The urban living landscape is evolving rapidly, with the growth of co-living, changing generational preferences, technology & AI, inflation, and the effect of the pandemic on commercial real estate all contributing to this evolution. While the presence of so many moving parts could be panic-inducing for many investors, opportunities abound for those who are able to not only identify them but also lead the pack.
This was the consensus at the Urban Living Festival held earlier this month in Canary Wharf, London. Experts across different real estate sectors highlighted the opportunities for investors in the burgeoning co-living sector.
The availability of affordable and quality rental housing in urban areas is lagging behind. Add in the cost-of-living crisis, the soaring population of these areas, inflation and financial pressures on investors and there’s a problem, a problem in which experts say the co-living model is a solution.
“There’s pressure now with inflation and higher construction costs. With co-living, you get higher density and it’s emerging as a solution to making investment more viable and securing higher returns for investors,” says Jenna Harris, head of co-living at Harris Associates.
However, while some investors may be dragging their feet due to a lack of adequate transactional evidence, Harris stresses profits in the sector are ripe for the taking.
“A sticking point for investors is the fact that there isn't much transactional evidence out there. But having said that, I think it’s fantastic is that the rental proof is now out there and there are buildings launching relatively soon that are already 45 per cent let. So, there is a huge demand and the rents have been proven,” she says.
Penny Clark, co-founder at Conscious Coliving adds that the core target market for co-living in the UK is currently estimated at about 725,000 people. However, the supply currently stands at just 4 per cent, signifying a huge untouched market for co-living.
Turning to the continent, a survey of European investors with over €1 trillion of assets under management found that 38 per cent were already investing in co-living, with 51 per cent planning to invest within the next one to three years.
Anil Khera, founder & CEO of Node says that from a product perspective, it’s very evident there’s the need. “Co-living is definitely a trend here to stay and we’re seeing the demand for larger self-contained studios. From an investor perspective, there’s definitely a lot more interest,” he says.
Clark also noted that co-living’s inherent structure supports sustainability goals and promotes social value through fostering community activities and engagement.
However, co-living faces significant barriers in the UK such as lack of suitable product planning interventions, limited market awareness, and availability of land. The uncertainty from policymakers and the lack of understanding about the potential benefits of co-living also impede its development. Establishing national standards for co-living and involving relevant stakeholders could alleviate these issues, raise co-living's profile, and promote the development of high-quality co-living spaces.
“I think certainly having a national standard with buy in from the relevant stakeholders would be helpful in raising co-livings profile, and also creating a more enabling environment for good quality developments to be built,” Clark says.
Riccardo Tessaro, CEO at Gravity Coliving adds that in order to address issues with planning, there needs to be a unified approach from the different players in the co-living sector.
“There are very different interpretations of co-living in the market today. In order for regulation to be more straight to the point, investors, developers and operators in the sector should sit down, try and establish what the format should be and then share data and information with regulators so they can understand why co-living is needed, how it should be tackled and what the opportunities are in terms of existing asset conversions.”
The office is also undergoing a metamorphosis, as the remote working trend has led to significant changes in how office spaces are used and designed. Add to this a growing focus on environmental responsibility, the energy performance of these buildings and the mass exodus of workers which has resulted in an increase in vacant office space, and it’s clear the offices of the future aren’t the offices people are accustomed to.
This shift towards more holistic spaces brings with it the opportunity to attract people back into offices, not just for work but for the variety of experiences they offer.
Looking ahead, Guy Windsor-Lewis, CEO and founder at Locale envisioned a future of mixed-use developments bringing people back into the office.
“I see a future in 10, 15 to 20 years’ time, where we have these micro eco-systems with a little bit of residential, a bit of office, pop-up restaurants and one-man-band coffee shops. We’ll have lots of mixed-use micro hubs and that will be the way of bringing people back into the office,” he said.
Changing working trends have also influenced leasing trends in office real estate. A recent article in the Financial Times reported that the average length of UK office leases had reduced from nearly four and a half years at the start of 2019, to two years and ten months currently. This decline underscores the rise of flexible leasing options, reflecting the need for adaptability.
Andrew Harrington, partner at AHV Associates argued that going forward, real estate will increasingly move towards hybrid leases and management contracts where owners get a share of the upside to compensate them for inflationary risk.
However, he warned that inflationary risk cannot just be mitigated by having inflation- linked leases because that compensates for inflation but doesn't compensate for inflation taking off and jeopardising the viability of the tenant.
“That’s what is happening in Germany right now, he explains. “A lot of hotels in Germany right now are on straight leases with most of them linked to inflation and some of the hotel companies can’t deal with it. So the distress funds are all over Germany right now looking for distressed real estate leased to operators that are in difficulty.”
Technology and artificial intelligence
The intersection of urban living and technology continues to evolve at a rapid pace, with artificial intelligence (AI), web3, and other digital advancements reshaping how we perceive and interact with our environment. As experts at the Urban Living Festival emphasized, it is not the technology itself that is transformational but how people adopt, adapt, and innovate with it.
“We have the technology here and it's just going to continue evolving,” said Windsor-Lewis, adding “but it's all about how we use it and adapt it to make our lives better rather than letting it take the reins.”
Experts agreed that AI technology can significantly enhance guest experiences, particularly in the hospitality sector, by automating repetitive tasks thus freeing up personnel to focus on other areas which would be better done by humans such as identifying risks of potential criminal activity in hotels.
“By reducing the tasks that one person is doing and decluttering how a hospitality business works, more attention can be paid to more important tasks like actually looking at people checking in and making judgement calls only a human can,” said Steve Lowy, CEO & founder of The Residence Apartments.
Moreover, AI and advanced data analytics could help the move towards sustainability.
Francesca Prestinoni, principal sustainability consultant at Hilson Moran noted AI can predict energy usage within a property, enabling more efficient use of resources and facilitating energy conservation. When combined with renewable energy technologies, it can significantly reduce the environmental footprint of buildings, contributing to broader urban sustainability goals.
Experts also pointed out that augmented reality technology (AR) could play a role in the initial design and development of urban living spaces by allowing developers to virtually model new spaces to help them make informed decisions about the design and layout of their projects.
Sentiment moving forward
Looking ahead, experts stated their belief that the best-performing sectors in the coming years will be those that offer specialised, premium services, singling out co-living as a prime example.
“Where I think we're going to see the best performance over the next few years are living sectors where you're adding a premium service, densifying but giving a lifestyle choice that’s aspirational but still affordable, especially in this cost-of-living crisis. Co-living ticks a lot of boxes because you can get a higher yield and people have a lower price point,” Khera said
He added, “And it’s even better if you have great ESG credentials on top of that.”
Experts also emphasised the rising influence of the ESG agenda in shaping the future of the urban living sector.
“The ESG agenda is definitely having an effect on the investor and occupier side, more so with office and retail. One of the first questions you get when an investor comes in, is around ESG as it relates to the building or the wider estate. The assets that don’t measure up will become very hard to shift,” said Andrew King, investment director at Canary Wharf Group.
Finally, the role of regulation in shaping the evolution of urban living sectors was spotlighted. There was a broad consensus that the speed and direction of this evolution will largely depend on how the government responds.
“Regulation is going to have the biggest impact on how living sectors evolve going forward and how quickly that evolution happens. I’m hoping that the government is looking outside the four walls of the UK and taking on board what’s going on elsewhere and how that works,” said Joe Persechino, head of residential & student accommodation at AXA IM Alts – Real Assets.