This week Aaron Norris is joined Sterling Jawitz of Common. He is head of the real estate strategic partnerships at Common where he is in charge of growing and maintaining relationships with large-scale real estate developers, owners, and investors in all target markets. As a first employee of Common, Sterling spent more than a year as head of real estate acquisitions, focusing on real estate acquisition, strategy, project-specific analysis. Prior to Common, he focused on real estate development in New York City, specializing in high density co-living spaces that provide a social and professional development services and amenities. He also worked in real estate capital markets, primarily with institutional investors looking to deploy equity and debt.
Aaron used Common as one of his examples of some of the ways housing is changing and becoming a lot more acceptable. Aaron asked Sterling how he got started in real estate, specifically in the New York market. Sterling said he has always found himself to have an affinity towards real estate. His grandfather was a real estate developer in New York City, and his father was as well. Several people in his family, in one shape or another, have been involved in the real estate industry. When he graduated from university, he graduated from Washington University in St. Louis. He then moved to New York City where his family currently resides. It was here he decided to get into the real estate industry.
He spent the first half year in New York working as a commercial office broker and quickly found himself in a world that was not for him. He then transitioned over to acquisitions and development before entering into the real estate capital markets world. As he was exploring his profession in those fields, he started thinking about the co-living space. He saw all of his friends in New York really struggling to find a place to live, and he started thinking about how he could design housing for roommates. He was able to secure some financing for it, but he quickly found himself in a world competing against condo developers in New York City who were always going to pay more than Sterling and his friends would have been able to afford the land. He decided to re-approach the strategy more on an asset-like model. This is where he was introduced to Brad, who is the founder of Common and is really approaching this through a startup lens rather than a real estate lens. Sterling quickly jumped on board with Brad as the first employee, and now they are a team just shy of 90 in five cities across the country.
Aaron next asked Starling about co-living and what he would say about it. He said, first of all, that there is a misconception that co-living is something new. People have been living with roommates throughout all of history. You can find examples throughout U.S. history and ancient Chinese and European history, so there is nothing new regarding people living together. It has been in an ad hoc process, so today the ability to find roommates really exists on Craigslist. Co-living brings a level of security, flexibility, convenience, technology, and community to the housing landscape that does not normally exist and gives people a living environment they want.
Ultimately for Common, the focus is on roommate living. They are not talking about creating a sense of this experience for the traditional studio’s ones and twos, although this is becoming a larger portion of their portfolio. Historically, the notion people tend to think of co-living is that it is housing for roommates, which is the majority of their housing stock. They are talking about larger apartments with 3-5 bedrooms. This can exist throughout the entire real estate spectrum as well as one’s life spectrum. Co-living exists in strong markets in the bookends of one’s life. They see it in student housing as well as senior’s housing with healthcare. Those are two strong asset classes where this type of housing already exists. However, it does not mean it cannot exist with everything in between. What they focus on is delivering that community technology and flexibility, security, and convenience to their tenant base.
Aaron remembered living in New York City in 1997 and attending school here. Aaron lived in a residential hotel on 77th and Broadway that was absolutely disgusting had four bunk beds crammed in one room and a living space with one closet for four guys. It was like the realtors in the market had a lock on if you wanted a roommate since it was really hard to find what was available. There was hardly anything that was reasonable, so he could see how this would be so popular in a city like New York. After he moved from New York, he moved to LA and found his roommate on Craigslist. He had some very interesting roommate interviews when he first moved to LA, so this was a whole different program. Aaron understood the community building and roommate security piece.
When you move to another state and are wanting to get to know people, school helps make this an easier process. When you are a senior, you would also want roommates since you do not want to live alone. However, when it comes to the in-between space, it can be a little more of a challenge. Aaron asked Sterling if his target market was a specific age range, which Sterling said not at all. They have people living in Common who are recent graduates of college and even never attended. They even have people come in who are empty-nesters. The majority of their tenant base tends to fall into the millennial generation, but they definitely cater to everyone.
