Niche properties

Student Housing Stats

Demographic and economic trends point to continued growth in this niche sector.

There was a time when student housing either meant living in an on-campus dormitory or an apartment in town. On-campus housing was often austere, and off-campus housing was likely to be a poorly maintained apartment shared with several roommates.

In both cases, attitudes about student housing were pretty much the same: Students didn’t care that much about where they lived, they weren’t going to take very good care of their quarters, and the whole student housing experience was just a temporary situation.

But parents who went to college 30 years ago may now be surprised to find modern off-campus student housing that offers everything from tanning salons to spas, retail shops, and 24-hour fitness centers. Each project seems to add a new amenity to attract student tenants. In addition to indoor TV lounges, students now look for pools and barbecue areas for outdoor socializing. Simple Wi-Fi access isn’t enough — there needs to be lightning-fast Wi-Fi in the units and throughout the property. And while students want the opportunity to gather and socialize, they also want some privacy — their own bedrooms and bathrooms.

Today’s Student Housing

Student housing discussed in this article is privately owned, off-campus, and purpose-built. The typical unit configuration is a suite with common space for living and cooking and private bedrooms, each with dedicated bathroom. Most properties offer furnished units that rent by the bed with parental guarantees. Utilities are included and leases are typically for 12 months.

Most student housing developers are delivering three- and four-bedroom suites to maximize returns. For many universities privately owned student housing resolves the need to have competitive housing without utilizing the school’s scarce financial resources.

In terms of affordability, student housing generally offers accommodations at prices comparable to alternative housing — dormitories and conventional apartments. Cushman & Wakefield Valuation Services generated a rent comparison of a typical two-bedroom unit at a student housing property versus a conventional development in a similar area. The average student property offers a better package in a roommate environment.

Looking across the broader U.S. rental market, it is useful to compare data from Reis for conventional apartment rents with data from American Campus Communities, the largest student housing real estate investment trust, as a proxy for the national student housing market. As the U.S. Rental Comparison chart shows, only a conventional three-bedroom unit is more affordable than three individual bedroom leases on average. However, the difference does not take into account utilities and parental guarantees for the rent on the entire unit.

Proximity to campus is key, not only for students but also for investors who have learned through experience that properties close to campus are more resilient when the market adjusts. Close-in properties fare better when demand drops due to enrollment or housing policy changes, or when new development adds to a market’s supply.

Likewise, eco-friendly features and construction are important to students and investors alike. Many investors perceive green features to lower the future risk of non-compliance with more stringent environmental codes expected in the coming years. Developers have responded by building housing that meets Leadership in Energy and Environmental Design, or LEED, standards.

At many universities, private student housing meets a well-defined need. For example, the University of Minnesota is one of the top 10 largest U.S. universities and the only one in a major metropolitan area. It has 51,853 students on the Minneapolis campus. On-campus housing can accommodate 6,946, while commuters account for another 10,360. Private off-campus housing provides for 6,890 students, and the remaining 27,657 find arrangements in the conventional housing market.

In Minneapolis, developers responding to the 100 percent occupancy of class A student housing will deliver 2,267 beds by the beginning of the 2014-15 academic year. Based on pre-leasing as of June 2014, the additional inventory will be readily absorbed.

In many markets, as conventional apartment and student rents converge, the value of student housing becomes more compelling — for both students and investors. Comparing the quality of the alternatives, student housing offers increased safety, superior amenities, faster Internet, and greater proximity to campus. For investors it offers a way to diversify portfolios.

Investor Activity

Today, conventional multifamily rental properties are among the preferred property types for institutional investors, especially given its resiliency during economic downturns. Multifamily consistently records superior risk-adjusted returns compared to the other property types. Although still a small subset of the multifamily market, student housing has attracted increased interest from institutional investors.

What investors find attractive in student housing are the returns relative to conventional apartments. Occupancy runs higher — ACC had 96.5 percent occupancy in 2013 vs. 95.6 percent occupancy reported by Reis for apartments overall.

Even with increased investor capital pursuing student housing, there is still a capitalization rate premium. Over the last 12 months ending with first quarter, student housing had the highest cap rate among garden and mid/high-rise product, posting an average of 6.8 percent, compared with 6.4 percent for garden and 5.0 percent for mid/high rise product, according to Real Capital Analytics’ first quarter 2014 nationwide survey. The gap between student and garden properties would be wider except that the cap rate for garden product includes a significant number of older properties that raises the average.

