Investment Analysis

Big Money on Campus

Student housing remains a lucrative investment.

Economic cycles close the door on some opportunities while opening the door to others. In the case of student housing, all key indicators suggest that the door continues to remain wide open — promising the availability of attractive investment opportunities for years to come.

Investment Outlook

The current economic climate has caused business leaders across industries to shift gears by figuring out how to do more with less, and academic leaders are no exception. To that end, colleges and universities are now turning to the private sector to finance their new student-housing projects with greater frequency than ever before. These partnerships, if structured properly, afford developers and investors access to precious and normally unobtainable land that, considering the recession-resistant demographics of higher education, should result in attractive, risk-adjusted returns for decades.

Beyond the shift to the private sector, other positive macro-level fundamentals indicate the investment strength of student housing, whether it is on- or off-campus. College-age cohorts are keeping demand for housing high, but today’s students are not settling for the same dorms of their parents’ era. Against this backdrop, developers and investors alike can rest assured that the sector’s outlook is as bright as ever in 2013.

Rising Demand. Reduced endowments and continued declines in state funding have produced budget cutbacks, hiring freezes, and reductions in capital spending on college campuses across America, at a time when many institutions are experiencing all-time highs in enrollment. College-age cohorts will remain above the 5 million mark annually through 2020. These population projections should translate into steady undergraduate enrollments throughout this period.

Private Capital . Generally, capital spending budgets are extremely tight with most institutions preferring to preserve their debt capacity for those projects that support the core academic mission.

Public-private partnerships offer advantages to both sides. For student-housing developers, these arrangements provide access to unparalleled locations, which can offer better risk-adjusted returns over the long run. For colleges and universities, these partnerships deliver new, state-of-the-art facilities, while the developer typically assumes the financial burden and risk associated with the project. The end result is that the university usually incurs only indirect debt, which greatly minimizes the project’s impact on its credit rating/debt capacity.

High Expectations. Institutions across the country are facing the same situation: Much of their on-campus housing stock consists of 1950s- and 1960s-built dormitories that may no longer carry debt but still require a tremendous amount of ongoing capital for operations and maintenance and fail to meet the higher expectations of today’s students. As a result, university administrators need to replace these outdated buildings with new residence halls featuring the amenities that attract students. Furthermore, because universities only house about 30 percent of students on campus, there is opportunity to modernize housing both on- and off-campus.

Fragmented Sector. The top 10 student-housing owners own fewer than 10 percent of total housing stock, so there is also opportunity to consolidate. Through consolidation, national operators can take advantage of management efficiencies and economies of scale and improve the operating performance of stock acquired from local firms.

However, some local student-housing firms know their market extraordinarily well and could teach the national firms a thing or two. Just as with acquisitions in other sectors, it’s important to take the time to explore what’s being done well.

Investor Challenges

Despite attractive demographic and national trends, savvy student-housing investors must pay very close attention to the individual markets they are considering for investment. This includes gaining a thorough understanding of a market’s supply/demand fundamentals, barriers to entry, and the overall campus culture of the particular institution.

While occupancies and annual rent growth are great macro-level data points to test a market’s overall health, investors should dig deeper to ensure that they are identifying well-positioned opportunities within a specific market. For example, a luxury student-housing project may not work at a public commuter institution with a price-sensitive student body, but it could work at a state flagship institution with a significant number of nonresident students willing to pay a tuition premium for the out-of-classroom experience. This type of market analysis applies to both on- and off-campus housing investments.

Finally, student housing is management intensive and the experience of the management firm or operating partner will play a key role in influencing investment performance. The compressed leasing cycle, high tenant turnover rate, and unique property-level training require a seasoned operations team. Best advice: Select your management partner early in the process.

Dan Bernstein is executive vice president and chief investment officer of Campus Apartments based in Philadelphia. Contact him at dbernstein@campusapts.com.

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