Their website is www.common.com. One of the reasons Aaron uses them is because they have a beautiful website to look at, and it is very easy to understand the concept. Aaron asked for an example, specifically the one in San Francisco, that was new construction. Aaron asked Sterling to walk through the format of the living space and building. Sterling said there are currently three properties open in the Bay Area, two in Soma, and one in Oakland in the East Bay. The property Aaron referred to is their most recent property opening on the West Coast and is a really exciting project. Common partnered with a local real estate developer who found this asset that was under-utilized and has not been used in years. It was a former motel with large apartments where it was very conducive to the design and style that makes up their stock. The majority of the design they focus on higher-density, larger apartments. They were able to partner with the real estate owner in that deal and come on board as the property manager.
What Common does is essentially manage the property on behalf of the real estate developer. They take a management fee and have an incentive fee. Ultimately, they came in and helped through the design and procurement process. They also tried to maximize the utilization of the data they have based off their existing properties to help guide the design and operating process. The building in Oakland is primarily a four and five bedroom apartment at a price point between $1400 and $1600 a month, which is significantly lower than anything you will be able to find in the Bay Area.
What you get for that price is not only your housing, but also your utilities, wi-fi, weekly cleaning, shared goods, and everything fully furnished. They are removing the fee points with which roommates typically live. When you move into an apartment with friends and split the couch. When one person moves out, how do you decide who takes the couch and who ultimately owns it? When it comes to splitting utility bills and cleaning shared spaces, these are all things about which roommates typically fight. Therefore, these are the points Common really focuses on removing. In the monthly price you pay, you are getting everything included in that.
The price point in the Bay Area of $14-$1600 per room is quite reasonable compared to if you were trying to do a studio or 2-bedroom on your own. Common will range their properties anywhere between 10-30% below the price point for independent living in a similar market. If you were to go out and get your own studio apartment, Common will be a much less expensive option than that. The pictures Aaron saw showed Common does a beautiful job with the joint spaces and wondered if the level of detail and design always that high. Sterling said it is, and they have an incredible in-house design team. It is comprised of designers and architects who have an incredible eye for space and design. One thing they really focus on is providing that long-term housing and not one that is transient. These are people who are moving to the city and do not have that sense of community. They want them to feel like they are moving home and living there. All of their properties have the same level of focus and design when it comes to layouts, furnishings, and operating the property.
In some cases it is better than home since most people are not living in such highly-designed spaces. Sterling and Common really took a nod from HD TV. Aaron grew up around futons and hand-me-downs, so looking at the finishes he included was pretty great. They also focus a great deal on the user experience. For example, when you come home and open your computer, the Wi-Fi is automatically connected. Common wants to be able to provide this same experience, so when you live here they focus on providing flexibility. This is not a short-term stay or hotel. If your job were to move you from one city to another, you could very seamlessly go onto their website, check a few boxes, and move from one property to another in a totally different city. When you show up to your new home in San Francisco and open your computer, the internet is already connected. There is a not only a focus on the finishes, design, and layout, but it is also very much on the user experience.
The transferability alone is very powerful. Aaron has friends in his early 40s who live in LA, need the flexibility, but if they got a job in New York City one day they would need to get up and go. To give notice and be on the East Coast without having to break a lease is incredible.
Aaron and Sterling next went on to talk about interior. Aaron asked what the typical design would be on the interior for a 4-5 bedroom? He also asked what the living room and kitchen would be like as well as how many bathrooms it would have. Sterling said it is important to keep in mind that this is not much different than a traditional apartment, just larger and with more bedrooms. You are not suddenly finding something that is incredibly unique and different that becomes something that is non-financeable in the capital markets world. A typical 4-5 bedroom apartment will have 2-2 ½ bathrooms, sometimes up to three, a kitchen that can seat that many people, and a living and dining area. It feels like home and like an apartment; it does not feel like a dormitory. You do not go into bathrooms and their stalls, and there are no bathrooms at the end of the hallway. You are walking into an apartment, it just happens to be larger and with more bedrooms.
Aaron asked if the bathrooms are furnished as well, which Sterling said yes. The bedrooms are fully furnished, and everything you see in the pictures is provided. This even includes little trinkets on the furniture since they want people to feel they have a sense of ownership over their space and design it in their own identity. Everything from the bed to the pillows and mattresses is all provided.
Aaron asked Sterling if there is somebody on his team who acts as a roommate finder trying to put people together. There are people from empty nesters to millennials who are doing this, and Aaron wondered if there is somebody trying to piece together the right personalities at all. However, Sterling said they do not focus on roommate matching in that sense. One thing you have to be careful about is fair housing laws. With the amount of demand they have seen, sometimes over 1,000 applications a week, they are at 99.8% occupancy as of this day. It becomes more about the alignment of interest and values and making sure people understand what they are getting into when they apply to live in Common.
