This is Part 7 of a multipart series, please see past posts for context – Part 1, 2, 3, 4, 5 and 6. Visit JharrisPHD.com for all past articles, biographical information, and photography portfolio.

Roommates Rule in Many Rental Housing Markets

Household formation and household composition can be a complicated business. There are so-called “traditional” households with two married adults and a varying number of minor children and then there is the fairly easy to define “single” adult household. The more complex situations are where two or more adults share a living unit but are not legally married; this could be the common situation of an unmarried but otherwise romantically paired couple or it could be the complex arrangement known as “roommates.” Long before Uber, AirBnB, or even the now popular “co-working” office, roommates may have been the earliest human rendition of the “sharing economy.” Roommates typically share rental housing units for the purpose of economy of scale, cost savings, and to have a sense of home-life community. Zillow released a major study in 2017 and found that the share of US adults living as roommates reached 30.0% in 2017, up from 22.1% in 2000. Not surprisingly the rate is higher in high cost markets like NYC, 40.0% in ’17 up from 32.7% in ’00; LA 45.5% up from 37.4%; and Miami 41.0% up from 30.1%. It has also grown in markets with larger shares of younger adults and more transient job bases like Orlando, 35% up from 22.8%.

Demographic Shifts Fuel the Increase in Roommate Households

It is simplistic to equate the rising share of adult roommate households to pure economic factors such as rising rental costs and stagnant wage growth; however, these forces do of course motivate the trend. The largest factor is a shift in forces that drive household formation; or put simply, when Americans choose to “settle down”. Census data illustrates the point very well with a comparison of the statistics on the population of 30-year olds in the year 1975 versus 2015. In 1975, 99% of 30-yr olds were not enrolled in school, by ’15 that fell to 92%; in ’75, 90% were living on their own, by ’15 only 70%; in ’75, 89% had been or were married, by ’15 only 57%; and in ’75, 76% were living with a child, by ’15 just 47%. Summing these for factors together, in 1975, 71% of 30-yr olds met all four criteria, by ’15 just 32%. Not surprisingly, 56% of 30-yr olds in ’75 were homeowners, by ’15 just 33%. Thus, it is easy to see why so many more Americans are renters in this decade than 40 years ago, having adult roommates for longer periods of time is just the logical conclusion. Given that marriage and child birth keep having at older ages on average, this adult roommate phenomena is only likely to accelerate in the 2020s. Further, as discussed in this prior blog post, the changing nature of the workforce has led to shorter stays with employers and more independent contractor relationships; a net result of these forces is a growing proportion of the workforce willing to move for work, even on a short-term basis. These mobile workers are more likely to seek a roommate situation to reduce costs, maximize term flexibility, and even counteract the loneliness of moving to a new city as a single adult.

Co-Living is the In-Demand Housing Solution

Historically, roommate arrangements are informal agreements between the parties who then sign a jointly liable lease with the landlord by essentially presenting as a single contracting entity; partially fueled by fair housing laws, the landlord gives no distinction to married or related co-habitants versus roommates sharing a space with no further relationship. The result is the that the renters share a consumer surplus in the form of cost savings compared with renting two individual units; in exchange, the renters bare the risk of each other’s default and must co-arrange furnishings and utilities. For many, roommate arrangements can be nightmares, especially if one defaults and moves out ahead of lease termination. Enter the demand for “co-living”, a rental solution where the landlord individually contracts with each person based on their risk profile and desired lease term; further additional services such as furnishings and utilities are often bundled so that the occupant is getting a simple, all-inclusive living solution. Here, the landlord captures additional rent premia for offering the flexible lease contracts and bundled services; essentially getting higher rents per square foot in exchange for more intensive management and services. Overall, the multifamily industry has been slow to embrace and change their offerings in response to changing demand.

Co-Living Models Can Work Nationwide

Multiple startups, including WeWork via its WeLive platform, have begun offering co-living spaces in cities such as New York, Chicago, and San Francisco where demand (and rental rates) are obviously very high. As the Zillow study and Census statistics on roommates indicate, the need is nationwide and likely to grow for years to come. Further, it has already existed in an isolated format for college students, specifically in the purpose-build, privately operated student housing market. These properties have offered fully-furnished, utilities included, individual leased units to students for decades; they even take care of the roommate matching problem internally. Today, technology can enable the delivery of services and matching of roommates even easier than before. What is needed is property management firms and multifamily owners to embrace the concept and market it. The upside is easy to see in the form of higher overall rents, lower vacancies, and potentially new revenues streams from ancillary services. The downside is higher management and operating costs and potentially less predictable cashflows due to more frequent turnovers. On net, if properly implemented, these strategies could easily lead to higher net operating incomes and thus valuations.

Conclusion

The real estate industry has been slow to adopt to changing needs of users given demographics and technological trends. The multifamily industry is perhaps the least innovative on a relative basis. The office market is begrudgingly embracing the realities of co-working, multifamily needs to do similarly with co-living. The current trend of building apartment communities largely comprised of one bedroom and efficiency units, or even “micro” units, to solve the demographic and affordability equation may be short-sighted. Co-living, which can embrace larger 2, 3, and even 4-bedroom units, can more flexibly adapt to the needs of families and changes in future demographics. Flexibility is key for all landlords, technology is the enabler, better long-term profitability and valuation will be the result.