Mis-Adventures in Co-Living

99D Classic

This is a re-post from the old 99D site. The original was published February 8, 2018.

Bloomberg covered a rental and co-living boom in China as US and Chinese investors pour huge sums into new tech-forward managed rental companies. (Link)

The initiative to encourage renting homes is spurring some of the most important policy changes in private property ownership since 1988. It’s also creating opportunity for half a dozen companies, including Ziroom, You+ and Mofang Apartment. With already about 1.2 million tenants using Ziroom alone across nine cities in China, the startups are becoming the new gate keepers of social credit: tapping data and technology to determine rent prices, screen tenants and generate uncannily detailed profiles of their hobbies and habits.

This strikes at two trends I’ve long been interested in: surveillant alternatives to traditional credit scoring and co-living. I wrote about the former recently. (Link) Now it’s time to dive into the latter. Quickly, co-living, often referred to as “WeWork for housing,” is the general area of alternative real estate where strangers live in shared apartments with communal resources. I really believe in co-living and want it to succeed.

The combination of delayed marriage, financial uncertainty, and inequality are causing young people to put off buying homes longer and longer. (Link) As a result, cohabitation (unmarried couples living together) is on the rise. (Link) But this leaves a hole in the market for single people. Yes, there are a million and a half rental and roommate marketplaces, but the underlying asset (the apartments) are still generally designed for couples. Supply is staying the same even as demand is changing. We’re shoving a square peg in a round apartment-sized hole.

The continued housing crisis in American cities should prompt us to rethink housing altogether. Obviously we need more units on the market to lower prices (it’s Econ 101, despite what the NIMBYites would have you believe). The difficulty of new construction and the high proportion of single family homes left over from the post-war housing boom:

The reality is that most of the housing stock and most of the land area of America’s metros is made up of relatively low-density suburban homes. And a great deal of it is essentially choked off from any future growth, locked in by outmoded and exclusionary land-use regulations. The end result is that most growth today takes place through sprawl. (Link)

Instead of just making smaller or crappier versions of existing housing (smaller single family units and homes), we need to imagine wholly new possibilities/models for affordable housing. That is, rather than maintaining the same relationship between people and stuff (renters to kitchens, example), which sets an upper limit on price and square footage efficiency, we can invent a new type of housing that is built for affordability and single people.

I take inspiration from “reverse innovation,” which finds that affordable solutions are not just worse versions of their more expensive counterparts. This is a mental trap that is easy to fall into when exporting products to the developed world (or downmarket). The downmarket version of a wedding cake isn’t a smaller wedding cake; it’s a cupcake.

As Winter and Govindarajan put it, you need to “[cast] off preconceived solutions before you set down to define problems [to] help your company avoid the first trap—and spot opportunities outside its existing product portfolio. Consider the problem of irrigating farms in emerging markets. Farmers will argue for the expansion of the power grid so that they can use electricity to run water pumps and irrigate fields. However, farmers need water, not electricity, and the real requirement is getting water to crops—not power to pumps. If they isolate the problem, engineers may find that creating ponds near fields or using solar-powered pumps is more cost-effective and environmentally appropriate than expanding the power grid.”

We need to take a similar approach to urban housing. If you could build develop new units that are purpose-built as affordable housing with an emphasis on shared communal space, you could dramatically increase the efficiency of urban housing, both in terms of people:square footage and dollars spent. If you increase the ratio of people to real estate resources, you can optimize for utilization while controlling for price. Not everyone needs their own kitchen.

The problem is, most of the early co-living entrants in the US are starting at the top of the market. They promise turnkey luxury real estate replete with features and amenities like house-cleaning, social events, luxury bedding, etc. All that comes at a premium to market-rate apartments, totally defeating the purpose of co-living. I don’t even think it’s good business. The people who can afford to rent an apartment for $1500/month or more have other options. They’re not likely to stay long, leaving companies with empty units with high customer acquisition costs.

Co-living does not solve an acute housing problem for the wealthy. If it solves any problem, it is the difficulty of finding roommates and the problem of modern loneliness. However, co-living introduces renters to potential future roommates and friends, making it easy for people to move out together. (See: other options above). 

Sure, the rentals may be more affordable than they appear when you factor in all those amenities and luxuries, but that’s not what matters here. The people who really, desperately need housing can’t afford co-living as presently constituted. They don’t want or need the amenities that these companies use to attract renters and which, in turn, make the leases more expensive. The thing to watch is whether or not these companies will use their position at the top of the market to establish some traction and prove product viability before pivoting downmarket. Smartphones started as luxury items for the rich and now they’re staples for everyone, for example.

To return to Winter and Govindarajan and reverse innovation, co-living is focused on providing electricity, not on providing water. The problem to solve is making housing more affordable to those can’t otherwise afford it, not making faux-affordable housing appealing to those who can.

Co-living needs to shift its focus from amenities to affordability and reorient itself around solving a real problem for renters. Until it does, co-living is neither useful nor viable.

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Check Out: Landed, a very cool startup that uses grant/foundation money to subsidize down payments for teachers to help them live within the communities they serve. Obviously it’s relevant to the above.

Avoid: Altered Carbon on Netflix. It’s just derivative Blade Runner fan fic with awful writing that takes gratuitous nudity to the point of discomfort.

Follow: Oversharing, a newsletter from Ali Griswold about the “proverbial sharing economy.” (TinyLetter)

Go: to Philly sometime. I had a great time there and will definitely be back. It’s got a lot of charm. 

Read: here’s what I was thinking about when I wrote this post

Engineering Reverse Innovations - Amos Winter and Vijay Govindarajan, Harvard Business Review

Our research suggests that the problem stems from a failure to grasp the unique economic, social, and technical contexts of emerging markets. At most Western companies, product developers, who spend a lifetime creating offerings for people similar to themselves, lack a visceral understanding of emerging market consumers, whose spending habits, use of technologies, and perceptions of status are very different. Executives have trouble figuring out how to overcome the constraints of emerging markets—or take advantage of the freedoms they offer. Unable to find the way forward, they tend to fall into one or more mental traps that prevent them from successfully developing reverse innovations.

For Health Care Workers, the Worst Commutes in New York City Winnie Hu, New York Times

Affordability has become so bad that we’ve literally marginalized our service workers by pushing them beyond the pale of the communities they serve. Commute times are a pernicious form of inequality. Poor people have less time in each day.

The report, “An Unhealthy Commute,” by the Center for an Urban Future, a research institute, concluded that health care workers endure some of the worst commutes in the city. Many rely on public transit — yet live and work in neighborhoods with limited and unreliable bus and subway service. The median commuting time for health care workers using public transit stands at 51.2 minutes — the longest for any class of private-sector workers — compared with 47.3 minutes citywide, the report said.

Density's Next Frontier: The Suburbs - Richard Florida, CityLab

many urban cores are actually developing and densifying. And lots of housing continues to get built at the suburban periphery. Romem argues that America’s real housing problem—and a big part of the solution to it—lie in closer-in single-family-home neighborhoods that were built up during the great suburban boom of the last century, and that have seen little or no new housing construction since they were initially developed.

California’s housing crisis – it’s even worse than you think - Matt Levin, Mercury News

Half the state’s households struggle to afford the roof over their heads. Homeownership-once a staple of the California dream – is at its lowest rate since World War II. Nearly 70 percent of poor Californians see the majority of their paychecks go immediately to escalating rents.