MARKET WATCH: What’s Happening? Group living, which got its start half a century ago, is back in style thanks to new co-living spaces that promise all the perks of dorm life. While the same Boomers who first popularized group living have played their part in the resurgence, it’s Millennials who are pushing the co-living frenzy to new heights.
Our Take: Overall, the rising popularity of group living may be bad news for a homebuilding industry that is already bracing for long-term demographic headwinds. Now, even over the next several years, co-living may undermine housing’s growth potential.
Are you strapped for cash, new to the city, or just plain lonely? “Co-living” may be for you: A growing number of Americans are embracing life with roommates.
We’re not just talking about four-to-a-bungalow roughing it, either. One Brooklyn co-living space, rented out by Common, features 19 bedrooms spread out among four suites in a 7,300-square-foot building. Each suite comes with its own kitchen and two bathrooms, and tenants share common spaces. Best of all? Rent barely costs more than an average studio apartment in the same neighborhood.
Plenty of companies are capitalizing on this trend—though keep in mind that these represent a budding new industry trying to catch up with a tectonic change in living habits already underway.
The largest tier of players consists of property managers with no real estate ownership—like the aforementioned Common, which plans to expand from 40 bedrooms across the country today to 1,000 bedrooms by the end of 2018. WeWork, which debuted its own co-living operation last year (called “WeLive”), expects to house 34,000 residents across the globe by 2018. These mainstays have been joined by upstarts such as Ollie, OpenDoor, and Hubhaus that all promise to revolutionize how Americans live.
Another tier consists of companies like Property Markets Group (PMG) that both manage and actually own the property. PMG, best known as a conventional real estate developer, plans to build 3,500 U.S. co-living units comprising more than 7,000 bedrooms over the next five years under the “PMGx” banner. The final tier consists of Craigslist-like “marketplaces” that merely bring together potential roommates, including app-based services like Roomi and EasyRoommate.
CO-LIVING 1.0: BOOMERS
If you think it’s mainly Millennials fueling this trend, you’re right. (More on that below.) But it’s not just about Millennials: Boomers are also popularizing co-living in their own right.
Boomer elders are breathing new life into a more formalized version of the communes and co-ops they dabbled with back during the Consciousness Revolution. These “intentional communities” typically lean to the rustic and the pastoral, and promote wholesome values such as egalitarianism, serenity, and self-sufficiency.
The Fellowship for Intentional Community (FIC), a nonprofit that provides support services to these communities, says its U.S. membership (after a “big chill” during the 1980s) surged by 300% from 1990 to 2010. Today, FIC’s directory lists more than 1,000 intentional communities across the country—with FIC executive Laird Schaub putting the unofficial figure even higher, at 4,000 establishments. Credit this sustained popularity to Boomers like Bob Connors who, after decades away, decided to retire to the same communal farm (called, literally, “The Farm”) where he spent his formative years.
CO-LIVING 2.0: MILLENNIALS
The Millennial version of co-living is something else again. It’s a lot less like a chapter out of the Whole Earth Catalog and a lot more like a scene out of Silicon Valley.
Location, location, location. For starters, these spaces are mostly urban, with hubs in population centers like New York, Chicago, and San Francisco. A look at the heat map of U.S. co-living spaces shows that these residences are concentrated on either coast.
Why? Economic necessity is a big driver. Co-living has its greatest appeal in regions where desirability, urban density, and stringent zoning laws combine to make prices unaffordable. It’s no accident that there is significant overlap between co-living regions and the cities where a high share of Millennials live at home.
Because popular co-living hubs tend to be burgeoning urban (and mostly coastal) locations, Millennial co-living has acquired a hipster, blue-zone flavor. Think of the Zuckerberg-esque “hacker houses” that dot the Silicon Valley landscape, providing a home to startup hopefuls, young entrepreneurs, and coding camp attendees.
Aesthetic: fashion-forward and group-oriented. Despite often being cheaper than a comparable apartment, Millennial co-living spaces don’t skimp on furnishings. Many utilize modern design schemes consisting of simple-yet-clean colors and textures, industrial elements, and natural wood.
Open space is key, both when it comes to the actual floor plan (open kitchens and common areas are integral) and the amenities. WeLive Crystal City, for instance, features a courtyard complete with picnic tables, grills, and Christmas lights to encourage residents to relax together.
Take me to your leader. One major element not present in the Boomer version of co-living is an emphasis on rules and authority.
