Old School, New Analysis
Consider these factors before investing in student housing
While real estate activity
has picked up so far in 2011, investors are still very cautious about their
property investments. The areas that have remained relatively strong are those
niche-market sectors that allow easy identification of a market’s demand generator
and its potential for growth.
The student-housing market
is an area with strong demand, according to the National Center for Education
Statistics. Data indicate that college enrollment will likely increase by 11
percent between 2002 and 2013. This, coupled with the fact that rents for
student-housing properties have been rising at a higher rate than they have for
conventional apartments, can provide a base level of confidence for investors.
However, there are other factors to consider in determining if an investment is
When evaluating properties
located close to universities, investors should review the university’s
historical growth, plans and funding for future growth, educational standards
and programs, and special programs, among other factors. Ascertaining the
potential for growth and future demand is the common factor: Investors must be
confident that demand will outperform the creation of a viable new supply. But
beyond that, investors must analyze a market’s urban fabric to predict if a
real estate market supply shortage is inevitable.
The following examples from
university markets indicate the typical and less-common challenges that
determine the direction of supply and demand in student housing.
Leveraging Entry Barriers
Barriers to entry for new
real estate include zoning issues, difficult terrain, and high density. Cities
with increasing demand grow naturally and government restrictions can impede
that growth. But these restrictions are artificial and can easily be removed.
For example, in Austin, Texas, zoning regulations were protecting the low
density housing around the growing University of Texas. Over time, the city
realized that this was pushing student-oriented development away from the
university, which siphoned off demand for nearby retail and created additional
traffic congestion and campus parking issues.
Eventually the city eased
the zoning restrictions and, in just a couple of years, the market near the
university went from undersupplied to oversupplied. New buildings were forced
to reduce rental rates and were still unable to reach decent occupancy levels.
In addition, cleared lots are ready for more complexes to be built. As a
result, the supply-demand imbalance will not be in the property owner’s favor
for some time to come.
In some cases, the zoning
regulations may not be the barrier they are perceived to be. For instance,
Oxford, Ohio, home of Miami University, has been described as a difficult
anti-development environment by several real estate professionals. However, a
recent site visit and look at the urban fabric revealed otherwise: The city of
Oxford’s zoning promotes New Urbanism, which is the use of historic patterns of
urban development such as walkable streets, apartments over retail that front
the street, and parking hidden within the urban fabric. Developers have been
proposing projects set back from the road with large parking lots facing the
street — a more common housing type but not one suited to this particular
community. The community isn’t anti-development, just misunderstood by
Terrain is another barrier
to future supply. For example, a school located on a river presents an obvious
barrier to well-located competition: Students make housing choices based on the
part of campus where the majority of their classes are held. Terrain problems
also might include steep grades that are often not practical for major
construction, limiting development as well. Constructed barriers, such as large
highways and railroad tracks, especially freight lines, also form obstacles to
access and impair growth.
In fact, most large
campuses that are in or against mountains tend to have shortages of housing:
for example, Appalachian State University in Boone, N.C., and California
Polytechnic State University in San Luis Obispo. In comparison, agricultural
fields are not barriers and actually are potential sites of new supply in a
market. Several universities are beginning to lease or otherwise use their
agricultural fields for new university housing, including California State
University at Fresno and the University of California at Davis.
Activity: $41.3 billion
properties on the market
First-year cash on cash
yield: 8% to 9%
Rents: 10% to 20% higher
than traditional apartments
Expense ratio: 45% of
revenues, compared with 35% to 38% on traditional apartments
Occupancy average: 98%
Rent growth: 3% to 5% since
Sept. 24, 2010
Predominant use also may
compete with the demand generator in university towns. Property surrounding the
University of South Carolina in Columbia is dominated by the state government
buildings and downtown offices on two sides. The university and related private
housing and retail will not be able to expand into these areas because the
property is too valuable and the government use is as enduring as the university.
What goes on below the
ground also can affect growth. When looking at the market of Indiana University
in Bloomington, for example, large tracks of land just outside the city limits
look like an immediate threat for future oversupply of multifamily housing. But
further consideration reveals that this area is not serviced by sewer systems,
and large-scale septic systems are not feasible with the large amounts of
limestone and karst below grade and a protected aquifer yet farther below. This
area also is a shopping and office district for five rural counties, so the
current trend of office and retail, which do not have large septic
requirements, will continue to use the open land and limit new student-housing
supply in the future.
An examination of the finer
detail and a review of existing structures also are important for determining
the future growth opportunities of a market. For example, are there
well-maintained homes on small lots? These could be very difficult to buy up at
the quantity and price necessary for future development.
Yet as the quality of the
property on small lots changes, so does the possibility of development, as
shown by student-housing expansion at Texas Tech University in Lubbock. In a
fringe neighborhood, homes had lapsed into disrepair and the neighborhood had
deteriorated because investing in improving a small home on a small lot in this
area would not have been practical, given affordability of land and housing in
the area. This allowed a local developer to capitalize on this lower-cost
property convenient to the campus and acquire more than 900 homes, amassing 325
acres for development adjacent to Texas Tech.
In addition to quality of
value, density and the residual value of underdeveloped property are factors.
In a dense urban market where few opportunities for development exist and
growth is pushed away from demand generators, neighborhoods with small
buildings on large lots are attractive to investors because they are easy to
buy and redevelop. The University of Illinois at Urbana-Champaign is an example
of an urban center that is mixed with low-density lots. Many of these lots have
recently been redeveloped with high-rise buildings and now this market is in
danger of being oversupplied with housing.
Dense areas that leave few
opportunities for redevelopment also reduce the opportunities for parking,
making the close proximity of student-housing properties to the university even
In any setting, the value
of the property also is a reflection of the infrastructure in place. A
free-standing single-use retail establishment, such as a fast-food restaurant
or a gas station surrounded by a parking lot, is a potential target for a
developer, particularly if it is close to a demand generator. Within the urban
neighborhoods surrounding Virginia Commonwealth University in Richmond, a
free-standing Hardees stood directly across the street from the university
until a few years ago. The site’s proximity to the university and low density
made it an optimal location for a tear down and redevelopment into student
housing. The property is now a four-story student-housing complex over one
story of student-oriented retail and restaurants.
It also is important to
understand the potential for adaptive reuse of the existing buildings within a
city. For instance, in any housing, bedrooms and living spaces must have
exposure to sunlight. Therefore, the maximum depth of an apartment is generally
considered to be 30 feet from the exterior wall. Assuming a configuration of
apartments on both sides of a corridor, it is very difficult to efficiently
convert a building that is more than 70 feet deep into housing as typically
anything more than 65 feet deep is not ideal. For example, an old loft building
might look like a potential development for housing, but if it is too deep, it
cannot be adapted efficiently and may not be a potential threat for additional
The most important issue
for investors to understand is where demand is coming from and if it will grow.
a clear understanding of a market’s urban growth patterns and a potential
asset’s ability to provide favorable returns, investors can not only make wise
investments, but can ensure that the value of those
investments remains high into the future.
Adam Hird is a managing
director at Kayne Anderson Real Estate Advisors in Armonk, N.Y., and a
registered architect. Contact him at email@example.com.