By John Bailey and William Bailey, Marcus & Millichap ‘ Chicago
Investors looking to diversify their holdings should continue to consider buying student housing properties. Whether in major cities or smaller communities, most colleges and universities don’t have enough beds for all the students enrolled. Reports indicate that there are only between 25 percent and 30 percent of necessary beds on-campus at colleges and universities versus enrollments. At the same time, more and more students are registered and attending classes each year.
Are there many opportunities to buy a student housing property?
Nationally, there are over 4,300 degree-granting institutions and branches. An opportunity may be closer than you think! A recent trend is development of student living units being built near regional campuses that previously had been considered only commuter schools.
What is the best way to begin looking for an opportunity?
Finding the right college town to match your investment criteria may be as simple as listing to the younger generation of friends and family who are applying to college. As they go off on their college tours trying to decide which institution is best, they pay nearly as much attention to the town, retail amenities, environment and accessibility since most believe they are making a four- year commitment. While many colleges encourage or require at least freshman students to live ‘on campus’, there are generally an abundance of apartments nearby to serve students wanting to live ‘off campus.’
How can I compete with the resources of a college or university?
Today, both private schools and state colleges and universities face similar budget pressures to fund educational programs and contain costs. For the public institutions, there is the added issue of almost every state having budget, taxing and funding constraints. Schools like Western Michigan University, Purdue and the University of Wisconsin-Platteville are either cutting back on providing beds ‘on campus’ or requiring upper-class enrollees to find alternative housing. Another problem for the schools is the number of dormitories which each year are becoming older and more economically obsolete than the nearby apartment complexes. Colleges and universities are facing up to the fact that running housing and food service operations is not their expertise or core mission.
What about the recent trend of parents buying condos near colleges and universities?
To contain costs while their children were attending college, many parents became investors who bought purpose built condominiums or apartment conversion condos. The idea was to find a place where a student could live for three or four years and when their student graduated then the property could be sold. Many believed there would be profit and appreciation to offset the cost while their student was in school. While condominiums were a good investment for many, others found them to have the same drawback of investing in any rental condo. They are a less liquid asset that requires management, repair and maintenance. Also, financing is becoming more difficult for investment condos. For those who have been unable to sell units, there is the additional burden of finding a tenant and collecting rent.
How much competition will I face if I decide to look for student housing investments?
The business of professional apartment ownership and investment fits well between the institutional housing of the colleges and universities and those parents who invested in a house or condo close to the campus. There are several tiers of student housing investors. Best known are REITs like American Campus Communities, GMH Communities Trust and Education Realty Trust who have both bought and developed complexes aimed to the student market. In larger towns and cities where colleges are located, the bigger apartment players often are the owners of apartments proximate to campus that have evolved into student housing properties. Next, there are the local owners, often graduates of the school that have stayed in the community and begun investing in the student housing market with a house or duplex and who have grown organically through management and acquisitions. Finally, there are the new real estate investors whose business plan targets the growing student housing market.
What are some differences between conventional and student housing complexes?
An advantage of many student housing complexes is that they often finish leasing for the next school year during the prior spring. While most operators would like full-year leases commencing at the beginning of the fall semester, there are owners who allow a certain percentage of semester long leases for students graduating at the end of the first semester or transferring in at the beginning of second semester. Some complexes lease apartments with everyone in a unit signing the lease and parental guarantees are often required. Alternatively, there are owners who base their leasing programs upon renting ‘bedrooms’. The biggest challenge is building in a window of time prior to commencement of new leases that allows for unit turnover and maintenance.
What attracts students to a particular complex?
Today, the student renters are savvy and adept at seeking the best units their budgets allow. Compared to traditional apartment prospects, they bring a whole new level of research to the process before signing a lease. They learn the reputation of the property, compare it on the various apartment rental websites, determine if there is a nearby stop on the campus bus line, check to see if cable and high speed internet are provided and discover which of their friends will be their neighbors the next school year. Further, they expect the same quality and finishes in their apartments that can be found in other apartment complexes in the market.
An investor still can acquire student housing properties 50 to 75 basis points or more than conventional apartments elsewhere. At the same time they can enjoy higher rents and returns in student housing properties with a commensurate higher sale price when the property is again sold.