Cohabitation assets, like all housing, have been hit hard during the pandemic. Prior to March, cohabitation properties were growing in popularity, offering a 30% discount on gross housing costs per rental, while operators generated an NOI 15% higher than the industry average due to increased density. Coliving will only see an increase in demand after the pandemic, as tenants seek more affordable housing options, according to a new asset class report from Cushman & Wakefield.
However, the asset class must first survive the pandemic. Like the general apartment market, cohabitation has seen a drop in rents and vacancies as well as rent collections. The Cushman & Wakefield report shows that savings from cohabitation properties fell from 30% to 23.2% as a result, with average March-August cohabitation rents dropping 9.4%. Although significant, the decline remains lower than that of comparable studios, which saw their rents fall by 11.7%. Overall, the impact on co-living was less severe for the co-living properties than for the multi-family.
While rental rates have fallen, rent collection has actually held up better than market-priced apartments. During the pandemic, apartment owners reported a decrease in rent collections from 4.5% to 5.2%, but in cohabitation properties, defaults remained below 4% during the pandemic. Multi-family category A assets experienced even higher defaults, exceeding 8%.
This underscores the strength of the target audience of middle-income condominium properties, according to the Cushman report. During the pandemic, 73% of middle-income adults stayed up to date on paying their bills, while only 46% of low-income adults were able to make the same claim. This trend illustrates the potential resilience of this booming asset class, even in times of decline.
While the profitability of cohabitation properties is a plus, there are some pandemic challenges for the asset class, particularly related to remote working. However, coliving operators are already pivoting to meet this new need in properties. According to Cushman & Wakefield, several properties are reinventing common spaces into business centers and on-site offices. On the flip side, some operators said the majority of residents plan to return to work full-time or part-time in the future. This is likely due to the fact that the majority of residents are at the start of their careers or in a new position, which suggests less flexibility to work from home than higher level positions.
The lending community also remained bullish on the asset class. Although some underwriting standards have changed, they still fund new construction contracts. For example, ELK Développement recently secured $ 14.1 million to build an 86 unit cohabitation property in a Hollywood opportunity area. Shahin Yazdi, principal and managing director of George Smith Partners, secured the funding and said lenders continue to review cohabitation agreements despite the changing market.
“People don’t know what the future holds in this space; however, there are still lenders interested in the asset class with the right momentum in play, ”he says.