The 5 key challenges every Coliving operator has to face

In the summer of 2018, I decided to spend several weeks in San Francisco. I needed a place to stay. 

San Francisco’s Archbishop's former mansion had recently been converted into a Coliving/Coworking space, and that's where I lived for three weeks.

You can catch glimpses of how awesome it was in that documentary from The Economist (from 4:37).

There is a communal kitchen, multiple common spaces, a living room with a working fireplace. It is a stunning house.

Every evening after work, instead of binge-watching Netflix lying on my bed, I was hanging out with people I would never have met otherwise. I even invited friends who are living in the Bay for “dinner at my place.”

I had a fantastic time and the cost was only about 60% of what I would have paid if I had stayed in a hotel.

Coliving is changing the way people are consuming real estate.

And from an operational standpoint, it is creating a host of new challenges for operators.

This article is my take on what you should pay attention to if you’re looking at this new industry.

Regulation and taxes:

"Transient Coliving" or "Lifestyle Coliving"?

When you boil it down, there are two significantly different forms of Coliving:

To know which is which, ask a person who lives in a Coliving community the following question:

Is this your only home or do you have another permanent address?

• If the answer is "this is my only home" you're talking to a "Lifestyle" Coliver: digital nomads, young urban professionals, Millennials who are looking for a new way to connect and live.
• If the answer is "No, my permanent address is xxx" you're talking to a "Transient" Coliver: student, tourist, someone who has been sent to town to work on a specific project, or me when I was staying in SFO.

Unfortunately, the regulators in most jurisdictions have not all (yet) adopted this definition.

Instead, they rely on different criteria depending on the country:

• Duration of stay (less than one week, three months, six months).
• Condition of the property (furnished vs. unfurnished).
• Services provided to people while they're staying in the property (Housekeeping, reception, specific amenities).

"Transient" Coliving operators, like #Lyf from Ascott Residence, have to operate in a very different regulatory framework from "Lifestyle" Coliving operators like #Quarters.

If you're operating a property that welcomes "Transient Colivers" the constraints will most likely be much more stringent than for "Lifestyle Colivers."

Check what the requirements and constraints are for what you want to do:

• Location and zoning
• Building codes and safety regulations
• Licenses and certifications

Behold the Taxman:

What about Value Added Tax (VAT) or Goods and Services Taxes (GST)?

When you pay rent to a landlord, you don't have to factor in additional taxes.

But if you rent a serviced apartment or stay in a hotel, things are different, and the operators are responsible for collecting taxes.

Here again, in most jurisdictions, you should be able to use the distinction 

• "Transient" = VAT/GST is applicable; you should expect to have to collect and pay VAT/GST.
• "Lifestyle" = VAT/GST is usually not applicable: these are residential leases and in most jurisdictions, the sale and lease of residential properties are exempted from GST/VAT.

IT Systems and processes:

The Medici Living Group describes itself as "As one of the world's leading PropTech companies." 

For Anil Khera, Founder & CEO of #node, "the only way to build a truly global community is through tech."

Don't get me wrong here: You should use as many standard systems as possible.

Accounting, invoicing, project management, internal communication: you will save a lot of time and effort when you leverage what others have done.

For instance, if you're looking at an incident management system, you should consider Unee-T: THE Web App to manage incidents in your properties.

That being said, Coliving is a new industry. A lot of things don't exist yet, and you WILL have to build new tools to manage and grow your business.

What are your "Sources of Truth":

You need a "Single Source of Truth" for every critical information that you handle.

The "Single Source of Truth" is the system that is the reference point for all your organization for that information. All the other downstream systems that you will need to work with should use that source. It is the "Master" and the other systems are the "Slaves".

You can have several "Single Sources of Truths" of course: one for prospects, one for properties, one for the contracts you've signed.

But you need to make sure that the information is updated only once and only in the "Source of Truth".

The worst-case scenario is to have two (or more) different systems to keep track of the same information.

Back in my LMB days, we had a flat that stayed empty for a full month because the Sales team did not know that this flat existed.

We found out when the finance team checked the list of properties and wondered why we were not collecting any rent on that one.

You might think that you can start with Google sheets and see how much you can stretch it.

Don't.

If you're successful, the number of properties you manage will grow. The amount of information you need to store and keep track of will increase too. Exponentially.

Google docs are also bad because they're not built to efficiently manage fine-grain permissions (decide who can access and edit this information but not that information).

Confidentiality, privacy, data security:

Some of the information you will handle is highly sensitive. Financial data, of course, but also all the information you'll need to collect if you need to profile your members and match them as flatmates.

In most jurisdictions, you are legally responsible for making sure that they are adequately protected (Hello GDRP.)

If you're looking at Coliving, you WILL have to rely heavily on technology and IT systems. Don't underestimate that.

Finding properties - Dedicated building vs Individual flats:

To find properties, Coliving operators have two strategies:

• The "Individual flats" strategy: You go to individual landlords who own flats in a multifamily building. You get a deal to rent the property from them, and then turn the apartment into a co-living space.
• The "Dedicated building" strategy: You go to building owners, real estate investors or developers and either re-purpose or design an entire building optimized for Coliving.

These strategies have different consequences and implications:

Capital Expenses:

• "Individual flats": Low CapEx limited to furniture, fixtures and flat equipment.
• "Dedicated building": High CapEx.

