Student Housing Is Not for Amateurs

There is opportunity aplenty in the student housing sector for firms willing to study hard and follow the lead of the seasoned pros.

In the mid-1990s, as capital began to return to real estate after the recession, industry legend Sam Zell famously said, “let’s not screw up this recovery.” Zell’s “please do not overbuild again” admonition is especially prescient today when it comes to student housing, where some markets are in danger of being overbuilt.

Student housing is clearly no longer a backwater niche. The sector gains new respect daily as investors eye the huge number of echo boomers in, or fast approaching, college age. The National Multi Housing Council (NMHC) saw this potential nearly a decade ago and started a student housing initiative to serve the need.

Recently, NMHC created the National Student Housing Council (NSHC). I receive calls nearly every day from people seeking advice about entering the student housing market. My counsel? The most dangerous form of development in any student housing market is from developers and investors who have access to money and a piece of land but who have no expertise in student housing. This is not a sector for amateurs; it’s difficult enough even for seasoned pros.

That said, there is opportunity aplenty in the student housing sector for firms willing to study hard and follow the lead of the seasoned pros. In other words, get to know the business before jumping in.

A five-year horizon

Newcomers should give themselves at least a five-year timeline to learn about this sector. Each and every student housing market is unique—just as every college is unique—so carefully analyze potential markets.

Just because national demographic information says that there is a wave of young people coming does not mean a given school is thriving. And just because applications are rising at one university does not mean the same is true for a school just 20 miles away.

Indeed, a recent NSHC survey found that while most schools surveyed showed noticeable or even dramatic increases in freshman applications between 2008 and 2010, approximately 7 percent of schools showed a drop in applications. Firms should spend days—if not weeks—learning the entire housing stock for that college before considering entering the market.

Are there sufficient dorms to house students? Do they prefer living in shared houses or in fraternity/sorority houses to living in apartment communities? Is enrollment increasing? What is the quality of the housing stock? Talk to the students and to the school’s admissions team. Find out the various rent levels and who your competition would be in that market—are they newcomers as well, or experienced student housing operators?

If the initial feedback is positive, only then should firms consider entering the market. The best way to do that is to buy an existing property. (The riskiest way to enter a market as a newcomer is to develop and build a new property.) It goes without saying that an existing property—where you can add significant value by upgrading, without spending your entire investment allocation—is best.

A student housing education

The key ingredient to a successful foray into student housing is operation of the property. Operating student housing is different than operating a traditional apartment community. Instead of having move-ins and move-outs spaced throughout the year, they are all dramatically compressed into the space of a week or two. Owners and operators must not only deal with students but also with parents. And having a concentration of young people means there can be activity on-site 24 hours a day.

New investors and land owners should not drive the process. The chance of success is greatly increased by working with a seasoned operator who has a track record. Don’t rush in—there are really no shortcuts. While there are some similarities between conventional multifamily and student housing, it is the dissimilarities, especially on the operating side, that will lead to success or failure.

One of the key sessions at NMHC’s upcoming 9th Annual Student Housing Conference will be a session on why conventional apartment owners are reluctant to enter the student housing market. Four panelists will explain the differences and similarities between conventional apartments and student housing. These are people who have spent years in the student housing sector. This is a great chance to begin to learn your way and avoid many of the mistakes others have made in this niche sector over the years.

Jim Arbury is vice president of student housing for the National Multi Housing Council and directs its National Student Housing Council.