Student Housing – An Overview

We’ve earlier posted content on several different segments of commercial real estate such as multi-family, hospitality, office, and retail, and in this article we will discuss the student housing market. Student housing is a subset of the multi-family asset class and is characterized as housing principally serving undergraduate or graduate college students. The sector is noted for its dependable cash flows and has benefited from recent demand trends in higher education. The resiliency of student housing properties during the recent economic downturn has attracted significant interest; however, like any real estate investment, student housing is not without distinctive risks and challenges.

Characteristics of Student Housing Properties

One of the unique features of student housing is that leasing is offered by room or bed, and not an entire unit. This represents the shared nature of the accommodations, with nearly universal “roommate” living arrangements, and allows individual renters to be charged based on their specific bed and share of the applicable common areas. Leasing terms are typically of one-year durations, which lead to a high annual turnover and an active shortened leasing cycle requiring intense marketing.

Newer developments have included a growing presence of amenities such as wireless internet, cable television, kitchen appliances, and full furnishings. The combination of high tenant diversity and financial backing from students’ parents contributes to the relatively low risk profile of the renter population, despite the annual turnover rates. However, maintenance costs generally run higher for student housing compared to traditional multi-family properties.

As with the other commercial property types we’ve covered, student housing can be classified by quality as either Class A, Class B, or Class C. Class A comprises newly constructed assets located in major college towns with on-site facilities such as swimming pools, fitness centers, and clubhouses. Class B/C facilities are usually older properties in need of specific improvements if higher rents are desired, or may be in more distant or otherwise less desirable locations. For student housing transactions completed through 2012, the average cap rate was 6.41% on Class A properties and 7.17% on Class B/C. 

Current Trends

Student housing has recently emerged as a mainstream investment category.

A key driver of the demand for student housing is the enrollment trends of colleges and universities. Despite the development of on-line courses and some dissatisfaction with the current costs associated with a college education, domestic matriculation continues to rise.  An increase in international students seeking U.S. education has added to the demand, creating an increased need for student housing as colleges and universities have lagged in expanding their on-campus dormitories. Additionally, students are recognizing that existing on-campus facilities can sometimes be outdated or lacking in amenities, which has allowed private developments to differentiate themselves by better aligning apartments with student needs in locations convenient to campus. These factors contribute significantly to the student housing market, allowing the sector some protection from the negative effects of the recent stagnant economy. With the proper due diligence, investors can achieve favorable returns while accepting the operating risks that are associated with this asset class.

Source: Realty Mogul