The bankruptcy of co-living pioneer Common Living underlines the uncertain future for the model

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Founded in Brooklyn in 2015, Common Living was an early pioneer of a new venture in home management: Instead of renting out entire units, rooms would be rented to private individuals. Utilities, Wi-Fi and cleaning fees would be bundled with the rent, and the apartments would be fully furnished.

Since then, co-living has exploded in the US and around the world, but Common Living’s journey as a pioneer of the model ended unceremoniously late last month when the company announced it had filed for Chapter 7 bankruptcy protection and liquidated its assets. The company, which operated a U.S. portfolio of 5,200 units in twelve cities, now joins a growing list of co-living operators that have been wiped out, raising questions about the model’s future viability.

In 2023, Common Living merged with a Berlin-based competitor, Habyt, creating a combined entity that operated more than 30,000 units in more than a dozen countries. Habyt CEO Luca Bovone said that while Common’s closure was unfortunate, liquidating Habyt would make it a profitable company.

“This decision, while not what we had hoped for, will make the rest of the Habyt group more financially agile, with a greater ability to accelerate growth and generate value,” Bovone said. Bisnow saida site dedicated to commercial real estate news.

Thousands of Common units will be acquired by Outpost Club, another giant in the model that already operates about 1,500 units in 40 buildings in New York City. Sergii Starostin, the company’s CEO, said this Fortune they had taken over management of seven properties before filing for bankruptcy, with Outpost targeting 50% of Common’s inventory.

While many co-living companies folded during the pandemic, Common aggressively expanded its portfolio and raised funding. Between 2020 and 2022 it acquired approximately 5,000 units, and by 2023 it had more than $110 million in venture capital. However, in an interview with the New York TimesCompany founder Brad Hargreaves declined to comment on whether Common was profitable or not.

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Outpost Club’s Starostin said he believed the massive funding that fueled Common actually contributed to its financial troubles as investments pushed the company to expand rapidly in markets like Nashville, Ottawa and Chicago.

“Common had to grow very quickly in many places,” Starostin said Fortune, which explains that acquiring a single property in a new market requires building an entirely new staff and marketing effort. “And if you multiply that by twenty, that becomes a pretty expensive trip. My opinion is that it just takes more time to scale these types of companies.”

Habyt CEO Bovone told Bloomberg that Common’s bankruptcy was related to the company’s contracts and operations, as well as increased pressure from interest rates.

This isn’t the first time Outpost has stepped in to manage a former competitor’s contracts. It has taken over some of it Bedly’s sublease agreements in Manhattan and New Jersey when the company shut down in 2019, and the same happened when the German company Quarters Declared bankrupt in 2021.

Like Common, Quarters failed despite his success in raising venture capital. The Medici Residential Group raised $300 million for its German subsidiary to expand in the US in 2019.

“Venture Capital doesn’t work very well with real estate because we see demand growing quite quickly in about 10 to 15 different markets,” Starostin said. “So I think those companies failed because they were required to grow too quickly in a lot of different markets, and that’s very difficult to do in the real estate industry.”

Clara Arroyave is the CEO of Co-Living Cashflow, a platform for buying, selling and investing in co-living properties. While she said she was upset by the news about Common earlier this month, she also said it wasn’t surprising given the amount of investment that had gone into expanding the company.

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“When you raise venture capital, you are pressured to grow and deliver very quickly,” says Arroyave, who founded and ran a co-living company in Boston. before it went bankrupt during the pandemic. “And often you are forced to expand your number of rooms, demand or market, and you continue to grow without profitability or with very high overhead costs.”

Unlike other prominent competitors who have flamed out, Starostin said Fortune that Outpost has chosen to concentrate its operations – and expansion plans – in New York, where the company has already established workforce and marketing networks.

The pandemic was a serious test for the model, and some of the largest operators were forced to close their doors as many potential tenants turned away from close living arrangements with strangers. When Quarters went under, it had about 3,000 units in operation and another 1,500 in development. 2021 also saw the demise of WeLive, the co-living offshoot of WeWork, and The Collective, a British-based company that had almost 100,000 units in its portfolio when it went bankrupt.

In addition to the pandemic, expansion challenges and high interest rates, co-living companies must grapple with issues more specific to their still relatively new approach to housing. Many companies advertise themselves less as traditional landlords, and more as platforms to connect people with available rooms. Potential renters don’t have to worry about finding roommates for an entire unit or a one-year lease. Rooms are rented individually and people often only stay for a few months. But the somewhat fluid, hands-off approach has led to problems in some cases.

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In 2022, the Daily Beast reported that some tenants of Common Living properties had complained to the company about security issues, poor maintenance and on-site residents being potentially dangerous. One tenant posted in an apartment group chat that he would set the building on fire, but residents quoted in the article reported that Common’s response team failed to communicate or address situations in an appropriate or timely manner to grab.

And yet, despite the closure of Common and other competitors, Co-Living Cashflow’s Arroyave and Outpost Club’s Starostin said they believe the business model will survive. While it has progressed in fits and starts, the flexibility and easy access to housing that are at the heart of the co-living idea is something that is in plenty of demand among young renters.

“Young people can’t afford the rent, and the fundamentals of housing — in New York, Boston, LA — aren’t going to change the numbers dramatically anytime soon,” Arroyave said. “But to keep co-living strong, the question is: what part of the business model isn’t working?”

“The move is already here,” Starostin said. “I don’t think it’s going anywhere. The only question is who will grow in this market, but the market itself is there.”

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