Anyone who lives in a college town (like Boston, where Buildium is based!) knows how hot the student housing sector has become.
However, colleges have been around for centuries; so why is it that investing in student housing has become increasingly popular in recent years? We decided to investigate the trend. Here’s what we learned.
Student Housing: By the Numbers
There used to be a time when college students only had a few housing options: to live in on-campus housing, rent an apartment in town, or live with Mom and Dad and commute to campus. None of these options are particularly appealing. The average dorm is 51 years old, and off-campus apartments are notoriously run-down. As for living with Mom and Dad? C’mon!
Real estate investors have realized that this is a major opportunity. Investors have scooped up multifamily residential properties around college campuses and are now making above-average returns.
- In 2016, the average rental rate per bedroom increased 3.6%, while occupancy rose by half a point, according to an analysis by CBRE. The average occupancy rate for new, off-campus student housing is in the mid-90% range. Stabilized off-campus housing assets hover around 99% during the school year.
- Acquisitions of student housing skyrocketed in 2016. There was an estimated $9.8 billion in transaction volume, which was a $4.2 billion increase over 2015, and was more than 3 times higher than in 2014.
- Student housing continues to appreciate at record rates. The average price per bed reached a record high in 2016 at $66,386 per bed. This average was 10% higher than 2014, and 30% higher than in 2014.
- Although the cap rate spread between conventional multifamily and student housing is starting to compress, student housing cap rates still run about 0.5 to 0.75% higher than conventional multifamily housing.
The Appeal of Investing in Student Housing
People are investing in student housing for a number of reasons, including the strong property fundamentals outlined above—but there are other reasons as well.
First, student housing can take a variety of forms. It can be as small as a duplex that a local landlord rents to a group of students. It can be as large as a traditional dorm with modern amenities, such as a swimming pool and a fitness center. The breadth of student housing opportunities allows investors of all sizes to enter the market.
Many of those investing in student housing have a personal connection to college towns, which makes real estate in these areas attractive. For instance, some people have fond memories of attending college in Cambridge, so they scoop up multifamily properties near Harvard or MIT when the opportunity arises.
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Conversely, some of those investing in student housing buy real estate in college markets where their children are going to school. Rather than overpaying for traditional student housing, some parents opt to buy a condo or small multifamily property that their children can live in while they’re students there. In either case, the investor has a certain level of familiarity with the local market.
Finally, and perhaps most importantly, investing in student housing is considered relatively recession-proof.
“When you remind investors that when the economy goes into a recession, enrollments go up—a light bulb goes on in their heads,” says EdR Chairman and CEO Randy Churchey. “What really attracts them to our business is the stability of cash flows,” regardless of where we are in the market cycle, he reports.
Let’s not forget: college enrollment continues to climb. Between 2000 and 2015, enrollment in U.S. undergraduate degree programs increased by 30%, from 13.2 million to 17 million. By 2026, that number is expected to increase to 19.3 million.
Investing in Student Housing: Proceed with Caution
Although the outlook for student housing remains strong, investors should proceed with caution before deciding to purchase this asset class. Investing in student housing, while attractive for many reasons, is by no means infallible.
For example, many students are first-time renters. They often won’t have landlord references for you to call or a credit history for you to evaluate. As a result, you’ll probably be dealing with their parents as co-signers of the lease, which can complicate things. Instead of dealing with just one person, you’re now dealing with multiple—and parents who don’t live in the area might try micromanaging from a distance, or might be absent from the picture altogether.
Along the same lines, first-time renters might not know how to properly maintain their rental unit. Not only can students cause excessive wear and tear on units, but they may also become a property management headache if they start calling for minor issues that experienced renters would fix on their own.Investing in student housing: How lucrative is it? Is it risky? Learn the basics on the #BuildiumBlog! Click To Tweet
Nonetheless, investing in student housing can be highly lucrative. Rentals closest to campus typically retain their value best; but apartments a bit farther away from campus may be more versatile, as they could attract graduate students or recent grads that have stayed local for a job opportunity. Once again, there are a number of options to consider as you think about delving into the student housing market.