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The “New Student Housing Model” is Dangerous to AcademiaTo the Editor:I am the president of a very small, privately held family student housing community named W.  24th St. Apts. in  Austin, Texas. We have served the students attending the University of Texas since July 1989 from this location. The business is operated by the tiny management company known as J & L Brown, Inc., an entity consisting of  three  employees including my wife and our supervisor of 20 years—along with a  small army of conscientious contractors.The property consists of three buildings, 47,600 square feet of net rentable area divided into 72 one-bedroom units and eight two-bedroom units. Two of the buildings are “Bills Paid” and the other is “All Bills Paid.”  In each building, we bundle cable, internet (10 megs of fiber optic  up/down), and parking along with the original utility structure into the students’ rent. We are the top-rated student community in our zip code, by the residents.Enough about us. The reason I am writing is to mention to someone how dangerous the “new student housing model” is to all of academia. First, let us look at the unit mix that “evolved from market” from 1945 to about 1985 or 1990. 1) 25% – Public and private dorms–for freshman/transfers/and foreign students2) 25% – Multi-bedroom–the lion’s share of the multi-bedroom was 2 bedrooms3) 50% – One bedrooms and efficienciesThe next comment/question is WHY? The answer is very simple. The  student goes off to school at 18-20 years of age and lives in  the dorm; they  just are not prepared to manage a household and  need someone to do it for  them. During that first year, they  make friends and decide to  find a dwelling to share. In the middle of year  two, while living  with those friends, they learn that being friends is much  more  fun, than living together. So, now it’s time for their OWN place. They are firmly set in their degree plans, maybe have internships or  involved in  some type of community service, and are beginning to  “couple” into the  households of the future.This new model inverts the supply of housing, 80 percent three-bedroom instead of 50 percent one-bedroom or efficiency. I have witnessed this for myself  here in Austin, where 80 percent of all new construction is three-bedroom in density, or higher.  The kids are being forced into “by the bedroom” leases that they hate; the only positive is that they are not joint and several on the leases, but that is not really a positive. Why? If your student moves in with two or three friends, you as a parent probably did a lot of discovery about  your student’s new roommates. Now, what happens when one of them (at Christmas) leaves for a study abroad opportunity, transfers, flunks out, or graduates (we can  all hope)? If the remaining residents do not have a ready  and  willing replacement, then the management can put ANYONE they deem qualified in there with YOUR KID.It gets worse, if you have a daughter—the “by the bedroom” leases are not gender specific. In  a soft market, and we  are smack dab in the middle of soft, your baby can end up with a football  player.Let’s look at graduate couples for a moment. How do they fit in the new model? They are all on shoestring finances. Are they supposed to rent a bedroom with two or three other parties occupying the other bedrooms and share a common area/kitchen? Can they really afford the $2.00+/ sq. ft. rents? I think not.Universities abdicated their authority with regards to  housing nearly three decades ago. The big ones, like UT Austin, discovered that they are inept at controlling costs, so they asked  the private sector to take care of  it. If you perform a Google  search for dormitory operating costs, you won’t  find much useful  information. When an investor enters the student housing  arena,  they need to understand one immutable fact: all student housing is a dormitory, or dorm hybrid. When your resident profile is 18 – 24  years of  age, it’s a dorm. Get over it. It costs about $12/ft  annually, without  replacements, to provide everything a student  needs in the UT-Austin  market.In “The Echo Boom Gets Louder” (MHN Magazine December 2008), these well-capitalized  entities compete with one  another through an amenity war. One has  granite countertops, the other has a  media room. If you were to poll the prospective  residents of such  an edifice, before it was constructed, and ask them not what they  want, but “what they can afford?” the investor/developer would radically change the product. When you work with students, the age-old adage  “Champagne tastes, beer budget” is most appropriate. I  have saved over a  dozen articles from your periodical over the  past several years and I am  flabbergasted by what gets built for kids.There are market reasons why this type of construction  exists.  The cities of large universities want the kids living  nearby school to get  them off the roadways. The lenders think  their money is safer in the  “luxury”  builds, and the  universities themselves are  anxious to have shiny new housing communities to  enhance their  status while competing for your academic dollars.  The truth about being a student housing operator is as  follows:  1) you either charge 12 months of rent in 9 months, or 2)  you discount for  annual occupancy. There are no other  choices.With the unit mixes of the new construction that I have  witnessed  across the country (I have one collegiate student in  each of three other large  markets, Ohio State, Tennessee, and Texas  Tech), our industry is developing a  breed of housing that is  unsustainable. In Austin, the new places are  charging $2.20/ft. to  earn $1.85/ft., two years ago when the market was  robust, and that  is a 15 percent vacancy rate. How inefficient can we be with the  students’  already limited budget? The new construction will never attain   occupancy rates that are reasonable. Most of the new student  construction in  Austin was saddled with vacancy rates in excess of  15 percent (more like 20 percent) for  the Fall of 2009. It gets worse; prices  will drop in these new dwellings.  They already have. In that case,  your student will have do without  replacements (like A/C,  appliances, carpet, etc.) or service (you have no  idea how  important janitorial service can be around student housing) because   the new operators are not funded to perform these tasks. Also, I  am certain  that students won’t be very pleased by the lack of  service, so add 5 percent to 10 percent  of construction costs for capital  replacements due to damage to your already  swelling operating  costs.So, let’s review. The new model has a minimum vacancy rate of  15 percent  annually, a minimum turnover rate of 90 percent annually, and is  loaded with  amenities that the student cannot afford. Operating  costs are really $12/ft.  + $15+/ft. in damage for the inattentive  operator. What I just described is  code for no cash flow. My  estimation is that all of the stuff constructed  for students since  2004 will become “luxury slums” by 2010. What is really sad is that student housing is the “Silver  Bullet”  of our industry. I don’t see us running out of students  anytime soon. I  don’t see universities declining in popularity  anytime soon. I don’t see the  socialization being replaced by  another facet of the educational stream (i.e.  on-line learning). If  we had just simply provided students with what they  need (like utility, cable, internet, a place to park their vehicle, a caring staff, and a discount for annual occupancy), then you can put your  income on  a 4-6 percent escalator and your expenses on a 1-4 percent escalator.  Year five looks way  better than year one. Year 10 looks way better than  year  five. The attitude that  real estate is a short-term investment  must cease, especially in regards to  student housing. The only way  it works is over the long  term.As we arrive halfway through our 20th year of operation, I needed to report to someone
these facts. We have operated for the duration with a 1 percent vacancy rate. My rate has escalated from .50/ft  to $1.50/ft. and  similar increases for expenses have been  recorded. Our NOI will be almost tenfold from year one in about  24 months, when we complete a rehabilitation of  all three buildings. This was all made possible by adhering to the fundamental perspective that what is good for the student is good for us. If  something is not done soon to change the model, then in ten years  time, it will be all that students are offered. What a  tragedy.Jeffrey C. BrownPresident, W. 24th St. Properties, Inc./ J & L   Brown, Inc.Austin, TX