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 and Sterling continued their discussion by opening this segment up with competition. Aaron asked if there is a lot of people in this space looking to do the same thing. Sterling said there are a few people in the space such as WeLive and a few other startups that have popped up. This includes areas like New York and San Francisco as well as Los Angeles. Some of the larger players are folks that are international groups out of Europe, Asia, and India. These are primarily focused in their own regional markets, although a few of them have started exploring opportunities in the United States.
Common is very excited about all this. They view co-living as a developing asset class, similarly to the way self-storage or student housing developed into asset classes in the last 10-20 years. If they were the only player in the space, it would be a great business. However, it would not be an asset class. The more people who were entering into co-living really proves this is the way people are choosing to live and will change the way residential real estate is designed for a very long time. They get excited about hearing new players entering into the space. People entering into co-living today are getting a significant premium for entering in at an early stage as they did in the other asset classes. As you see the asset class develop, in theory you will most likely see a compression in cap rates. You will also see a tremendous amount of value being created there.
Aaron and Sterling next went on to talk about the different markets and where they are currently located. Sterling said they launched in New York and are currently operating here, Washington D.C., Chicago, and the Bay Area. This includes San Francisco, Soma, and Oakland. Aaron asked whether they are expanding into other markets or only focused on these four main metropolitans. Sterling said they are definitely growing their real estate presence in those existing markets. However, they have announced a few other markets they will be entering into over the course of the next year or two. They have announced some projects in Los Angeles that will be opening up in 2018 and 2019. They also announced a project in New Orleans that will be opening up in 2019 as well. This is a ground-up development project.
Aaron asked Sterling if he sees micro-living and other shared housing such as pod shares being competition or other asset classes on their own. Sterling said he sees the pod shares as different. Someone choosing to live in a micro unit is very different from someone choosing to live in a shared housing facility like Common. That being said, co-living or community-experienced based living can exist throughout all of this. Sterling said we would not necessarily shy away from building these smaller micro units. In some markets this may make more sense. The focus would then be on creating that sense of community, whether in the physical space and creating that extension of living room spaces, as well as on a programming sense. The research and study he has done on the micro-housing world in the United States shows this is where they are ultimately missing out. They are missing the experience, community, and technology as well as design and providing all that through design and technology.
Having started in 2015, Common is somewhat new. Aaron asked if they had a sense of their expected length of stay on average for their tenants. Sterling said they are seeing just north of a 80% renewal rate on their 12-month agreements. This is even higher than traditional market rate, multi-family renewal. This is very existing and shows that this is not transient housing or something they come to just to get their feet wet and get accolated to the city before moving out. They really view this as long-term housing. Sterling said he can confidently say based off the data that people will stay about three years.
Aaron and Sterling used this opportunity to segway into discussing the politics of it all, especially when it comes to markets like New York and California. The lack of housing has just started to get political. There is lots of talk about everything from getting rid of rent control at the legislative level. Aaron asked what the response has been from cities he has entered into and what their response has been. They have had a tremendous amount of positive responses from the local community, whether it be politicians or community members, who really embrace what they are doing. In California, they are only open in San Francisco, not yet in Los Angeles.
When entering into a new market, they spend a lot of time meeting with local community leaders and politicians. Once they property is open, they try to engage with the local community, whether through local businesses or events. This way, they try to get their membership and tenant base involved in the local community. From the response they have had so far in the markets they are going into, this is the type of housing that is very much needed. They do not design and build for this, but it is the way people are choosing to live. It allows them to deliver more affordable housing than is currently achievable on the market. The price of affordable housing is significantly lower than if you were to go out and live on your own. The response has been tremendous, and it is really about the work they do and getting ahead in the market. They also want people to know who they are and why it will be good for the community.
