The newest wave of college students is even bigger than that of the last generation, and combined with a larger influx of international students they have boosted sales in university housing across the country. State funding for on-campus facilities is waning, which is opening the door for more opportunities for public-private partnerships and private development projects. Experts say student housing investments can prove lucrative, but challenges like shorter lease terms, higher turnaround and higher management costs must be taken into account. For more on this continue reading the following article from National Real Estate Investor.
The rapid growth of university enrollments in the United States has been bolstered by highly favorable demographics, particularly the echo boomer age cohort (those born between 1982 and 1995), and an increasing number of international students. With heightened economic demand for advanced skills and knowledge, more high school graduates are attending full-time colleges. According to the U.S. Department of Education, 68.1 percent of high school graduates went on to attend college as of 2010.
Meet the echo boomers
The echo boomer generation, whose oldest members became college-aged in 2000-2001, boasts a cohort of 77 million strong. College student populations are expected to continue to grow over the next decade (by an average of 1 percent annually through 2020). According to the National Center for Education Statistics, between 2011 and 2020, U.S. college enrollment is projected to increase by about 2.3 million students. Additionally, colleges have been experiencing a steady increase in international student attendance. The United States has one of the best higher education systems in the world, which draws students worldwide.
State university budget cuts mean opportunity
The majority of housing on public campuses is funded by state budgets, which have been constrained due to budget deficits. A significant number of states are experiencing severe budget deficits due to loss of state tax revenues and no quick turnaround is expected. Decreased state appropriations force universities to prioritize their capital spending, which may lead to limited ability to upgrade aging on-campus housing. Tight public university budgets and substantial investment losses during the market downturn of endowment funds of private colleges have prompted increasing public and private partnership opportunities.
School-owned housing facilities can accommodate approximately 30 percent of today’s total enrolled student population. Thus, most students not commuting from their parents’ homes must rely on private apartments or houses as living quarters. A significant amount of on-campus student housing is outdated or inconsistent with current student living standards, boosting demand for new student housing with modern amenities.
Because of growing enrollment numbers, on-campus housing capacity as a percentage of undergraduate enrolment actually decreased in relative terms over the past several years. As such, it is likely that university-owned housing has failed to keep pace with the demand growth.
Both cap rates and asset pricing have seen strong improvement in the last two years. Furthermore, financing for student housing remains attractive, especially from the government-sponsored lenders Fannie Mae and Freddie Mac. Yields are generally 75 basis points to 100 basis points higher than those of comparable conventional apartments and student housing investment can provide for unlevered core return opportunities in the 7 percent to 9 percent range. Opportunities exist for all investment strategies: core, value-add and development.
Student housing offers unique risks and challenges
Student housing is not without its unique set of risks and operating challenges. These include a concentrated and cyclical leasing period (generally from October to the following May in a given year), higher maintenance than that of conventional apartments, and significant annual turnover. Therefore, partnering with experienced operators that thoroughly understand the asset class and the local market is critical.
Other challenges include:
- Shorter Leasing Cycle: Most student housing is leased during a narrow window of time from Fall to Spring, which puts pressure on early marketing and leasing efforts to ensure a fully rented building when classes commence in the fall term.
- Higher Turnover Rate: Unit turnover is low during the academic year, but less than half of the students typically renew, creating high annual turnover that occurs in a concentrated period of time.
- Development/Redevelopment: Development or redevelopment projects have a very narrow delivery window (the fall semester). If a project misses the beginning of the new school year, it could potentially experience high vacancy until the next school year.
- Management Intensive: Compared to conventional apartments, student housing presents significant operational challenges, including high turnover, risk management issues and intense marketing, which require a highly experienced operator. Often students are hired as on-site assistants to facilitate property management. Maintenance costs are normally greater for student housing.
This real estate niche can provide opportunities for attractive returns and improved portfolio diversification for those investors willing to accept the distinct risks, operating challenges and idiosyncrasies of student housing. Student housing also offers investors some degree of insulation from economic fluctuations. With limited supply of high quality on- and off-campus housing and favorable demand factors, including the increasing need for a university-level education in today’s competitive job market, the future seems bright for student housing investment.
Dr. David Lynn is CEO and Founder of Lynn Capital Management and Portfolio Manager of the LCM Total Return Fund.
This article was republished with permission from National Real Estate Investor.