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Does Co-Living Threaten the U.S. Housing Market?

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By Saeculum Research

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.

This trend originated with Boomers, who experimented with communal living in their youth and who are gravitating back to that nostalgic paradigm in their 60s and 70s. But the bigger push toward co-living today has a distinctly Millennial flavor: young, urban, upbeat, and supervised. Over the short term, this co-living surge is bad news for a homebuilding industry that was already contending with long-term demographic headwinds.

Among seniors, Boomers are breathing new life into a more formalized version of 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) says its U.S. membership (after a “big chill” during the 1980s) surged by 300 percent from 1990 to 2010. Today, FIC’s directory lists more than 1,000 intentional communities across the country. Credit this sustained popularity to Boomers like Bob Connors who, after decades away, decided to retire to the same communal farm at which he came of age.

The newer and broader Millennial surge toward co-living is quite different. For starters, these spaces are mostly urban, with hubs in population centers such as New York, Chicago, and San Francisco. Co-living typically utilizes design principles such as simple yet clean furnishings, plenty of common space, and breathtaking views of the city. One major element not present in the Boomer version is an emphasis on rules and authority. Millennial co-living spaces are run by community managers responsible for maintaining the property, scheduling social events, and even resolving conflicts—much like a campus RA. (See: “So Happy (Living and Working) Together.”)

Companies specializing in co-living have been thriving. The largest tier consists of property managers with no real estate ownership—like 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, expects to house 34,000 residents across the globe by 2018. Another tier consists of property owners like Property Markets Group, which plans to build 3,500 U.S. co-living units comprising more than 7,000 bedrooms over the next five years. The final tier consists of Craigslist-like “marketplaces” that merely bring together potential roommates, including app-based services like Roomi and EasyRoommate.

What draws Millennials to co-living? Naturally, cost comes into play. Millennials also don’t mind being dependent on others—whether it’s Mom and Dad or a group of strangers. It doesn’t hurt that Millennials who have been closely monitored their entire lives simply don’t place a premium 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, a great urbanscape view, and walkability. (See: “Micro-apartments are a Macro Hit.”)

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 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 bearish. Look no further than the ever-more sober Census and U.N. projections, which show a steady deceleration in the growth rate of the U.S. adult population (an excellent proxy for housing unit demand) over the next two decades.

Homebuilders cannot fight long-term demographics. But they can bet on two countertrends that they hope may neutralize (or at least delay) the bad news. Some forecasters are predicting a rebound in demand from Millennials who put off starting a family in the decade following the Great Recession. Others are expecting a floodtide of retiring Boomers to push down the average number of adults per household, thus rekindling the demand for new housing units.

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. (See: “Millennials: Are We There Yet?”) 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.

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, 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 fewer of these young adults are either married or have children. The number of adults per household headed by 25- to 29-year-olds and 30- to 34-year-olds also grew, yet less dramatically. To date, there is no evidence of any resurgence in Millennial family formation or baby making. (See: “U.S. Fertility: Down for the Count.”) Yet even if there were, the size and direction of any resurgence on housing demand is a lot more ambiguous than many assume.

As for the second bet, to be sure, 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 also boost demand for housing. Indeed, in recent years, the soaring number of new households over age 65 has been single-handedly propping up the demand for new housing units. (See: “The Millennial Housing Wave: For Real?”)

But even stronger countercurrents are pushing the average Boomer household size up (1.83 adults per household headed by 65- to 74-year-olds in 2016, up from 1.80 in 2003)—which should limit the good news for the housing industry. Why? 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 65+ women 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.

The message? Co-living, both formal and informal, is here to stay. Which means that, recession or not, the housing sector’s near-term future is not as positive as most people believe.

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

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