Sterling next expanded on getting tenants involved in the community. When it comes to programming and building out the common community, they rely on their members to grow it organically. They are not necessarily hosting events on a daily basis and telling people what they have to attend. However, it is more about enabling, empowering them, and giving them the tools they need to grow the community they want. At the same time, they want to make sure they are involved in the local community so that when they host potluck dinners at their properties every Sunday night, local community leaders and politicians can come in and meet or give a presentation. Common also gives them neighborhood guides and tools they need to understand how they can get more involved in the community, whether through volunteer work or local shops. This way they can not only feel a part of the common community, but also the greater community.
Aaron said this is no small fee and a really big deal. This makes Common very special and juxtaposes next to Airbnb. It has had such a difficult time getting into the larger metropolitan areas, and specifically student housing has been a real problem. We have four universities in one city, and the students got a little wild. Landlords were taking family rooms and creating three extra bedrooms. You could have eight students to a room, and they would throw block parties. They ended up regulating it to where if you had more than two unrelated parties in the same house you had to register and get a license.
This is a very different approach since Common is bringing the politicians to them. Aaron had just gotten back from New York and thought he was staying just one area, but it felt like it was an illegal Airbnb. He was told if he got caught he would have to pay a $500 fine, which he was completely unaware of at the time. He wouldn’t have signed up if this was the case. When somebody tries to compare Common to Airbnb, it sounds very different. Sterling said they are not short-term stay, and the majority of people living in Common are signing 12-month agreements. If not, they are on 6-month agreements. It is really about getting out ahead and educating people on who they are and what they do. They understand these people are going to be involved in the community and be positive and not the rowdy group. You may lose some fun points, but the brilliance is not wasted on you. If you get community members that are interested and invested in where they are living, the likelihood of them staying increases.
Aaron asked Sterling why he chose the markets that he did. Sterling said he chose the markets that had significant supply and demand constraints. They are continually seeing year-over-year job growth, population growth, and housing supply not keeping up with that. You are seeing a tremendous amount of increases in pricing year after year in rental housing. These are cities where it makes sense to operate here. You can think of them as gateway NFL major U.S. cities, and that’s where this makes the most sense. Sterling said he heard someone use this term in a meeting a few weeks prior. Although he is not an avid viewer of football, he can still appreciate this.
Sterling said a lot more going forward was going to be new construction. Aaron asked if the ultimate goal was to build his own inventory instead of renovating existing. Sterling said the pipeline in the future is going to skew more and more towards ground-up development, especially as they start doing larger projects. Homes today range anywhere from a 9-bedroom brownstone to a 145 members in a new ground up construction project. As they scale the business, grow the membership base, and do larger projects, those are always to skew towards ground up development. It is very difficult to do an adaptive re-use project on an existing office building and convert it into a co-living space where economics make sense. You have such large floor plates and you need to have light and air. Most people also prefer not to live in a bedroom that does not have windows.
When you think about taking an existing office building with large floor plates and being able to maximize density from a residential standpoint, it is very difficult. For larger projects, they really have to go towards ground-up development. They will continue to do adaptive re-use projects and redevelopment projects to the extent that the economics work. One of the other things Sterling mentioned was a background check, and Aaron wondered what the risks are of putting 4-5 unrelated strangers together in a building and how they manage it. Sterling said from the application process, which includes criminal background checks, it comes down to being a hands on property manager and understanding what is going on in the property. All their members are directly connected to each other through a chat software that allows them to speak to their suite and building mates.
For Common, it is about being clued in on everything that is happening and making sure people who live there feel comfortable to come and talk to them if there is an issue. They have the right processes in place to deal with issues as they arise. Today they are only 450 members, so they have been fortunate to not have any serious problems come up and have been able to handle everything. However, as they scale they will be working with 1,000 members by the end of this year. By 2020 they are targeting 10,000. They understand more problems will arise at this point, but they are about planning ahead and getting ahead of these problems when they are 3x and 10x the size they are now.
Aaron asked if they have property managers who live on site in these properties. Sterling said not in all the properties, although they do have a team member in charge of the property, whether they be on site for a larger property or manage a portfolio of a handful of properties, is always within an Uber ride or walking distance of the properties. If by zoning or code you are required to have a super property manager on site, everything they do is to code. This could be through the design, building, or operation process. They will have someone on site if need be.