Boomers fled to communes as young adults in part to escape a society they felt was overly oppressive and rules-driven. But Millennials practically beg for these rules: Millennial co-living spaces are run by community managers responsible for maintaining the property, scheduling social events, and even resolving conflicts. These individuals are like a landlord and an RA all in one—with doors always open to assist community residents. (See: “So Happy (Living and Working) Together.”)
Of course, as one might expect, critics cannot resist poking fun at this version of co-living, which they see as a fad soon to pass at best—or yet another sign of Millennial arrested development at worst. Depictions of today’s co-living spaces are dripping with Millennial stereotypes—20-somethings playing vintage board games, building terrariums, and drinking wine. One recent article in The New York Times marvels that, “In the ‘90s, We Had ‘Friends.’ Now They Call It Co-Living.” (Indeed, Xer “friends” lived in separate apartments, while Millennial co-livers live together.)
Other critics complain that co-living puts training wheels on adulthood. After all, Millennials who reside in co-living spaces not only have authority figures on hand to help them if something goes wrong—but they often have staff who will clean and perform other everyday tasks for them. (Some co-living spaces offer complimentary maid services.) How’s that for “adulting”?
DRIVERS
So will this trend simply die out when Millennials finally decide to “grow up”?
Probably not. Co-living doesn’t so much reflect Millennials being slow to reach adulthood as it reflects Millennials redefining adulthood. To be sure, cost comes into play for this cash-strapped generation. But it’s not just that housing is more expensive. Millennials simply don’t attach as much importance to the pride of property ownership and are turned off by the travails of property upkeep. Flexibility is also key: A Millennial moving to a new city may not want to commit to 12 months at an apartment, sight unseen, and risk losing a sizable deposit if things don’t work out. It’s a far less risky proposition to go month-to-month in a co-living space. (And if there’s one thing Millennials hate it’s risk.)
Millennials don’t mind being dependent on others—whether it’s Mom and Dad or a group of strangers. It also doesn’t hurt that Millennials, who have been closely monitored their entire lives and have been raised to be team players, don’t place much importance on personal space and privacy. Most are perfectly happy to live in a micro-apartment or a crowded co-living space as long as there is a nearby gathering place to socialize—whether it’s downstairs in an outdoor common area or a few blocks away in a coffee shop. (See: “Micro-apartments are a Macro Hit.”)
Proximity to the urban core is another Millennial motivator. Many are willing to sacrifice traditional living quarters in exchange for walking (or biking) distance to work and a great urbanscape view. When one considers that Millennials have been known to live on a boat harbored outside the city or in a literal box stationed in a friend’s San Francisco apartment, co-living seems downright luxurious.
As is the case with micro-apartments, tenants, city governments, and landlords all love co-living. Why? It means higher density, more salary earners, more rental income per square foot, more tax revenue, busier stores, fewer cars, and less traffic and parking infrastructure. That’s a lot of wins.
IMPLICATIONS
Today’s co-living frenzy has far-reaching implications for a number of industries. It is generating new demand for remodelers and interior reconstruction firms. It is starting to shift the buyers of appliances and furnishings from persons to groups and firms. It could even help ease the impending U.S. caregiver deficit caused by a wave of retiring Boomers: AARP reports that, in 2010, there were 7.2 potential caregivers for each person over age 80, a ratio that’s poised to shrink to 4:1 by 2030—and to less than 3:1 by 2050.
Co-living also poses a serious challenge to the homebuilding industry, which was already bracing for a long-term slowdown brought on by unfavorable demographics.
The two fundamental population-level drivers of housing demand are fertility and net immigration—and, in each case, the long-term outlook is darkening. Look no further than the ever-more bearish projections made by official forecasters in recent years. Census’ (most recent) 2014 projection shows a steady deceleration in the yearly growth of the U.S. adult population starting in the late 2020s, fueled largely by a decline in expected net immigration. And that was before the U.N. Population Division came in with its 2017 revision, which shows a further decline in expected net immigration.
What’s more, these projections are based on the assumption that the average number of adults per household will stay relatively steady, as it has over the past couple of decades. This is a perilous assumption, for reasons we’ll soon discuss.
Homebuilders cannot fight long-term demographics, which will inexorably turn against them by the late 2020s and beyond. But they can bet on two countertrends that they hope may neutralize (or at least delay) the bad news over the next five or ten years. Hoped-for countertrend #1: Resurgent demand from Millennials who put off starting a family in the decade following the Great Recession. Hoped-for countertrend #2: A Boomer-driven fall in the average number of adults per senior household—a trend that would amp up the senior demand for new housing units.
