Housing USA: Co-Living – An Untapped Avenue for LIHTC?

6 min read

In recent years, the concept of “co-living”—wherein some or all parts of a unit and its common areas are shared by multiple renters—has garnered attention from developers. The most common form, dating back decades, has been college dorms, which are often located on-campus and owned by universities. But some such projects are being built by the private development community, and the model is worth exploring as a path to affordability in high-demand markets. Low Income Housing Tax Credits could be a tool to facilitate that.

Many balk at the co-living model because of the perceived lack of amenities and privacy. But this shouldn’t be a reason to reject legalizing and promoting the option. College students, for one, are accustomed to these arrangements, and are among the groups most impacted by the affordable housing shortage. Research by the Department of Housing and Urban Development found that more than 56,000 students reported being homeless “and that figure almost certainly underestimates the true total.” On-campus housing is often expensive, with the average cost of room and board at $11,950 for state schools and $13,620 at private schools (or $995.83 and $1,135 per month, respectively). Co-living dorms that are built and managed by the private sector off-campus, by contrast, will likely be cheaper for lower-income students. In 2017, for example, I reported for Forbes on an Orlando-based co-living project that was being built by Ustler Group near the University of Central Florida. The project started off renting dorm beds for $690 per month.

Students aside, co-living was once a common form of affordable housing for many demographics, via the single-room occupancies (SRO) found in American cities. But they became less common throughout the mid-20th-century, thanks to a combo of reduced demand and regulators who deemed the format unsanitary. As HUD’s EDGE magazine reported, in markets nationwide, “regulations dictating minimum square footages for living space and the number of unrelated individuals allowed to live under one roof reshaped the affordable housing industry and made co-living essentially illegal.”

SROs are still outlawed in most places, but co-living development—which is often branded differently than SROs—is making a rebound. Despite a downturn last year, as concern over Coronavirus cooled enthusiasm for shared living, some firms are specializing in this niche and seeing major projects break ground. Common, a co-living brand that already operates in 11 U.S. cities, is acquiring other co-living companies and appears prepped to be the dominant market player. But other firms are building individual co-living projects in various U.S. cities, ranging from the aforementioned Orlando dorms; to the 460-unit Society Atlanta project; to a 300-unit project in Midtown Detroit that will include hotel and retail space. The project’s co-living aspect helped it secure funding, presumably due to the increased cash flows tied to the greater tenancy numbers from this format.

Prior to the pandemic, a firm called Starcity was planning the world’s largest co-living property in San Jose, with rents between $800 and $2,500 per month. The firm had an expansive presence in the Bay Area, targeting tech workers and other professionals who couldn’t afford the area’s high rents. That company has since been acquired by Common, and the status of the San Jose project is unclear.

Cushman & Wakefield sees solid long-term prospects for this format, noting that “co-living assets continued to maintain a 23.2 percent rent per square foot (PSF) premium over the average of Class A studio rents PSF in comparable markets as of Q3 2020.”

That suggests co-living will remain relevant, and take a larger role in urban real estate – and not just for college students. Supporters argue that, if implemented at scale, co-living can put a dent in the lack of affordable housing available today, as well as facilitate other benefits.

“Not only does it solve the cost and spatial demands associated with housing, but it also addresses the intimate aspects of human connection that have been lost. Loneliness rates have doubled in the past ten years, and rent costs have gone up much more than that,” argues Christine McDannell, who helped establish a startup aimed at improving co-living access.

Some of these projects are targeted at urban professionals, but there’s no inherent reason why they couldn’t be built as affordable housing, and receive LIHTC allocation. HUD has touted co-living’s advantages for enhancing affordability. Beyond apartments structured as co-living facilities, the EDGE magazine article notes, there are “homesharing” arrangements, which facilitate connection between roommates with lower incomes. Sixty of these existed nationwide as of 2019, including one at the University of Washington, which allowed cost-burdened students to seek out rooms with local residents.

One of these affordable co-living facilities is found in Houston. Harmony House, in operation since 1994, was founded by a church organization with the goal of providing housing to homeless men looking for work. The facility has over 100 beds and in-house programs for combating substance abuse and is currently expanding. According to HUD, “Residents can pay rent daily, weekly or monthly, with typical costs set at $13 per day, $65 per week and $235 per month. All rental payments go toward building upkeep and general operations, keeping Harmony House a self-sustainable housing option for many.” HUD observes that Houston’s permissive zoning makes this option viable.

The economic dynamic at play with these co-living arrangements—whether they’re for students, young professionals or the homeless—is one of efficiency. By fitting more units in a building, and more people in a unit or shared space, it enables more tenants to split a project’s fixed costs. That’s why co-living’s a cheaper option.

Which is why the format should be on the radar for housing financing agencies that are allocating tax credits for affordable housing. To date, there do not appear to be any co-living projects financed with LIHTC. This may be due to the temporary nature of tenancy in these projects; data cited by the World Economic Forum finds that residents typically spend 58 days in co-living arrangements. This would defy the mission of LIHTC participants to underwrite housing that provides stable long-term units; and would make projects vulnerable to complaints about transience, which has been a long-time criticism of SROs.

As co-living becomes more commonplace, though, it deserves more consideration from policymakers and affordable housing developers. It can not only boost overall housing supply, but can help the LIHTC subsidy stretch further, providing accommodation for more students and workers across the socio-economic range.