Student housing has seen some very good years over the past two decades as the Millennial Generation has wandered its way through the halls of higher education. The upcoming generation, Gen Z, is not quite as large a cohort, but changes in demographic, employment and economic trends portend a continued and growing need for more student housing. As an investor, Jacobson Equities, seeks to identify and invest in select opportunities that tap into the right real estate markets to generate attractive returns. In this article, we will explore the potential of the student housing market and highlight the key fundamentals that make it an investment worthy real estate segment.
What is Student Housing?
Let’s start with the basics. Student housing is a subsegment of multifamily real estate that offers rental accommodation to undergraduate and graduate-level students, typically properties located near college and university campuses. On-campus dormitories don’t have the capacity to house all the students who want housing, so private student housing complexes bridge the gap. A property is considered student housing if more than 40% of the building is rented to students. A “designated student housing property” commits that 80% of the building is leased to students and located within 2 miles of a campus with more than 10,000 students. These designations are used primarily in financing decisions with loans backed by Fannie Mae or Freddie Mac. Student housing can run the gamut from dormitory-like structures rented on a room-by-room basis to typical apartment-style complexes rented by the bed or as a complete unit. Like traditional multifamily, amenities will vary with the property. Like conventional multifamily, current trends social and economic preferences are driving demand for higher quality, luxury-like amenities such as pools, spas, gyms and social spaces.
A Segment with Strong Fundamentals
The student housing market boasts robust fundamentals, making it an appealing investment prospect. According to the National Multifamily Housing Council report The Future of Student Housing Demand, enrollment in undergraduate public four-year universities, which is a significant source of student housing demand, is projected to increase by 1.1 million new students by 2031. An additional 400,000 students are expected through graduate enrollment. The NMHC estimates that the student housing market will grow from a total of 8.5 million beds in 2020 to 9.2 million by 2031 (an increase of 734,000 beds).
These numbers indicate a sustained demand for student housing in the coming years. But currently, supply rather than increasing to meet the expected demand has languished thanks to higher interest rates and rising construction costs. According to real estate tech and data provider YardiMatrix, only 18,000 new bedrooms have been delivered at the Yardi 200 universities (Yardi’s list of the largest most competitive public and private universities in the U.S.) over the past 12 months, down from 30,000 bedrooms in previous years.
The YardiMatrix Quarterly Report on Student Housing reveals the current strength of pricing in the student housing market. Nearly 70% of available beds at the top 200 universities in the country are already pre-leased for the upcoming Fall 2023 term. Rent growth reached 7% year over year, with an average rent of $829 per bedroom, marking the highest recorded rent for this group. Such positive market indicators highlight the potential for attractive returns on investment.
Strong demand and increasing rents have positively impacted the finances of the student housing properties. For year-end 2022, the NMHC reported that net operating income for student housing properties averaged 64.5 percent of revenue, the comparable figure for conventional multifamily was just under 60 percent. Rents for multifamily units have risen much more rapidly than student housing, which has increased demand for less expensive student-focused properties. This trend is particularly true in urban environments where students often would seek conventional housing further from the campus at cheaper rates, but as rents have increased, they have returned to the less expensive, and closer locations of the student properties.
Student housing has also historically been seen as recession resistant. During times of economic uncertainty and recession, college enrollment tends to expand. When job opportunities become scarcer, there is a tendency for the workforce to return to school.
Varying Market and Geographic Factors
Investing in student housing requires a comprehensive understanding of the many different local market dynamics and the ability to navigate the unique challenges they present. One critical factor to consider is the location of the student housing property. Proximity to campus has a significant impact on rental rates and property values. Research from Berkadia indicates that properties closer to campus command higher rents and fetch higher valuations. However, the same study highlights that units located further from campus experienced the greatest rent increases. Balancing these factors requires a nuanced understanding of the market and local dynamics.
Regions flush with colleges and universities, including Miami’s Miami-Dade County, Seattle’s King County, Atlanta’s Fulton County, and the City and County of Denver, are seeing a robust supply of new student housing units. Still, they cannot keep up with the demand. California perennially needs student housing. College enrollment across the state is forecast to increase by 28,000 in the next five years. With average California rents extremely high compared to the rest of the country, student housing provides a more cost-effective living arrangement.
California Dreaming
Identifying the opportunity in student housing in 2004, Jacobson Equities purchased Westpark Plaza, a 240-bed student housing property in Chico, California within walking distance to California State University Chico. In line with the trends, the asset’s strong fundamentals in student population growth, rent increases, and a prime location have translated into 12 percent cash-on-cash returns to investors and a property valuation that is nearly twice the original purchase price.
A Bit Riskier Than Conventional Multifamily, but Worth It
Risk management is another critical aspect of student housing investments. Students tend to be less likely to stay in the same property year after year and may not treat the property with the same care as families or young professionals. An experienced sponsor can implement effective tenant screening processes, proactive property management, and maintenance strategies to mitigate risks and optimize occupancy rates. In return for the additional risk, student housing investors typically enjoy slightly higher returns than conventional multifamily housing.
The student housing market in the United States at the current time presents itself as an exceptional investment driven by the growing demand for college education. However, to capitalize on this market, it is crucial to partner with an experienced sponsor. A sponsor’s deep understanding of the student housing sector, ability to identify the best investment opportunities, and skillful management of risks are required to deliver the expected returns.