Aaron asked Sterling if they have run into any code issues as far as the planning department. They are expanding the number of people going to the billings, and Aaron wondered if they have any problem with this. Sterling said today they have not had any issues since the local politicians have gotten out ahead and educated the local department buildings and inspectors as well as the appropriate parties on who Common is. They want people to know what they are doing and how what they are building is in line with local zoning codes. They make sure they consult with the appropriate legal counsel before entering into any market to make sure they are crossing their T’s and dotting their I’s. That way people know they are not going to have a violation or that they build something they did not know was at odds with zoning or would cause a violation. In any instance they try to get ahead of every problem, whether it be on the design, permitting, or zoning front.
Aaron asked if they have had cities approach them to build more. Sterling said they have talked to a few cities about building housing for them and what it means to build affordable housing for them. A few cities have talked to them about when the typical developer or affordable housing developer is building an affordable housing development, it is usually comprised of studio 1-2 bedroom apartments. This is typically because the code is dictating what those price points need to be in terms of their ties to AMI.
You are seeing a larger part of the population that needs some form of government subsidy housing being families and larger groups of people. Larger units, including 4-6 bedroom units, would be incredibly beneficial to them. They are always having conversations with people about how they can utilize Common’s designs and layouts to deliver housing that is affordable.
Aaron asked Sterling what he sees as the future of co-housing, to which he said it is nothing new. People have been living with roommates throughout all of history. If you look at the macroeconomic shifts happening in today’s environment, it only points to that growing. People are delaying marriage. In the 1960s, the average marrying age was close to 23 years old. Now, it is just shy of 30. People are seeking a more flexible work/life balance and becoming increasingly more independent, choosing access over ownership. You are seeing an economy where people are buying homes and not buying cars.
Forbes ran a piece on access over ownership, and it said 78% of millennials spend money on an experience or event over buying something else. On top of this, you have a decrease in the number of people moving out to the suburbs year-over-year and an increase in people who are moving into cities that are becoming denser and denser. Building is also not keeping up with the growing population. People are also choosing to live with roommates later in life. With marriage getting delayed and all those other things happening, people are not only living with roommates in their 20s but also in their 30s and later. This points to co-living not being a passing fad, but an emerging and growing asset class that is here to stay.
In most major markets, you are seeing rents dramatically increasing a lot faster than incomes are growing. From 2000-2010, rents increased 12% nationally while median income fell by 7%. All of that combined is the perfect storm for delivering Common’s solution. The way Common is approaching this is brilliant in the way they are getting people to plant roots. Aaron had no idea the level of detail they were going into to create experience. On their website it said it’s out there for people to see, and most landlords don’t want their tenants talking to each other. This is what really sets Common apart from other property management companies that exist. They really try to drive home this idea of knowing your neighbor and creating that sense of community as well as making those people feel they have a sense of home and ownership over their space.
However, you can really only enable that if you have their ear. Be willing to listen to them if they have a complaint and try to help solve their problem if you can. Common does the repairs and maintenance, and they make sure the requests get taken care of typically on the same day. They try to respond to any ticket within ten minutes and make sure the member knows they recognize they are having a problem and will address it within the following 24 hours. Back when they had a handful of properties open and were around 100 people membership, someone posted to the member channel that the common homes should have blenders in them. The next day, every suite by Common had a blender in them.
Common would not do this for everything, but this was a good example. You could create a shared goods room for a certain level of items, but they aren’t going to buy every individual item to put in every shared home. In the shared goods room, people can take them when they need and return them when they are done. Common really cares about the member experience and listens to them. Net promoter score is a big metric used in the consumer industry. In NPS, you are asked how likely you are to recommend a product or service to friend or family on a scale of 1 to 10. Common then tracks this after they move in and have been in it for a few months as well as upon renewals. They want people to enjoy the experience they are enjoying living in Common.
If you want more information on Common, you can go to www.common.com.