The student housing market is hotter than ever, particularly among foreign investors. As we noted in a recent article, roughly 20 percent of capital coming into the US student housing sector is sourced from abroad. This is a staggeringly high number when compared to the multifamily housing sector, for which cross-border capital only accounts for 5 percent of total investment.
Yet it isn’t just foreign investors who are being lured in by the student housing sector; US-based investors are also starting to realize the potential of student housing. Colleges and universities have always needed off-campus housing, so why is it that the sector is only now starting to attract investors in droves? We decided to investigate the trend and here’s what we learned.
There used to be a time when college students had only a few housing options: live in an on-campus dormitory, lease an apartment in town, or live with their parents and commute to school each day. Most students tried to avoid the latter option. On-campus housing wasn’t particularly glamorous (the average dorm is 51 years old!), but off-campus apartments tended to be equally run down. When it came to housing, students didn’t have many appealing options to choose from.
Commercial real estate investors saw this lack of quality housing supply as an opportunity, which fueled a boom of student housing development. Many of the properties being constructed were luxury buildings, loaded with so many amenities (roof deck pools, fitness centers, ground-floor retail, and restaurants) that it became difficult to tell that these complexes were tailored to students. Below are a few key figures that underpin the boom in student housing.
Generally speaking, commercial real estate capital markets have been strong over the past few years. Banks have been offering low-interest rates and institutional investors, seeking to diversify their portfolios, have been pumping money into the commercial real estate market.
Since the November 2016 election, Treasuries have continued to rise and spreads have significantly compressed. Some sectors are feeling the squeeze as a result—but not student housing. Cap rates for student housing have remained largely untouched.
Student housing has benefited from several financing trends:
Real estate investors are still bullish on the student housing sector. Yes, more students are enrolling in online classes and in theory that would weaken demand for student housing. However, enrollment in on-campus programs also continues to grow at record levels. Between 2000 and 2015, enrollment in U.S. undergraduate degree programs increased by 30%. By 2026, that number is expected to increase to 19.3 million.
The average college can only provide on-campus housing for roughly 25% of their students. Just last month San Jose State University (SJSU) notified approximately 1,400 students that there would not be enough on-campus housing to accommodate them. Half of the students notified were incoming freshman.
“It’s frustrating as a parent to see my daughter going through all the motions of not having the college experience that she has been looking forward to,” said one mother from Solano County whose daughter selected SJSU as her top choice school.
University officials say the lack of on-campus housing is rare and is a result of unexpectedly high enrollment. More than 5,000 freshmen are slated to arrive on campus this fall, a staggering 25 percent higher than the school anticipated.
Despite the uptick in student housing development, there is simply not enough new housing being built to accommodate demand—which makes student housing an attractive investment opportunity for the foreseeable future. Furthermore, when the economy dips, demand for student housing typically increases as more people decide to go back to school.
To be sure, student housing investing is not foolproof. Many of the tenants in student housing are renting an apartment for their first time and often won’t be able to provide the credit reports or landlord references typically requested when renting traditional multi-family apartments. As a result, landlords are often managing leases with a student’s parents along with the student. This can make a transaction more financially secure, but can create additional headaches for landlords and property management companies.
Other key student housing considerations:
Despite the industry’s challenges, investors are starting to see how lucrative the sector can be. Student housing has become its own niche, no longer a forgotten sub-asset-class of the multifamily industry.