It takes 3 clicks to secure an apartment on AirBnB. It takes 3 weeks to secure an apartment using standard leasing procedures. Terms and fees vary but the underlying asset — an apartment — is the same. The boundary between travel and daily life is blurring. Why should the user experience be so different?
A bit like the 12-track music record before Steve Jobs decided to sell songs individually, the urban rental market was shaped by many assumptions that are no longer relevant. Housing-as-a-service means apartments that are ready to move into; easy to discover, evaluate, and book; available for flexible long-term stays; at a price within reach of young urban professionals¹. Achieving a reasonable price would likely entail shared amenities and, in some cases, shared apartments.
But real estate is not digital media. Change is constrained by inelastic supply, regulation, and the habits of owners and lenders. Following is an overview of existing supply and demand; the attempts to offer an improved experience for those moving to a new apartment; the legal and regulatory barriers hindering change; and a few guiding principles for the development of additional solutions.
Demand and Supply
A growing number of people remain unmarried and childless well into their thirties, have flexible or unstable jobs, and are often burdened by student debt or the slow growth of real incomes. Households are getting smaller, and longer periods are spent with roommates and not spouses. Changes to the nature of life and work are driving young professionals to favor on-demand access over long-term commitment, and to cluster around large cities with ecosystems that cater to their needs and aspirations.
But traditional urban rental markets are often hostile to these type of tenants. Manhattan is a case in point: Historical supply is skewed towards multi-bedroom family dwellings; new developments target the high-end in order to avoid rent controls or cater to foreign investors; and many studio and 1-bedroom units are occupied by older and/or low-income tenants under various subsidies and stabilization programs or are (illegally) sublet to short-term visitors.
Securing a lease takes several weeks and involves scouring multiple listings sites, visiting various properties, dealing with one or more brokers, paying direct or indirect commissions, sharing sensitive information, paying significant upfront fees, and taking on uncomfortable financial and legal obligations. Moving is expensive and settling in entails additional costs for installing AC units, buying/selling furniture to fit into the new space, and activating various services and utilities.
Tenants can reduce costs by moving farther away from the center or sharing a lease. But this usually means spending even more time to find a decent apartment, dealing with less professional landlords and brokers, and being exposed to a host of risks associated with roommates.
Various companies are trying to streamline the urban rental experience. So far, these efforts proved difficult to scale, incomplete, priced beyond reach, or illegal.
Co-living communities such Common, Ollie, and Starcity are designed and furnished to cater to a younger demographic at a more affordable price. They emphasize community, charge a membership fee in lieu of rent, and allow tenants to commit to several months at a time or leave earlier than planned. These projects have proved reasonably popular so far, but it is unclear if they can be economically viable at scale. WeLive, the largest among them, was projecting 14 locations by the end of 2016, but has opened two so far, citing higher-than-expected costs and a potential change of strategy.
AirBnB is the easiest way to find and book a furnished apartment almost anywhere on earth. It is priced for short stays — less than a week, on average— and offers an uneven experiencefor both guests and hosts. The company’s CEO expressed interest in solutions for longer stays, but its recent acquisitions show a focus on high-end travel and on travel experiences in general.
Other companies reduce friction in specific parts of the rental process: Nooklyn combines rental listings with a social platform that makes it easier to find roommates and discover hidden gems in off-center locations; Flip provides a legal and convenient way for existing tenants to sublet or assign their leases, and for new tenants to move in for shorter periods and/or without the need to sign a traditional lease; Roomi makes it easier for potential roommates to find each other; Cort provides on-demand furniture; and Craiglist facilitates a large informal market of reasonably-priced, long-term sublets.
Meanwhile, traditional serviced-apartment operators such as Oakwood, Frasers, and Ascottoffer extended-stay housing solutions for corporate executives. Churchill addresses the same market by aggregating listings from smaller operators. But just like the serviced office market before the rise of co-working, these apartments are priced well beyond the reach of young professionals with middle- and even high-incomes.
Challenges and Possibilities
In NYC, innovators need to work within and around a variety of legal constraints. Most notably: It is lengthy and expensive to evict a tenant, even an illegal and non-paying one; opting to operate as a hotel incurs additional taxes and does not make it much easier to evict non-paying tenants once they’ve settled in; and leasing individual bedrooms might turn an apartments into an SRO (an exotic type of regulated housing), triggering fines and/or additional compliance requirements.
But perhaps the biggest challenge is deciding what product to develop. Startups take an iterative approach to determine the exact features and pricing model most suitable for their target market. The process involves changing the product continuously and gathering feedback from users at every step of the way. The cost and time required to produce new “versions” of real estate assets are significant.
Beyond these limitations, real estate “hardware” has the advantage of being financed and refinanced at the project level. This means that housing-as-a-service ventures have the opportunity to tap into significant revenue with little outside financing. To do so, they will have to incorporate asset ownership into their business model (directly, with partners, or through some sort of securitization) and rely on properties, lease structures, and cashflow models that are within the comfort zone of traditional lenders.
The Road Ahead
Young urbanites are among the world’s most sophisticated consumers. It should be possible to provide them with a great housing experience at a reasonable price. Co-living ventures are the first to make a meaningful attempt at this. But the time, costs, and sometimes unique layouts they require make it difficult to iterate and discover what the market really wants. At this point, it is not clear if there is mass-market appeal for extending the dorm experience to people in their 30s.
There is profit to be made from eliminating friction and risk; making better use of multi-bedroom apartments; providing great service to attract better-paying tenants to off-center locations; using technology for inventory selection, management, and pricing; leveraging tenant relationships to create new services and revenue streams; and revamping the traditional brokerage process.
The ideal approach would make use of existing residential supply, be lean enough to allow for experimentation, take advantage of traditional housing loans, and use software and data-analysis to provide tangible value.
¹ While this group has some similarities with classic “yuppies”, they differ by having less stable jobs, more debt, and by remaining unmarried which prevents them from combining two incomes.