The Sharing Economy of Real Estate
The most valuable startups shaking up the traditional uses of real estate are all co-something. Airbnb is not really branded as co-hotel (because that sounds dumb), but that’s what it is — a P2P shakeup of the hospitality industry. Co-working giant WeWork has been all over the news lately with its sky-high valuation and rapid expansion, and there’s a fair amount of attention being given to the likes of Common in the co-living space. Finally, the sharing of retail (Storefront), industrial (Flexe), and data centers rounds out all the new waves of co-real estate you can imagine.
Millennials have this earth-shaking habit of sharing things (like physical space) in exchange for services and convenience. So the two questions I’m thinking about right now are…
- How do we finance real estate in the future? As co-everything becomes the norm, how does this industry reconcile the traditional underwriting model of wanting stable tenants with long-term leases?
- What’s next? What other fixed real estate assets can we possibly disrupt through sharing that hasn’t been thought of yet?
How will we finance co-real estate?
Some co-real estate assets, like coworking office space (ala WeWork), are relatively easy to underwrite. WeWork cuts leases with landlords for large amounts of office space, before turning around to sublease much smaller slices that are enhanced with design and services. In this case, WeWork takes on the risk of generating revenue in the office space to make a spread on their lease, and you can underwrite WeWork as an entity for the purpose of financing.
How about retail sharing like Storefront? Landlords give excess/unfilled retail space to pop-up shops through Storefront’s marketplace, but the revenue is temporary and unsecured by a larger and more stable entity. A long-term retail property lender would essentially write off any short-term pop-up shop revenue as vacancy for the purposes of underwriting a loan.
I need input here from our readers — how does the sharing economy of retail, which is clearly increasing in demand, get financed? Will we ever see a pop-up only retail center? What would a long-term lender need to see to finance a retail center that doesn’t have any long-term tenants? Will it ever happen?
Is there another sharing economy revolution coming to real estate that we don’t see yet, or will the next decade just be about growth and optimizing these existing innovations?
As a thought exercise, we took every major commercial use of real estate, checked if the sharing economy model was already being applied, and imagined what it would be like if not:
- Office: Coworking ✔
- Multifamily: Coliving ✔
- Retail: Pop-up Marketplace ✔
- Hospitality: Airbnb ✔
- Industrial: Co-warehouse ✔
- Senior Housing: traditionally shared ✔ — Will there be a tech slant to the senior housing industry at some point, as seniors become more and more tech-savvy, and expect a new level of experience?
- Student Housing: ??? — Obviously a traditionally shared market within a campus, but I’ve got to believe there’s a company out there building dorms (not apartments) that are conveniently located near multiple college campuses, overlaying some light social/management tech platform, and rolling out some extra services and amenities, maybe food service. Who’s conquering this space?
- Self-Storage: traditionally shared ✔ — I’ve heard rumblings of disruptive startups that let you share garage space through an app, so maybe some more disruption will take place here.
- Mobile home parks: traditionally shared ✔
- Healthcare: ??? — What would be the disruptor of the hospital model? A medical robot at your home?
Change is inevitable. It’s only a question of how fast and how far things will change within a reasonable investment horizon. What other changes will we see in the use of space in commercial real estate in the next 10 years? Make some predictions and chat about it with us in the comments.
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