Understanding the Risks & Opportunities of Student Housing

In recent years, student housing has attracted attention as a resilient asset class with the ability to drive returns even during a depressed macro-economic environment. The sector’s rent growth and occupancy figures outperformed traditional multi-family apartments during the recent Great Recession, encouraging the current investor demandfor student housing property. Investors interested in participating in student housing projects should understand the niche aspects of the market and the unique opportunities as well as associated risks involved in that sector.

Positive Trends in Student Housing

Developers and investors who see a strong future in the student housing space are generally bolstered by the demand trends for U.S. higher education and the risk profile of the tenants. Currently more than 20 million students are enrolled in a college or university in the United States. While the 2012 attendance figures show a 500,000 year-over-year decline, the majority of the decrease occurred among graduate students aged 25–29. With cohorts of the Echo Boomer generation entering college age, overall college enrollment growth in the United States is projected to grow to 24 million by 2022. Additionally, record numbers of international students are arriving in the U.S. to obtain bachelors’ and advanced degrees. These factors, combined with funding challenges for some institutions to expand on-campus housing facilities, has created an opportunity for private off-campus property to serve the unmet demand. The growing enrollment supports a relatively stable supply of potential occupants for student housing landlords, and the common practice of requiring students’ parents to cosign on lease agreements further enhances the attractiveness of the tenant base.

Unique Challenges and Risks

Despite the current positive sentiments towards student housing as an alternative investment, it’s worth noting the distinct operating challenges and risks. While we’ve mentioned the attractive aspects of the student tenant base, there are also some unappealing aspects to that market. Student renters historically have a high turnover rate and cause above-average “wear & tear” on their units. This leads to higher maintenance and renovation costs compared to standard multi-family buildings and a more active, shortened leasing period prior to the start of the academic year. Also, the student housing industry is maturing, and the increase in competition will have an effect on the market price for assets. 50,000 beds were supplied to the U.S. student housing market in 2013 and an additional 50,000 are expected in 2014. With proximity to campus being the most important amenity for students, oversupply could lead to increased vacancy. Student housing has gone through a significant transition in recent years and now draws significant interest from sponsors and developers. It is important for investors to understand the risks that come with the opportunities in the segment.

Source: Realty Mogul