Courtesy of Starcity

A rendering of Starcity Bassett

Two of the country’s most housing-starved cities are welcoming one of commercial real estate’s most innovative housing concepts as a solution to the housing crisis.

New York City’s market for co-living is as established as any in the U.S., with more than 1,100 existing co-living units and over 1,600 more in the pipeline, according to a conservative estimate provided to Bisnow by brokerage Cushman & Wakefield. It is conservative because the number of deals and their sizes is growing rapidly, with the city now working to quicken the pace.

In November, Mayor Bill de Blasio and New York City’s Department of Housing Preservation and Development launched ShareNYC, a program to publicly fund the development of co-living projects, especially affordable ones. The department then issued a formal request for information (for stakeholders to contribute development, financing and management ideas) and a request for expressed interest specifically for developers.

Now San Jose has turned its gaze to co-living, with a Bay Area startup and the city's forward-thinking government aiming to make the concept a local success.

In the span of nine months starting last October, the Bay Area’s largest city became the first in the U.S. to expressly include co-living as a use in its zoning code, allowing co-living developer Starcity to purchase a downtown site entitled for a 302-unit multifamily complex and gain approval for the largest co-living development “in the entire galaxy,” as Starcity CEO Jon Dishotsky jokingly put it.

The San Francisco-based startup has a handful of smaller-scale co-living developments of six to 120 bedrooms in both Los Angeles and San Francisco, but Starcity’s co-living high-rise coming to San Jose, which the company anticipates will break ground by year’s end, will indeed be the largest in the world by Starcity's definition. (X Las Olas in Fort Lauderdale, Florida, will have 1,200 units and markets itself as a kind of co-living but is distinct from co-living as an asset class, according to Dishotsky, because it is heavily composed of multi-bedroom suites, among other reasons.)

Starcity's 803-bedroom, 18-story tower will coincide with the company's building of its second-largest development: a 270-unit, 16-story tower to break ground in San Francisco’s SoMa area next year.

Courtesy of Starcity

Starcity Bassett rendering

Unlike San Francisco, Los Angeles and other major municipalities where co-living developers are pursuing projects, San Jose's revamped housing code has hung out the "welcome" sign for developers. Silicon Valley's necessity and market conditions also make it more likely than many other regions to welcome thousands of new co-living units in the next decade.

Now co-living developments in San Jose can proceed with greater density, fewer parking spaces (just 0.25 per unit) and with multiple bedrooms per kitchen space (among other advantages), compared to co-living projects in other cities, which traditionally are subject to requirements under conventional multifamily or group housing uses.

“Co-living is a good fit for downtown San Jose,” Chris Burton, San Jose’s deputy director for the city's office of economic development, told Bisnow. “We’re close to transit, accepting of and welcoming density, and we have major employers that are either located or looking to locate in the immediate vicinity.”

Just blocks away from 199 Bassett St., where Starcity’s tower will rise, Google’s massive transit-oriented village will take shape around San Jose’s multimodal Diridon Station, which itself will eventually offer a new BART station and much-needed connectivity to the rest of the Bay Area.

Google alone has purchased over $300M of property in preparation for its plans. San Francisco-based developer Jay Paul Co. has committed almost $700M, according to San Jose Spotlight. And local developer Urban Community is reportedly on its way to spending billions. The millions of square feet of office space that will rise in San Jose in the coming decade also means the city’s need for housing solutions will only grow more dire.

To developers, co-living makes sense. KT Urban, a prominent and longtime residential developer in San Jose, sold 199 Bassett St. to Starcity last year and is staying on in an advisory role as the startup prepares to break ground. KT Urban partner Shawn Milligan cited work done for the firm by real estate consultant The Concord Group, which counted approximately 78,000 potential renters in the San Jose MSA for co-living-type projects.

“When we were looking at the Starcity project, for example, with 800 beds, we were pretty encouraged by the fact that we were only going to have to capture about 1% of that market in order to fully lease the building,” Milligan told Bisnow.

In February, KT Urban was reportedly considering turning its own plans for a 290-unit residential project into a co-living tower of up to 850 bedrooms, the Silicon Valley Business Journal reported. Milligan said the firm has fielded interest from a number of co-living groups and nontraditional multifamily operators and that it also has its eyes on other co-living opportunities in San Jose.