Countertrend #1: Asking the wrong question. On the first bet, yes, it’s true that Millennials have put off marrying and having children in the wake of the Great Recession—and in so doing continued a trend already well established by Gen Xers.
But this delay alone cannot possibly explain the dramatic Millennial shift toward group living. Census data show that nearly half of young adults (48%) are living with family and friends, up ten percentage points from 2007. In fact, today, more Millennials are living with family and friends than are married or living as a single parent in their own home—a complete reversal from 2007.
If Millennials were simply putting off coupling and starting new homes, this should have led to a rise in young adults living alone—but instead we’ve seen a decline. Likewise, the precipitous drop in Millennial family households, which is much steeper than the decline in young-adult fertility, has also been accompanied by a jump in the share of single Millennial parents (mainly young women) living with parents or friends rather than by themselves.
Bottom line: What’s really suppressing housing demand is not so much the further Millennial delay in family formation, but the growing tendency of Millennials to live in groups no matter what their life situation—married, cohabiting, single with kids, or single without kids.
Consider that, from 2003 to 2016, the number of adults per household headed by 20- to 24-year-olds grew from 1.87 to 1.99—the biggest rise of any age bracket—even though more of these young adults are either unmarried, childless, or both. The number of adults per household headed by 25- to 29-year-olds and 30- to 34-year-olds also grew, though less dramatically.
Would homebuilders benefit if there were a surge in Millennial family formation and baby making? Homeownership would probably get a boost—but the impact on actual housing construction would be surprisingly ambiguous. (After all, the marriage of two singles living alone actually reduces the net demand for housing units.) In any case, it may not matter either way because we’re not yet seeing any evidence of increased Millennial family formation. (See: “U.S. Fertility: Down for the Count.”) In fact, we’re actually seeing the opposite, with young-adult fertility on the decline again after a brief “head fake” in 2014.
To illustrate how much all of this matters, let’s imagine that co-living becomes the new normal for young adults. If adults per housing unit among Americans in their 20s and 30s rises another 3 percentage points (rather than declining 3 percentage points back near the pre-GFC norm), we’re talking about a swing of roughly 2 million homes. Over the next decade, that’s a shortfall of 200,000 units per year—which is about one-fifth the total annual production of new housing units.
Countertrend #2: Pump the brakes. As for the second bet, yes, the large size of Boomer cohorts aging into retirement will put some downward pressure on the average household size. This generation’s fiercely independent mentality (culminating, for example, in more divorces, more vacation homes, and an emphatic aversion to senior care institutions) will no doubt push up the demand for housing.
But even stronger countercurrents are moving in the opposite direction. One critical trend is the recent rise in men’s life expectancy relative to women’s, which is causing a steep reduction in the share of senior women (mostly Silent Generation women age 75+) who are living alone. Another is the new Boomer embrace of extended family, however they choose to define it—either with their own adult children, with peers of their choice via “intentional” co-living, or even with unrelated Millennial roommates.
Indeed, these countercurrents are pushing the average Boomer household size up—from 1.80 adults in 2003 per household headed by 65- to 74-year-olds to 1.83 in 2016—which should limit the good news for the housing industry. (And, thanks to fewer widows among Silent seniors, the household size of households age 75+ has risen even more dramatically.)
In recent years, to be sure, Boomers have single-handedly propped up the demand for new housing units. (See: “The Millennial Housing Wave: For Real?”) But this is strictly by dint of the huge size of these Boomer cohorts, not because of any decline in the average number of adults per senior household.
WHAT THE FUTURE HOLDS FOR HOUSING
The culmination of all these trends is that the average U.S. household size, for all age brackets, has recently started to rise again after falling for decades. After bottoming out at 1.91 adults per household in 2001 and 2003, the average number of adults per household has risen to 1.94 in 2016, an uptick of 1.6 percent. This is not a trivial increase. It constitutes a 1.6 percent reduction in housing unit demand from the same number of adults, which equates to roughly 2 million fewer homes.
Again, keep in mind that the population projections mentioned earlier assume that the average household size will stay constant. If household size actually rises (as we’re beginning to see), it will cause a much earlier bearish outlook for housing.
The message? Co-living looks like a pretty durable social trend in which all generations are participating for their own reasons. If it is here to stay, then the housing sector’s near-term future—recession or no—is not nearly cheerful as many of the industry’s boosters would have us believe.
