By Janice Bitters  – Commercial Real Estate Reporter, Silicon Valley Business Journal Feb 27, 2019

Silicon Valley Business Journal

San Jose leaders cleared the way Tuesday night for a new kind of housing development to rise in the downtown core, with the City Council agreeing unanimously to add co-living to the city’s zoning code.

The move will allow San Jose’s first co-living development proposal, a nearly 800-bed project by San Francisco housing startup Starcity, to move ahead in gaining entitlements and starting construction. Many developers and council members say they see co-living as a way to get shovels in the ground on badly needed homes in the area as developers say traditional housing projects are getting financially harder to build.

“We have been doing everything we can to try to accommodate what we think is the last gasps of a cycle for development … in the hopes that we can get a few more projects underway and shovels in the ground,” San Jose Mayor Sam Liccardo said Tuesday night.

Meanwhile, city lawmakers will regroup in the coming months to decide how to impose certain fees and requirements, including affordable housing minimums, on the still relatively new housing concept of co-living. That’s a key discussion that development experts and housing advocates say has the power to spur or halt future co-living developments.

Notably, Starcity’s proposal doesn’t hinge on that conversation financially, as the project is taking advantage of a set of expiring tax breaks once implemented in San Jose to spur large multifamily development.

Developers Tuesday night told San Jose leaders that the details on how the city implements fees, parking requirements and, in particular, affordable housing minimums and rent restrictions on future co-living projects will decide whether more developments of the sort will rise.

“If you create too big a gap between market rent and required rent [for affordable units] then people won’t invest in it,” Erik Schoennauer of land use consultancy The Schoennauer Co., told the council Tuesday. “It’s coming up with the right formula where you are going to get some reduction of rent but it’s not so big that the market says forget about it.”

Co-living offers flexible, short-term leases for private bedrooms adjacent to shared common spaces, a model that allows for more residents in a building than a typical multifamily development and tends to fetch lower rents than a typical apartment. Starcity, for instance, says its rents tend to be between 15 percent and 30 percent lower than average rental units in a given market.

Many co-living buildings offer a bevy of amenities, host resident activities or mixers and include the cost of shared household supplies in a fixed monthly rent cost. The model, often referred to as “dorm living for adults,” is nearly synonymous with millennials, a generation that seems to have fully immersed itself in the “sharing economy” culture.

But housing advocates also urged city leaders to make sure co-living projects of the future create space for people not only with a wide range of income levels, but for families with small children and older residents looking to downsize.

Another co-living proposal

San Jose is already gearing up to consider its second downtown co-living proposal. Earlier this month, Cupertino-based KT Urban said it is studying how to make one of its residential tower proposals in downtown compatible as a co-living project.

On Tuesday, KT Urban Principal Mark Tersini seemed to unveil a few new details about the potential development. He thanked city council members for meeting with New York-based co-living company Ollie and noted his 27-story proposal, known as Garden Gate, could become home to around 845 bedrooms.

“We are out in the market talking to the capital markets, and all the traction we are getting from the market is on the co-living,” he said, referring to potential financial partners that would help make the development happen. “None for the traditional [residential projects] and none for the for-sale.”