Niche investing in student housing may now be going mainstream. While student housing has traditionally been a niche alternative that few investors considered, many investors have been increasingly eyeing this asset class with new interest, and for good reason.
According to a report by Axiometrics, the student housing sector continues to demonstrate strong fundamentals, maintaining a national occupancy rate of above 95 percent and average annual rent growth of 2.3 percent. Pre-leasing activity is accelerating, indicating strong demand for student housing, especially for communities located within walking distance from a campus.
So what factors are driving the growth that we are currently seeing in the student housing market, and what do investors need to know about investing in this product type?
Here are three reasons why student housing is a sector to watch this year.
Today, more students than ever are pursuing higher education, and investors are taking note.
The National Center for Education Statistics reports that enrollment in post secondary institutions increased 20 percent from 2003 to 2013, and it is projected in increase an average of 1.4 percent every year through 2023. While this increase is due in part to population growth, a cultural shift is underway that is also contributing to rising rates of college enrollment.
Today’s Millennials are placing increasing importance on higher education, and represent one of the most highly educated demographic groups in the United States. A Pew Research Center study found that 34 percent of millennials have earned at least a Bachelor’s degree, compared to 24 percent of Baby Boomers.
The consensus among Millennials is that there is long-term value in obtaining a college education. Statistically speaking, those with college degrees earn more than those without.
These enrollment figures bode well for multifamily investors. The increase in student enrollment in college universities across the nation means that simply put, more students will need off-campus housing. Student housing typically offers a more value-oriented alternative to traditional multifamily housing, as these properties are often furnished and located in close proximity to college campuses.
By paying close attention to these demographic shifts, investors can capitalize on the growing demand for high-quality student housing, resulting in long-term value in this type of niche investment.
While new deliveries of luxury Class A multifamily product are raising concerns that the multifamily market is reaching its peak, student housing, on the other hand, is projected to grow over the next several years.
One trend that we are currently seeing is increasing foreign interest in student housing. Institutional investors, especially foreign buyers, are expanding outside the scope of their usual investments and looking beyond core assets in search of higher yields. Due to the rising competition in core markets for properties such as Class A trophy office towers, many of these investors are shifting their focus to niche sectors such as student housing.
One reason for this shift is the opportunity for substantial returns. While conventional multifamily housing is subject to fluctuations in the market, student housing consistently boasts strong fundamentals and commands higher overall occupancies. This higher occupancy rate translates to strong, steady cash flow and attractive returns for investors.
Higher cap rates, coupled with strong enrollment figures across the board, are driving investor demand for well-located student housing assets with upside potential.
At Olive Hill Group, for example, we are actively targeting student housing campuses that present an opportunity to add value through capital improvements. As university campuses continue to grow, especially in West Coast markets such as California and Nevada, we see an enormous opportunity to invest in student housing communities and generate yield by enhancing the infrastructure and amenities of these assets.
Resilient to Economic Pressures
Student housing benefits from many of the same fundamentals as conventional multifamily product, but with the added benefit of being resilient to economic pressures. For that reason, it is generally considered a recession-proof product, making it a strong, stable asset class for investments.
For example, the same benchmarks used for evaluating multifamily investments generally apply to student housing. Typically, student housing communities in major urban metros near transit options and retail amenities are poised to perform well over time. These highly dense areas with quality demographics, high population growth, and strong employment drivers are more resilient to withstand shifts in economic pressures, providing more stability to investors.
That said, while student housing performs well regardless of the economic climate, it is generally considered countercyclical. More people return to school during economic downturns, and we saw this firsthand with the 2007-08 Great Recession a decade ago. Looking ahead, investors recognize the value in investing in a niche sector that will not only survive but also thrive in adverse or volatile economic conditions.
Based on resident demand for student housing, opportunity to generate higher yields, and long-term stability, student housing investments remain poised for considerable growth this year. By looking beyond core assets and targeting niche sectors such as student housing, owners and investors stand to benefit from the long-term value of this asset class in the year ahead.
Tim Lee is the vice president of corporate development and legal affairs at Olive Hill Group, a privately owned investor, operator, and developer of commercial real estate properties with a diverse portfolio of office, retail, hospitality and multifamily properties. Since 1996, the firm and its affiliates have invested in more than $2.4 billion in commercial assets encompassing over 15 million square feet, driving growth through long-term hold periods. Contact him at [email protected].