Why Investing in Student Housing Makes Sense Today
About Student Housing Real Estate
As a subset of multifamily, investing in student housing comes with its own set of challenges and opportunities. Student rental properties may seem similar to traditional multifamily properties; however, there are several key differences, which we’ll dive into below. We will also address the current state of the student housing market, and why you may want to consider investing.
One of the main benefits of student housing is the tenant base is consistent and highly visible. Tenants often pre-lease prior to the beginning of the school year, rather than signing leases on a rolling basis, making cash flow highly predictable. Moreover, leases are almost always offered on a 12-month basis, so there is no need to worry about summer vacancies. And it does not usually take long to secure new student tenants if the property is well located. Delinquencies are also less of a concern since parents are guarantors on the lease.
College students generally want to live with other students, but certain campuses do not provide enough dormitory space. In off-campus student housing, the entire building caters to this demographic.
Premium rent opportunities
Savvy student housing operators understand there may be opportunities to generate additional top-line revenue. For example, some properties offer:
- Luxury amenities in public areas (i.e. fitness centers, study rooms, and smart home devices).
- Furnished units, which appeal to renters seeking convenience and/or high-end housing solutions.
Student housing properties often see more “wear-and-tear” than typical multifamily units. That said, a security deposit would likely cover any significant damage. If you have not already done so, take a look at the sponsor’s pro forma. Business plans will vary by project, but they should all account for projected maintenance and renovation costs.
Student housing differentiators
All student housing is not equal; potential real estate investors should consider the market dynamics and risk/return profiles of any offering prior to investing. Here are a few key things to keep in mind:
- Supply/demand: Approximately what percentage of students live on campus? Is there enough housing nearby to support the demand for off-campus housing? This will vary greatly by location. Some college towns may have zoning laws, which restrict the supply of new units. Another factor to consider is that many dormitories are de-densifying due to the current coronavirus pandemic, which in turn, should increase demand for off-campus housing.
- Public vs. private universities: According to Yardi Matrix, year-over-year pre-lease occupancy growth has been driven mostly by large public universities, indicating strong demand among more affordable universities offering in-state tuition.
- Proximity to campus: Most undergraduate students want to live close to campus (ideally, no more than 0.25 – 0.5 miles away). If the property is within walking distance of students’ schoolwork and social life, it likely offers a competitive advantage. Alternatively, students may still be interested in a property if it is near accessible transportation or a direct shuttle service, which can be taken alongside their peers.
- Pre-furnished units: Move-in day is much less stressful when students don’t need to worry about purchasing large items, such as a bed, desk, and dresser. After all, this type of housing is transient; students will leave and want to purchase their own furniture later. If off-campus housing provides the convenience of a dormitory, it may draw more interest, and hence a more compelling investment thesis.
Is student housing recession-proof?
The National Multifamily Housing Council recently analyzed 43 years of college enrollment data. Their findings suggest college enrollment does not appear to be negatively affected by recessions. This aligns with the conventional wisdom that student housing tends to be “recession-proof.”
Think about it this way: student housing is a subset of the multifamily asset class, where employment prospects generally drive demand. As long as the economy and higher learning do not collapse entirely, young adults will want to go to college. Thus, demand for student housing tends to be insulated from macroeconomic or market-specific shocks.
College enrollment trends
Through our analysis, we believe student housing is often a sound investment, particularly as the nation’s top universities continue to grow their enrollment. Students will always need housing; in fact, 41% of 18- to 24-year-olds were enrolled in college or graduate school in 2019. Building on this trend, the National Center for Education Statistics projects college enrollment will reach a total of 20.3 million by 2028 (a 3% increase from 2017).
2022 investment opportunities
The student housing market is showing signs of improvement, indicating a potential return to normalcy. As of December, 31.5% of beds at the core 175 universities tracked by RealPage had been leased for Fall 2022. Note this number is directly in line with December 2020’s pre-pandemic rate of 31.7%.
If this sounds surprising, consider that many universities have shifted their focus back from online to in-person learning. On that same note, many students who were uncomfortable or unable to attend prior to this year have now received at least one dose of the vaccine and are ready to re-enroll.
A Case Study in Student Housing Investment Properties
EquityMultiple investors recently participated in the acquisition and repositioning of two student housing properties located in downtown Bloomington, Indiana near Indiana University. The investment had significant in-place cash flow, strong historical occupancy, and strong rent growth in pre-leasing. This was the second investment opportunity available from the Sponsor, an experienced commercial real estate investment firm with a track record in value-add multifamily and student housing.
Since inception, we have offered a total of four student housing investments with this same Sponsor, two of which were located in Pittsburgh near Duquesne University, and one of which was in Columbia, South Carolina near the University of South Carolina.
As of February 2022, EquityMultiple’s student housing investments that are currently cash-flowing have generated weighted average cash-on-cash returns of 17.34%*.
Want to learn more about how EquityMultiple can facilitate your participation in a student housing real estate investment? Please don’t hesitate to contact our Investor Relations team via email at firstname.lastname@example.org or by scheduling a call today.
*Cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.
**About the methodology: We reviewed the annualized weighted average cash-on-cash returns as of December 31, 2021 (effective date) for EquityMultiple student housing investments located in Pittsburgh, Pennsylvania, Columbia, South Carolina, and Bloomington, Indiana. Data is accurate as of February 17, 2022.
This document is for informational purposes only and is not an offer or solicitation to purchase or sell securities. Investing involves risks, including the potential for principal loss. There is no guarantee that the strategies and services will be successful or outperform other strategies and services. Certain assumptions may have been made in connection with the analysis presented herein, and changes to the assumptions may have a material impact on the analysis or results.
¹Past performance is no guarantee of future results. The investments discussed herein may be unsuitable for investors depending on their specific investment objectives and financial position. Investors should independently evaluate each investment discussed in the context of their own objectives, risk profile and circumstances.
All opinions expressed herein constitute the author’s judgement as of the date of this article and are subject to change without notice. Statements made are not facts, including statements regarding trends, market conditions and the experience or expertise of author are based on current expectations, estimates, opinions and/or beliefs. Such statements are not facts and involve known and unknown risks, uncertainties and other factors. Past events and trends do not predict or guarantee or indicate future events or results.
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