Big Money on Campus
Student housing remains a lucrative investment.
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.
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.
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.
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.
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.
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
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.
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.
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
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.
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.
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 email@example.com.