Interested in investing in student housing, but wondering if it’s just a passing trend?
Gone are the days when university students routinely camped out in decrepit granny houses. Today’s students, particularly international and the affluent, want amenity-rich housing – and are willing to pay top dollars for it.
Instead of run-down housing, properties boast fitness centers, restaurants, and roof deck pools. Some properties are nearly indistinguishable from luxury housing. And with universities only able to supply 25% of their students with housing, investors and developers alike are rushing to fill the gap.
Student Housing Is a Recession-Proof Investment
Unlike retail or office properties, student housing is resistant during economic lows. Unable to find jobs and hoping to acquire enough skills to “get a good job,” students flock to universities when the economy is in a downswing.
In fact, this is exactly what happened during the Great Recession. The number of students enrolled in U.S. universities hit an all time high, with 70.2% of all students enrolled in higher education in 2010 according to the Pew Research Center.
Although the economy has recovered, there remains a huge influx of students from another source: foreign countries. Nearly 364,000 students with F-1 visas are enrolled in public colleges and universities in the U.S., which is double the number enrolled during the Great Recession. That’s an astonishing 104% increase.
Not surprisingly, college students have demands similar to millennials, with an emphasis on amenities such as superfast WiFi and housing that supports a live, learn and play lifestyle. Urban campuses are particularly attractive to both students, as they offer a mix of culture and convenience. For investors, urban campuses are less subject to the student vacations, which minimizes vacancies.
What to Look For When Evaluating Potential Student Housing Properties
Close to campus
Housing should be close to campus. Since students prefer to walk or bike to classes, the ideal distance should be between 1/4 to 1/2 of a mile from campus.
Floor plan that matches the needs of students
Unlike other multifamily properties, floor plans for student apartments must be uniquely suited to the needs of students and fit in with the culture of the university.
Developers and investors have borrowed a page from the hospitality industry’s game plan: create a variety of housing meant to appeal to a wide spectrum of tenants. Instead of assuming that one size fits all, successful investors are offering students a choice between housing that differs based on design as well as lease rates.
This strategy is often more effective than simply building dozens of high-end apartments. These end up being overbuilt, overpriced, and have a hard time maintaining profit over the long-term.
For example, companies like Campus Crest, which recently acquired Copper Beech Townhouse Communities, offer two very different types of product for this very reason. They’ve discovered that sophomores and juniors prefer traditional housing with standard floor plans, while seniors and graduate students gravitate towards apartments that provide a more residential experience.
Excellent Property Management Is a Must
Managing student housing isn’t for the weak. Management must be prepared to deal with all the possible issues that arise from young adults out on their own for the first time, as well as the extensive wear and tear on each apartment.
In addition, students rent on a per-bed basis, which means that housing not located in urban areas must face the wallet-clenching reality of vacancies during a large chunk of the year, usually from May through August.
Financing for Student Housing
Obtaining financing for a property at the right time can be critical to an investor’s success. As the popularity of student housing spreads, more and more lenders are offering the choice to use forward rate locks, which lock in rates in the spring but close deals in the fall.
Although this has the disadvantage of requiring investors to carry additional costs as well as take on the risk of a property not reaching full occupancy, it does allow them to take advantage of lower interest rates.
In terms of acquiring loans, Fannie Mae and Freddie Mac are still heavily involved in financing student housing loans, with the GSA purchasing more than $4 billion in housing loans in 2016. However CMBS lenders have also become more involved, offering competitive loans to investors in secondary and tertiary markets, where traditional financing is harder to acquire.
Life insurance companies have also begun offering financing as well, including early rate lock options and flexible pre-payment provisions. And although most insurance companies don’t give loans over 65% LTV, they still might be a viable opportunity for investors with properties in major cities or towns with large public universities.
Although student housing does present unique challenges, and attractive deals are getting harder to find, investors willing to roll up their sleeves and learn about the industry might just find their investing sweet spot in student housing.