What is the first thing that comes to mind with the words “off-campus student housing?”
If you’re picturing Farber College’s Delta Tau Chi house from the classic movie “Animal House,” you should probably upgrade your thinking. Certainly, off-campus housing for university students once consisted of ramshackle apartments and older homes. However, since the late 1990s, such housing, also dubbed “purpose-built student housing,” or “privately owned student housing” (POSH) has changed significantly. Many universities have decided to get “out of the housing business” and rely on private developers to help meet the demand for apartments around their campuses.
As a result, purpose-built student housing properties often incorporate modern designs and numerous amenities. Common features include both private and public study spaces, spaces for recreation, restaurants, and large common areas where students can gather and talk.
Though student housing is a subcategory of the multifamily sector, these two product types differ in some of the following ways.
According to data from National Center for Education Statistics (NCES), the research arm of the US Department of Education, between 2000-2015 undergraduate enrollment increased 30%, from 13.2 million to 17.0 million. By 2026, the NCES forecasts enrollment at 19.3 million students. Millennials, born between 1981-1997, have been driving higher enrollment numbers since before the Great Recession. Though millennials are at the end of their college-going years, Generation Z is right behind; the oldest of this population are starting to attend college. At 69-million strong, the Generation Z cohort will likely continue having a positive influence on undergraduate enrollment. That being said, changes in undergraduate enrollment does not directly translate to increase the demand for student housing.
Meanwhile, on the supply side, across the entire US, a shortage of beds remains. Axiometrics, a RealPage company that collects and analyzes privately owned student housing data across major universities nationwide, pointed out that more than 37,000 beds were delivered in 2017, with 8,000 more in the pipeline, or anticipated to be delivered soon. Though this might seem like a large number, supply continues to lag demand, as it has done since the recession.
Source: Axiometrics, a RealPage Company
Adding to the scarcity is that much of the available on-campus housing is antiquated. According to Bill Bayless, CEO of American Campus Communities, one of the nation’s largest owner of student housing “the median age of the housing in the 65 markets we are in is 51 years.”
For large, cash-strapped universities, justifying the cost of retrofitting these older “dorms” with modern technology and amenities can be difficult. As such, older dilapidated dorms are being torn down to make space for new classrooms. This, in turn, may drive students from on-campus living to nearby, newer off-campus, purpose-built housing.
During the past decade, the student housing sector has garnered the attention of REITs, pension fund and other large investors who point to the data showing lower rental rate volatility than traditional apartments. The chart below shows that university enrollment in the US tends to grow at a faster pace during recessionary periods, than during non-recessionary periods. While it is important to note that the increase in undergraduate enrollment rate does not automatically translate to an increase in demand for student housing at the same rate, student enrollment remains one of the most important factors that drives the student housing demand. Even so, it is critical to recognize that each student housing property is unique with supply and demand fundamentals that may not follow national trends.
To summarize, continued demand and scarce supply are two factors that help make privately owned student housing a potentially viable asset. Furthermore, this investment could offer:
But, not all student housing is created equal. Before jumping into such an investment, you should consider the following.
Even with the caveats above, a student housing property could be a viable addition to your portfolio, with the potential for revenue growth and appreciation based on a location.
The Realized team recognizes the potential opportunity of student housing investments and their impact on your portfolio. Contact us today by logging on to realized1031.com or calling (877) 797-1031 to learn how to tap into this relatively stable asset class.