Speed:

• "Individual flats": High, it’s possible to increase and adjust capacity rapidly based on supply/demand dynamics.
• "Dedicated building": Low, it takes from months to years to get a new building online.

Operational Expenses:

• "Individual flats": High, there are limited economies of scales unless you have a minimal number of units in the same development.
• "Dedicated building": Comparable to running a traditional Service Apartment business.

Regulations and rules:

• "Individual flats": Complex to navigate, multiple stakeholders involved. “Transient” Coliving will most likely be prohibited.
• "Dedicated building": Only two stakeholders. Government-linked (Urban planning, taxes, other relevant regulatory bodies) and building owner.

The Coliving experience:

• "Individual flats": Events are hard to organize on-premise. Colivers are sharing the building with people who might not have the same interests or lifestyles and who can sometimes be resistant.
• "Dedicated building": The building can be designed to facilitate interactions and improve the members' experience. It's possible to create communal spaces and optimize unit design — no resistance from other people in the building.

How to make a profit:

• "Individual flats": More paying people per sqft/sqm. Form very difficult to impossible to share common spaces between different flats.
• "Dedicated building": More paying people per sqft/sqm. More people can share the same facilities (kitchen, living room, dining room, laundry, internet connections).

A tough balancing act:

Over the long run, the most cost-efficient strategy is to go "Dedicated building" and get to a point where you can design and run full, purposed based building.

But unless you have deep pockets, it's challenging to establish your credibility and demonstrate that you can pull it off.

That's why most Coliving operators started with an "Individual flats" strategy first. 

Once you've proven that your product resonates with customers, you should rapidly liaise with institutional investors. Move to the next step and start designing and activating entire Coliving themed buildings.

Revenue and Cost management:

Running a profitable Coliving operation is an incredibly complex act to pull out. 

The affordability issue:

Real estate is getting more and more expensive in most major cities and yet, salaries and incomes are not rising as fast as real estate prices.

The golden rule of real estate is that one's housing expenses should be roughly ? of one's income. 

It's a hassle to find a tenant for a three-bedroom flat priced as 3,000$/month: the pool of people who earn 9,000$/month is not very deep.

On the other end, there are many more people earning 3,000$/month, and it's much easier to find a tenant for a 1,000$/month room if the deal is compelling.

Coliving operators will find and connect three of these people and put them in that 3,000/month three-bedroom flat.

These are the main reasons why Coliving is so attractive to many real estate investors.

#JLL did a study of Coliving in April 2019. They discovered that 82% of the people who might consider Coliving would only accept to pay between 0 and 10% more compared to a traditional leasing agreement.

Coliving promises to turn a constraint: "I can't afford this by myself," into an experience: "you'll be living in a community of like-minded people, and you will have an amazing experience."

It's a significant promise! And it can become costly if you don't execute or manage your customers' expectations correctly.

How can you get more paying customers per sqft?

#Lyf by Ascott recently launched a "Transient Coliving" space at the Funan in Singapore. 

They managed to create 40% more rooms than if they had built a traditional Serviced Apartment compound. 

How did they do that?

They moved many of the common spaces of a traditional flat: kitchen, laundry, living room, outside of the apartments and into communal areas.

Coliving operators are building a bridge between their members (the people who stay in the property) and their real estate partners (the people who own the property).

Property owners get better yields and Colivers get better deals: it's a win/win!

Brand recognition and positioning:

The Coliving revolution is in its early stages, there still is a lot of confusion about what Coliving is, and whom are the people attracted to Coliving. 

#TheCollective was created to "redefine the way people live in cities focusing on community, convenience, and value."

#Quarters is for "urban people who want to live centrally and be part of a large community."

#OxforCaps markets itself as "Student Living 2.0 - Think beyond hostels & PGs!"

#LaCasa offers you to live in thematic houses: cinema, cooking, you will be with people who share the same interests as you.

For some, Coliving is the better way to do flat-sharing: it is reassuring to deal with an established company instead of individual landlords or roommates they found on Craig’s list. 

These Colivers put their faith in the ability of the operator to provide an affordable housing option in a convenient location and with limited risks.

In one of my previous articles The Customer Satisfaction Equation, I highlighted the importance of clarifying your promise to your customer.

Who are your customers? What is your brand promise? Are you primarily targeting "Lifestyle" or "Transient" co-livers? 

Make your brand promise evident to your customers and build your product based on that brand promise.

What's next?

Coliving is an obvious solution to a severe problem. I'm convinced that it's here to stay. 

You should buckle up, though; it's going to be a bumpy ride and there will be casualties.

A lot of things are being invented. Some of these challenges may become easier to tackle as the industry matures. 

Regulatory frameworks will evolve and adapt. New tools and systems will emerge.

The industry is moving at a blistering pace: Roam, where I was staying when I was in San Francisco, does not operate the Archbishop's Mansion anymore. The place is now operated by #sonder.

My bet is that operators who will pay attention to these 5 key challenges: 

• Regulation and taxes.
• IT systems and processes.
• Optimizing sourcing strategies - "Dedicated building" vs. "Individual flats."
• Revenue and Cost management.
• Brand recognition and positioning.

Those will fare much better than their immediate competition.

What do you think? I've said my piece, now it's your turn!

What are your thoughts on the challenges that Coliving operators will have to face?