“We think [co-living] is going to be a very viable solution to the housing shortage,” he said.

Courtesy of Starcity

A shared kitchen in one of Starcity's existing San Francisco developments

Some of the early results of the nation’s largest co-living developments have been promising, especially in San Jose, where as many as 2,500 homes are approved but stalled by soaring construction costs. Hoping to ease the bottleneck, the City Council has set a goal of 25,000 new homes between 2018 and 2023 and 120,000 by 2040.

“The challenge we face given the high construction and land costs of San Jose is that it’s really hard to make traditional projects pencil,” Burton said.

The efficient use of space in co-living, where bedroom counts are maximized and living rooms and kitchens are often shared, has offered more rent per SF than traditional development, developers have pointed out. In addition, its layouts also help satisfy San Jose’s need for density — the city has a building height limitation of roughly 25 stories in many parts because of its nearby airport.

Increased revenue allows co-living developers to offer their chosen combination of discounted rent or luxury amenities to the market. Dishotsky said rent at Starcity Bassett, for example, will start in the low-$2Ks, and that total tenant expenses will be 30% to 50% cheaper compared to a newly constructed studio apartment in downtown San Jose, which has rents in the high-$2Ks.

The growth coming to San Jose will also draw a workforce largely composed of younger tech workers, a demographic that has characteristics developers covet, like delayed marriage and family formation and a movement to cities. Cushman & Wakefield reports that will continue driving co-living’s national growth in the coming decade.

Co-living could also serve as as a measure against isolation. Milligan believes the Bay Area, and particularly Silicon Valley, is home to a workforce that will find the company co-living provides especially appealing.

“San Jose’s economy is very transient in terms of human capital coming from all over the world,” Milligan said. “And I think co-living can be a bridge to help [new residents] forge social relationships for when they arrive here.”

Richly funded national and international co-living firms will likely join Starcity and KT Urban in San Jose in the coming years. Fresh off a $300M round of fundraising, Quarters, the world’s largest co-living company, is reportedly looking at properties in San Jose, while X Social Communities, the new co-living brand of traditional developer PMG, has targeted the San Francisco Bay Area amid its ongoing flurry of activity.

Courtesy of Starcity

A Starcity bedroom in its Venice Beach location

In addition, developers of existing San Francisco and Oakland co-living projects could channel future Bay Area development to San Jose. The New York-based company Common, which has the largest co-living footprint in the U.S. and operates developments in both S.F. and Oakland, has already announced a $100M expansion to Los Angeles and reportedly responded to the ShareNYC RFEI.

“We were shocked,” Dishotsky said of how quickly Starcity’s interest in 199 Bassett St. turned into a change in the city’s zoning code and approvals. “We have been trained in the mean streets of San Francisco planning.

“Downtown San Jose is essentially a blank canvas," Dishotsky told Bisnow. "You’ve got a boomtown that’s never been urban. This is kind of the last place in the Bay Area to think in a more creative and innovative way.”

Such thinking allowed Starcity to respond to market demand it and partner KT Urban identified, penciling out a project that Burton thinks, if successful, could offer the first 803 units of many more coming to the city. He said San Jose has engaged in early talks with other co-living developers and that some see Starcity Bassett as a bellwether for future projects.

“Everybody is waiting to see where the rents come in,” Burton said. “Once we see a project go in, we'll really understand what the opportunity is.”

Because global investment in co-living has increased by over 210% annually since 2015 (with over $1B in the pipeline so far this year), ground-up co-living development, which currently accounts for about 60% of the market, is likely to follow suit, according to a report from JLL. A rise in ground-up development — rather than conversion or adaptive reuse — enabled by increased investment is another factor pointing to co-living’s future popularity in San Jose.

Dishotsky, who said Starcity is looking at a bunch of other sites in San Jose, thinks that San Jose’s zoning alteration and overall openness to co-living is a potential model for other municipalities going forward.

“I think it's going to require additional momentum from some of the major cities,” Dishotsky said. “But if they start to see companies doing some version of what we're doing today, they're going to start to take notice and see it as a way to bring the missing middle back in.

“I think it’s the first of many other dominoes to fall.”