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The Rise of Co-Living & What it Means for Traditional Real Estate

Between WeLive, Ollie, Webster Apartments, Common, Quarters and more, co-living buildings are picking up speed in the city. With approximately 650 of these residential units in Manhattan alone and even more in Brooklyn and Queens, landlords attempting to lease standard two or three-bedroom shared apartments are facing a new obstacle.

 

Co-living buildings appeal mainly to millennials and particularly those that don’t want to commit to a yearlong lease. At WeLive Wall Street, for example, tenants can stay for as little as one night or as long as an entire year. These types of flexible lease arrangements appeal to many people who aren’t sure exactly how long they will be in the city.

 

Often, the cost of rent in a co-living building is fairly similar to what one would pay for a room in a shared apartment. However, the appeal of co-living lies in the community atmosphere and the building amenities. Although residents in a co-living space typically have to share a bathroom, there are often communal lounges, game rooms, and workspaces. Some buildings even serve two meals per day and feature services such as regular housekeeping free of charge.

 

Although potential tenants in a co-living building often have to undergo a financial check, the process is still far less extensive than in a shared apartment situation which can involve guarantors and loads of paperwork. In years past, these shared two and three-bedroom apartments were a number one cash cow for many of the city’s brokers. The rise of co-living means that there are certainly not as many people competing for these shared apartments at any given time. However, co-living arrangements may be an attractive option for those who need somewhere to stay while they take their time finding a more permanent apartment instead of rushing to sign a lease.

Landlords and the Power of Brokers

When I started out in the world of residential real estate 13 years ago, about half of the city’s apartments were leased by brokers while the other half were handled by in-house agents affiliated with building management firms i.e., “building specialists.” Third-party brokers were able to show listings in buildings that had in-house leasing staff, but never exclusively.

 

Today, about 80 percent of the apartments in Manhattan are listed by either an exclusive third-party broker or a building’s in-house leasing representative. Landlords have learned that leasing in-house is a lucrative revenue source. There is also a much greater degree of control that may be exercised by landlords when their apartments are only being shown by in-house leasing representatives. This level of oversight is especially important to medium-sized portfolios, for which the management teams are concerned not with obtaining the highest rents or the quickest turnover, but rather attracting top-quality tenants.

 

In addition, the caliber of residential rental brokers has greatly increased over the past 10 years. Although it wasn’t always a celebrated occupation, the generation of brokers now in their 30s and 40s has brought a new mentality to the profession, one that often requires a higher level of education as well as a real understanding of strategic and analytic approaches to real estate. More than ever before, landlords are recognizing the power of brokers and harnessing the knowledge of this new generation of real estate experts to benefit both sides.

Sales & Rentals: Same Industry, Different Skill Set

Within the world of residential real estate, sales and rentals require very different skill sets, and to some extent, possibly even different personality types of the agents that work with each. While there is a full-service mentality at many companies, often, the agent that sells an apartment is not necessarily the same one that would be best for renting that apartment. In the early 2000s, I began to notice a trend in which people would purchase condos solely as investment properties for rental income. However, the buyers were guided by the agents that arranged the sale who often misled them about the rent rates. Due to the agents overestimating rents, it was common for buyers to not receive the rent returns they had initially been promised. It wasn’t always an attempt to deceive the buyer. Rather, sales agents are often unable to estimate rents properly which illustrates just one of the differences between sale and rental agents. Problems also arise when sales agents don’t know how to advise on lease renewals or on the different fees required in a rental transaction versus a sale.

 

Alternatively, it is quite possible that someone who purchases a condo as an investment property and uses the same sales agent to rent it out does actually receive the return on his or her investment that had been anticipated. However, being forced to deal with less-than-ideal tenants could be a very real possibility as many sales brokers don’t know how to screen prospective tenants or how to deal with issues that may arise with tenants. Screening potential rental tenants and potential buyers are two completely different processes. In the case of rentals, it involves much more than just ensuring that someone will be able to pay the rent. Although there are certainly agents able to successfully handle both sales and rentals simultaneously, these individuals must be experienced, multi-faceted and possess two very different skill sets in order to be up to the task.

The Hunt: What I Looked for When Hiring My Newest Addition

While on a recent search for a new agent, I began to realize that it was no small feat to find someone who struck the ideal balance between competence and honesty. Too often many of the agents who bring in high volume commissions in the short term are short on ethics. These ethical glitches can be as unfortunate as warehousing listings or as nefarious as poaching another agent’s clients. I have even heard of actual larceny in which some agents have stolen cash deposits from the agency safe.

 

So from my perspective, an agent’s reputation is critical – after all, we are a relatively small community. Newer agents are not quite so easy to vet, but one thing is essential and that’s their response to the role of management. Agents are, by definition, independent contractors. But the firm that holds the license still has the last word. So, if I say a hard “no” to a potential tenant, I want my agent to recognize that there is solid reasoning behind that decision. At the same time, I don’t seek out “yes” people. I have great respect for those who have their own opinions and can respectfully disagree when appropriate.

 

At the end of the day, working smarter is more important than simply working harder. If agents are doing ten showings per day, I can’t help but wonder if they’re even prequalifying people. An agent who shows three apartments in a day after qualifying the potential tenant and takes the time to match them to the right apartment, will be more successful than someone who is running around to showings without focus or perspective. The showings done in a thoughtful manner often lead to a better chance of actually closing a deal. Understanding the role of management, being able to respectfully disagree and knowing one’s limits so as to allow one’s self to work smarter are all incredibly important. However, knowing that I’ve hired an ethical and trustworthy agent is what helps me sleep at night and ultimately is what helps to build the Sierra Residential brand.

Why Multiple Listing Services Are Not for New York

I have often encountered brokers who question why New York City’s residential market is one of the few that has never had a bona fide multiple listing service, i.e., MLS. To understand this, one has to first look at what an MLS comprises to discern why it may not be particularly germane to our very specialized, idiosyncratic marketplace.

 

By compiling all the listings of multiple real estate agents in one location, an MLS allows agents to show their own potential buyers listings that belong to other agents. Buyers and sellers appreciate being able to view a large number of listings in one location without having to bounce around between different websites. Although this system works well for numerous markets, I would argue that New York’s lack of an MLS is a product of the fact that having one simply wouldn’t serve the real estate needs of this city.

 

Cooperative corporations, also known as co-ops, make up the majority of our apartment sales, and are a phenomenon nearly exclusive to New York City. Co-op boards tend to have different rules and requirements, so compiling those availabilities for a multiple listing service wouldn’t necessarily tell the whole story. Surely, not everyone viewing a particular listing would qualify to live there, which would likely lead to confusion and frustration for all parties involved. As a co-op is comprised of people who own shares in a cooperative corporation, buying a unit in a co-op building doesn’t constitute property ownership in the traditional sense of the phrase.

 

Moreover, many potential buyers believe that they can negotiate a better deal directly with the seller’s broker. However, when using an MLS, all the listings are inherently generic and brokers can allude to the fact that certain listings belong to them, even when not true. Furthermore, buyers’ brokers do not exist in any contractual sense in New York City, meaning that potential buyers are not necessarily legally beholden to anyone representing them throughout the sales transaction.

 

Adding a further complication, residential sales prices in this city are among the highest in the nation and there is a multitude of exclusive apartment and townhouse listings here. The New York City real estate world is a tight-knit community, in which buyers, sellers and agents tend to know one another and access to exclusive listings is gained largely through relationships. An MLS seems particularly impersonal and New York City is a very personal place. For many people, a multiple listing service for New York City would be confusing at best and completely misleading at worst.

Thoughts by:
Adam Frisch,
Managing Principal