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August 8, 2019

Business Model Canvas – CoLiving

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#Housing What is Coliving?

Quick Pitch – Coliving is a more communal way of living, where costs and space are shared in such a way that residents feel an enhanced quality of life and a greater sense of community. It is part design and part financial, as shared spaces help drive down costs, but only if the economic model of each co-living can help pass-through savings enough to keep rent affordable.

The human need for community and affiliation remains as important as ever. Because of industrialization, we have individualized our housing options. Unfortunately, we have forgotten about what it was to live in a neighborhood, a village, a street where people know you by your name and look after each other.

Co-Liv / Think Tank

How does coliving make money?

Co-living companies generally sign long-term leases on properties, redesign the building or space for a more communal way of living, which generally includes:

  • smaller room sizes
  • large living rooms and kitchens where all residents cook and relax together
  • amenities and events that create some participation among residents, such as theater spaces or weekly social events

While Phase 1 of co-living has seen glossy and glamourous construction of several large-scale commercial towers geared towards Millennials, it is important to remember that coliving consumers are generally price-sensitive and in many cases are looking at co-living as an alternative to roommates or shady rentals because they can’t get on the property ladder:

Recent research suggests a 25-year-old in London will now have to save until they are 54 in order to get onto the property ladder.

Are Co-Living Developments the Solution to Lifelong Renting?

At a micro level, each co-living property will make money on the spread between their monthly lease + operating costs, and how much they generate in rental income for residents. This can be a function of occupancy as well but for many of the premiere brands (ie Common) in the co-living space, they have thousands of people on the waitlists and are actually building new properties just to meet the demand.

At the macro level, large property investment firms are putting hundreds of $millions into co-living (about $1bn USD has been secured in 2019) because of their ability to increase yields on their property portfolios. Depending on where these investors bought their property and what their strategy is, it appears that they are looking to increase either the underlying value of the property or marginally improve monthly cashflow, but co-living is a more seasonal and low-margin business than traditional renting:

Low-margin business that is operationally complex – Coliving companies are essentially hotels with all the ancillary expenses, customer expectations and complexity associated with hotel operations. Operating costs are high — often much higher than expected — and we’re concerned that operators may not be accurately predicting this complexity when they forecast unit profitability.

Coliving – a primer for real-estate investors

Overall, money can be made by coliving operators with 100% occupancy rates, low operating costs, and a scalable brand across many cities in order to keep customer acquisition costs down, but otherwise, many companies will lose money on a monthly basis against their lease and operating costs.

Community-Centric or Commercial-Partner Strategy?

Coliving is fundamentally about community, but in the coliving market, it ultimately depends on whether or not the brand is a large commercial brand or a small niche brand. Large brands will tend to adopt a more commercial-partner strategy, whereas smaller brands will tend to be more community-centric and focus more on the individual experience of their residents.

Large Scale Operators:

Niche Brands:

In the case where large players are looking for scale and building their strategy around commercial partners, they will operate more like REITs and focus on the continual acquisition and turnkey management of properties around the world.

Smaller more niche players will focus on creating experiences and spaces for their residents that make their brands stand out and create a strong loyalty to the brand itself. A lot of the community-centric strategies for each niche brand will depend on geography and culture, as many of the European brands will cater more towards a European customer, while American brands will focus on more of a North American way of life.

Fundraising and Valuation

Many of the smallest coliving operators (less than 5 residences) will either bootstrap or take out bank loans to get their brand off the group.

Many mid-sized brands with a lot of traction will raise Series A and above from venture capitalists (VCs). US-based Tripalink just raised $10mn at a $100mn valuation for example.

As discussed above, larger operators with a strong track record in the space are raising hundreds of $millions from private equity and real-estate funds. Quarters, for example, recently raised $300mn USD from the W5 family wealth to fund their US expansion.

“This is truly a consolidated market for investment grade product,” he says. “Investors are beginning to see coliving as a tested niche subsector, comparable to student housing.”

Why Investors are signing up for coliving

Much of the amount raised and valuation will depend on the brand and their target market. Some brands like Quarters are going for mass-market, global expansion. Some brands like Tripalink are targeting students and young professionals. And still others are targeting the multi-family segment and trying to build a niche there.

Co-living Business Model Canvas

A business model is defined as:

“the rationale of how an organization creates, delivers and captures value.”

Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.

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Value Proposition

Shared living with a greater sense of community and access to large communal spaces:

  • High-quality living spaces without the need to buy a home
  • Meet-like minded people and share costs on living expenses
  • Maintain flexibility, move cities easily
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