Multi-family as a sector is a popular place for both institutional and private investors according to National Real Estate Investor. Purpose-Built Student Housing (“PBSH”), a subset of multi-family described as an apartment community designed for residents in higher education by offering amenities tailored to college students and typically located near a college campus, has also seen a high level of demand from sophisticated investors.
Below is a list of five potential benefits of student housing that likely have been the catalyst to investment in this sector:
1. Viewed as a recession-proof asset class: Student housing is a sector that is viewed as one that performs well during economic downturns leading to less volatile cash flows than traditional rental properties.2
As shown in the chart below, during the last two downturns in 1999 and 2008, enrollment in post-secondary institutions continued to increase as the economy was weak. This may be because people go back to school when the number of employment opportunities decreases.
2. PBSH is now considered an institutionally acceptable asset class: The number of college-bound young adults, combined with the under-investment in on-campus housing by universities, has created a housing shortage for college students in many markets. During the first half of 2018, investment in student housing was led by private investors, institutions, and foreign capital, as evidenced by the chart below.
3. One-year lease terms potentially benefit investors in a rising-rate environment: The industry standard term for student housing leases is one year. This means that every year rates are rest, and if interest rates are rising, the investor is not as exposed to inflationary pressures because the new rental rate is set every 12 months. This is a benefit versus other types of commercial properties, such as office and retail investments, where the lease terms tend to be several years.
4. Lease renewal timing provides visibility to occupancy: Students usually renew their leases within a specific window of time well in advance of the upcoming school year and they generally know if they will be attending school the next year (or not), providing the landlord with good visibility of estimated occupancy for the next school year. This differs from traditional multi-family where a landlord generally has about 60 to 90 days of visibility into projected occupancy.
5. Lease requirements and student aid provide potential for lower default risk: Most institutionally-owed student housing requires that each student provide a co-signor to the lease (likely a parent) which provides another layer of default protection for property owners. In addition, many students utilize student aid to pay for tuition and living expenses, giving the property owner a better understanding of students’ ability to pay rent.
NOTE: Degree-granting institutions grant associate’s or higher degrees and participate in Title IV federal financial aid programs. Some data have been revised from previously published figures. SOURCE: U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS) “Fall Enrollment Survey” (IPEDS-EF:99); IPEDS Spring 2001 through Spring 2014, Enrollment component; and Enrollment in Degree-Granting Institutions Projection Model, 1980 through 2024.
Please note that while PBSH has grown in popularity, it is not without risks. Student renters generally have a high turnover rate and cause above-average wear on their units. This can create higher maintenance and renovation costs when compared to typical multi-family properties. Also, the PBSH industry is maturing, and the increase in competition may have a negative effect on asset prices. Risks also include, but are not limited to illiquidity, lack of diversification, complete loss of capital, default risk, and capital call risk.