing crunch? A reflection of millennials’ unique willingness to share? Or simply a temporary fix that young people will abandon as soon as they can afford to live on their own?
For tenants, the draw is clear. Sure, they have to deal with roommates, but, according to Cushman & Wakefield, they are saving 20 per cent in rental expenses on average compared to living alone. They are also forgoing the headaches of another increasingly common way to find housing: co-buying with friends.
“Co-buying is an option,” says Stefanie Ricchio, a CPA and business consultant. “But I really worry that people don’t think through the many possible complications, including how to structure a shared mortgage, deal with shared expenses, plan in case one person dies. What if someone has bad credit and defaults?”
On the business side, opinions about the financial incentive for startups vary. Renting out a home or an apartment by the room can garner 30 per cent more revenue compared to renting to a single tenant, according to American real estate company JLL. That added margin helps explain how a company such as SoulRooms operates: They pay fair market value for their leases and charge no management fees to the property owners but pocket the surplus from renting room-by-room, minus expenses, of course.
But Zev Mandelbaum, president and CEO of Toronto’s Altree Developments, says he is unlikely to invest in a co-living project. “They tend to be very heavy in terms of management costs,” he says, all without guaranteeing customer satisfaction—one lousy roommate could ruin the experience for the whole house, leaving the company to mediate. “There’s a lot of maintenance required when a bunch of strangers are living together and not necessarily taking care of the property. The costs of active management make profits difficult to achieve. Over time, if management is not kept up to par, the assets will likely rapidly deteriorate and the operations will become like college dorms.”
Consider the bumps in the road faced by co-living’s older, more established cousin: co-working. Until 2018, WeWork’s network of communal offices were estimated to be worth more than US$16 billion and had raised more than US$4 billion in venture funding. But those investments dried up when the company revealed it was losing US$2 billion a year, trapped in costly lease agreements it couldn’t break.
Anil Khera is the co-founder of a co-living startup called Node, with properties in the U.K., the U.S. and one slated to open in Kitchener, Ont., in 2021. He admits that his properties are “a little bit more operationally intensive,” but says, “the difference isn’t huge between us and a conventional landlord.” The difference might also be compensated for by the higher capitalization rates of co-living.
What makes Khera optimistic that co-living will be viable long-term is that his tenants are well-established, and care for where they live. “The average age of someone living at Node is 28, and their average income is $70,000,” says Khera. “We have a lot of professionals, including a Deloitte partner in her 30s who lived in our Dublin location because it was close to her office. There’s a misconception that co-living is like dorm living. That’s not necessarily the case.”
Khera doesn’t see a future where co-living falls apart. “People don’t want to spend upwards of 40 per cent of their money on high rent unless they are getting an all-inclusive lifestyle,” he says. “Our people are smart people who expect a lot, and are getting a lot. I think that in order to be competitive, traditional landlords will have to start offering a similar level of service to us—cleaning services, Wi-Fi, nice designs—if they want to entice tenants to move away from co-living.”
SHARING ECONOMY
From Zipcar to Airbnb, the what’s-mine-is-yours economy offers a wide range of shared services from storage rental to paid use of private washrooms.