Annual student housing transaction activity has ranged from $2.5 billion in 2011 to almost $4 billion in 2012, when ACC acquired a portfolio of properties from Kayne Anderson for $863 million. In the 12 months ending at in 1Q14, transaction volume was $2.9 billion. This is 3 percent of the $92.5 billion of apartments that traded in the conventional apartment market.

With high prices supported by low interest rates and bolstered by an increasing amount of capital earmarked for student housing, owners can be expected to continue to take advantage of the seller’s market. Looking forward, transaction volume should remain high. With the recovery in their stock prices, student housing real estate investment trusts will likely be more active in the second half of 2014 after pulling back at the end of 2013 and into 2014.

Stock prices of two of the largest student housing REITs, ACC and Campus Crest, have substantially recovered, and, as of early July, were within 80 percent and 91 percent of their respective highs. ACC reported revenue growth from $361 million to $367 million for fiscal 2013 as a result of 1.7 percent rent growth, as occupancy took a tenth of a percent dip. By comparison, conventional apartments had 3 percent rent growth, according to Reis, which most likely includes higher rents for newly developed properties as well as same store rent growth.

Location Factors

From 2010 to 2014, 40 states had 634 sales transactions according to RCA. The top 20 states represent 84.1 percent of the volume. Not surprisingly, the three most populous states — Texas, Florida, and California — also recorded the most sales. Missing from the group is New York, the fourth most populous state, which is 13th on the list and recorded only 17 sales.

While there are plenty of universities in New York, student housing there is very different from the Sunbelt — there is more university owned housing and fewer sales of privately owned properties. More than half the state’s population resides in New York City, which is also home to more than a half-million college students every year, drawn by the city’s more than 100 institutions of higher learning. Universities in New York City generally lack defined campuses except for Columbia University. Dormitories, academic buildings, and student facilities are dispersed in neighborhoods around the city. With an excellent subway and bus system, university students can easily live quite a distance but only a short commute from school. For example, although there is no university in Brooklyn Heights, the former Hotel St. George, located above the Clark Street IRT station, is a popular residence for more than 1,400 students attending New York University, Pace University, and The New York Conservatory for the Dramatic Arts.

In the 1970s, Columbia University was able to house barely 50 percent of its students. At the time, a significant number were commuters or found conventional housing in the neighborhoods around campus. In that era, the surrounding area had not been gentrified, and students faced real risk of becoming crime victims. Today, the area surrounding Columbia is the second safest neighborhood in Manhattan, and the school is able to offer all students housing, a real necessity as conventional rents have skyrocketed.

Demand Forecast

From 1980 to 2012, the number of university-enrolled students grew from 12.1 million to 21.5 million, according to the National Center for Educational Statistics data. NCES projects the student population will reach 23 million by 2020.

A number of factors come into play in determining the size of the U.S. student population and, therefore, the demand for student housing. Taken together, the net effect of factors determining student housing demand are forecast to yield continued growth in the number of students attending universities.

The population between the ages of 18 and 24 is projected to continue rising through 2050. Of the total, a variable number will attend universities and colleges. The overall economy with its jobless recovery has driven those who can afford higher education to pursue further studies to defer entering the job market and, at the same time, improve their marketability. But the lack of real income growth for the vast majority of Americans has had a negative impact on attendance given the increased cost of higher education and tight family budgets.

Foreign students are another often-cited factor in the number of students attending U.S. universities. The total number of student visas granted in 2013 was 564,137. When compared to the 21.5 million university students enrolled in 2012, foreign students represent 2.6 percent of the population. While the U.S. is the preferred country for overseas students seeking education in developed countries, many of those students end up in Western Europe as a fallback, with the U.K. and Germany being the primary beneficiaries of this demand.

Based on demographics, the economy, and projected growth in the number of university students, demand for student housing is estimated to grow. As with conventional apartments, the future performance of the student housing industry will very much depend on the supply/demand balance in each submarket.

Byron Moger is the executive director of Multifamily Advisory Group in Florida for Cushman & Wakefield and also leads student housing assignments nationwide. Contact him at byron.moger@cushwake.com.

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