Once they go through the application process, pass the background and finance check, check out the property themselves either online or a 3D tour, then they can become a member if there is a room available in the market and at the price point of their interest. However, there is no match-making in terms of personalities, whether that person listens to music at night or works overnight. With the 99.8% being full, Aaron asked if there is a waiting list that is starting to form. Sterling said yes and that they are constantly growing their wait lists. For Common, it is about supply constraint.
Today, they have about 450 beds under management and expect to have about 1,000 by the end of this calendar. They are getting over 1,000 applications a week. Those are not for moving immediately with the right price point and exact location they want, but there is a tremendous amount of demand for people to live in Common and seek what they deliver. It has become a supply constraint issue rather than a demand problem.
They talked about the interior; but when it comes to the building itself, Aaron asked if there are any amenities that sell a lifestyle. This could mean a coffee shop downstairs or a workspace. Aaron asked if this is incorporated in some if not all of their buildings. Sterling said first of all, they love mixed-use properties. To the extent you can bring retail to the property or there is some level of commercial space, this will make it more of a vibrant community in an interesting location.
When it comes to specific residential amenities, one thing they really try to stay out of is what has been dubbed as the amenities arms race. They really try to not focus on building these large, cavernous amenities spaces. From everything they have seen and heard, they really go unused. The thing they focus on at Common and came up with a term for is the pajama rule. They want the community and living space to feel like an extension of your living room. They want you to have a sense of ownership over that space. You need to be able to feel comfortable walking into that space in your pajamas. If you don’t feel comfortable walking into that space in your pajamas, it probably caters to too many people and you do not have a sense of ownership over it.
It is less about building these large amenity spaces at the podium level of the properties. It is more about creating these family-sized community spaces that are hyper-designed and spread out throughout the building where they can really focus on creating smaller groups of communities. If you are talking about a Brown Stone in Brooklyn, you can get to know everyone in the building. However, if you are talking about a 200 person ground-up development, you can create that sense of community since you will know everyone there and in the floor above you. It is really hard to create a world in which all 200-300 people in the building interact and know each other as well as planning things on a daily or weekly basis together. It is really about creating the smaller level, family-sized spaces and really programming for that.
Aaron next mentioned the amenities arms race. This means the larger format ones in areas like downtown Los Angeles that include a full-sized basketball court, gyms, pools, and food trucks that come. They are really layering things on, but these are not always used by everyone. Aaron said it was interesting how Common was taking this angle. Sterling finds these great for marketing and lease-up, and people do use them. However, for the most part they go under-utilized. You can definitely create better design spaces. If people want to play basketball, they can find a place in the neighborhood. It is less about tiling it into one property as it is about spreading out the community.
Sterling said in one of the buildings in downtown Brooklyn, they actually do have a fully built-out gym. Any of their members who live in Brooklyn have access to that gym. They can create a community horizontally rather than create it vertically. Aaron asked if there is any specific property type he really likes. Sterling said ground-up construction is going to demand the highest yields since you are essentially designing for every square inch of that property.
For co-living and what is driving the above-market yields compared to traditional 1-2 bedroom returns, it is not only about the technology, flexibility, and convenience in the community, but it is also about the design. Essentially, the more bedrooms you can pack in, the less expensive it becomes per person as well as the less expensive it is to build per unit. You are building fewer kitchens and bathrooms, so you can drive your hard costs down. It is also better from a co-living user experience to have a 4-5 bedroom apartment rather than a 2 and 3 bedroom apartment.
The ideal scenario is ground-up development, which takes a long time. It could take 2-4 plus years. Common launched in 2015, and they currently have 16 properties open, the majority of which were adaptive re-use. Therefore, it is about 50/50, but the pipeline going forward is majority ground-up construction. Those were deals they set in place in the past 16-18 months and take a long time to get done. They pride themselves in being able to adapt to all different types of housing stock, whether it is existing or having to design something from the ground up. Ultimately, at the end of the day the economics need to be there. This means the user experience needs to be there, and they need to be able to deliver the grand behind which they can stand.