Small Sites, Shared Apartments
Some developers are making the most out of small multifamily sites by building coliving, and institutional investors are beginning to take note.
Thesis Driven dives deep into emerging themes and real estate operating models by featuring a handful of operators executing on each theme. The deep dives will give an investor enough context to understand the trend as well as opportunities for personal introductions to relevant GPs actively executing on opportunities. This week’s letter is on the development of small sites as coliving.
Strong urban rent growth over the past two years has brought coliving back from its near-death experience during the peak of the pandemic. Since the beginning of 2021, most operators—including my own Common—have seen stabilized occupancy rates in the mid-90s and meaningful recovery in rents as tenants seek out coliving as a more affordable option. Coliving—in which tenants typically rent a private room within a shared apartment—builds upon the organic roommate arrangements common in major cities by designing and operating apartments with sharing in mind.
To many, the progress of the coliving sector has been measured by press releases showing big, shiny towers under development. Simon Baron’s ALTA+ was an early example, with PMG’s X Social and Starcity’s ill-fated San Jose project following shortly thereafter. Big buildings draw headlines and institutional capital, and the most well-known operators have built a reputation designing and managing large coliving assets with hundreds of units each.
However, a number of GPs have decided to buck the trend by taking on smaller sites with fewer than 50 bedrooms per project. Cohabs is perhaps the most notable example of the small-site phenomenon with 1,400 bedrooms across 80 properties. And they recently received a commitment of $450 million from a group of investors including Ivanhoé Cambridge, adding credibility to the small-site model.
Today we’ll speak with a number of developers tackling small coliving sites whether as developers hiring third-party management or vertically-integrated owner-operators like Cohabs. In all, these small sites represent a significant opportunity to generate strong cash flow but present some major challenges, most notably with lenders and operating expenses.
This letter will review some of the financial metrics small site developers are targeting, what they look for in target sites, and the common challenges they face along the way.