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Analysts say student housing has been a safe and profitable investment for many years, but new trends in higher education and housing availability may be changing the landscape in some markets. Studies show that college enrollment is down overall, which may impact profitability, although the numbers at state schools are still positive. Even so, a surge of competition in those markets may be harder to draw steady yields as students get more choices and become more selective about how they spend their money in the face of mounting student debt. For more on this continue reading the following article from National Real Estate Investor.

The long-term outlook for student housing may be positive, but investors and managers should be on the lookout for competition from new construction.

“You are in a maturing industry where a lot of the easy money has already been made,” says Terrell Gates, founder and CEO, Virtus Real Estate Capital.

Experts expect demand for student housing to increase over the next several years. But student housing operators are looking over their shoulders for potential competition, especially in major student housing markets serving large universities. Nearly all of the new beds under construction are being built near the 300 or so largest universities in the country.

Demographics

Enrollment at U.S. universities reportedly declined last year by about 500,000 students. That news set off a wave of speculation that the student housing business might be overheated. Some investors worry that the recent dip in enrollment is the beginning of a long-term trend, as prospective students decide not to take on the burden of student loan debt.

“Students and parents are going to be more discerning on how much debt they pile on,” says Jim Arbury, vice president for the National Multi Housing Council. However, students are still likely to enroll. “An average student might pile up $25,000 in student loan debt. For the average job available to a college graduate, $25,000 is worth it.”

Projections from the U.S. Dept. of Education show college enrollment growing overall from 21 million in 2010 to 24 million in 2020.

In the recent dip in enrollment, the majority of the students who didn’t return were graduate students who have put off further education as the unemployment rate declined. “These are not people traditionally targeted by student housing,” says Terrell. Also the biggest drop in enrollment came at smaller, often more expensive private colleges, while most student housing properties can be found near larger, public universities.

“Nobody has seen a major impact on the great bargain schools, the state schools,” says NMHC’s Arbury.

New construction hits markets

Roughly 50,000 student housing beds came onto the market in the summer of 2013, in time for the 2013-14 school year. Next summer another 50,000 beds should hit the market. That’s up from 40,000 that came on line in the summer of 2012, according to Terrell.

The new flood of student housing follows a long period during and after the crash when very little new student housing was built. Also, the level of new construction is not that large considering that there are more than 20 million students now enrolled in college or university.

However, the flood of new construction is concentrated in the area nearby the roughly 300 largest universities with more than 10,000 students apiece, says Arbury. The newest student housing is targeted even more tightly. Because of the high cost of new construction, these new beds target the wealthiest students who can afford the cost. “You can only make the math work if you’re delivering class-A properties,” says Terrell.

Terrell expects to see more consolidation in the business as more large institution investors enter the space and existing student housing companies grow to an institutional size.  “The news is out: Everyone understands that student housing is recession resilient,” he says. “Consolidation is coming.”

This article was republished with permission from National Real Estate Investor.