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Student Housing Investments Helping CRE Investors Hedge Against Other Losses

Published: 08-02-23 Category: Investing

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Thinking about buying commercial property? You may want to consider student housing.

After record-breaking student housing investments hit the market in Q3 2022, more institutional investors are paying attention to this lucrative and recession-resistant category of commercial property.

Here, we'll discuss how student housing investments can help commercial real estate investors hedge against other portfolio losses and maintain a well-rounded, reliable portfolio.

Let's get started.

What Is Student Housing?

Student housing, as the name implies, houses college and graduate students. Student housing is typically close by in proximity to a university campus but can be in other parts of the city.

You might assume that student housing consists of squalid apartments and run-down homes, but you'd be wrong to do so. In actuality, student housing is just like any other kind of housing. The primary difference is that landlords of student housing target students as their primary tenants.

On-Campus Student Housing vs. Off-Campus Student Housing

You have two primary options when it comes to buying student housing: on-campus residences and off-campus residences.

On-campus accommodations include dormitories, while off-campus accommodations include apartments, condominiums, townhouses, and single-family homes. In the past, universities owned and managed dorms, but there is a recent surge of interest in private investment in on-campus college dorms .

How Profitable Is Student Housing?

Over the last few years, student housing has shown incredibly solid performance, with record-breaking activity in the latter half of 2022. Student housing sales have nearly doubled in the past five years to $22 billion, and the average price per bed was $99,937 at the end of 2022.

Cap rates for student housing hovered between 4% and 6% between 2016 and 2022 and outperformed market-rate multifamily over the same time period.

As you might expect, major hotspots for student housing are also big college towns, such as:

According to recent studies, student housing reached all-time, pre-leasing highs in Q1 2023, with average rents climbing to $829 per bed. The same reports also found that nearly 40,000 additional beds are under construction in university towns across the country.

All this is to say that investing in student housing may be a good idea if you're looking to round out your portfolio.

Why Is Student Housing a Good Investment?

Student housing's performance in the past decade is nothing to ignore. Below are just a handful of the reasons why you might consider investing in student housing.

#1 – Stable Demand

Student Housing Investments Helping CRE Investors Hedge Against Other Losses

Student housing has historically had very stable demand, owing to the fact that education demand is relatively inelastic. Student housing even performs well during recessions, when laid-off workers often decide to go back to school.

For example, college enrollments increased in the wake of the 2008 Great Recession, indicating that student housing demand can hold even in a recession.

The National Multifamily Housing Council predicts that total student housing market demand will grow by 0.8% per year between 2020 and 2031, for a total increase of 734,000 beds.

#2 – Reliable Rents

Since it typically resides near universities and city centers, student housing usually yields higher rents than multifamily in the same area. A 2019 report found that 67% of housing near university campuses had rents that were higher than the total city average.

Student housing's proximity to campus and its convenient walkability place upward pressure on pricing. Additionally, since many students co-sign their leases with a parent or guardian, you're more likely to receive reliable rental payments.

#3 – Predictable Cycling

Student housing also operates on a predictable cycle that coincides with the school year. Tenants typically renew leases during the same time, either in the summer or in the early fall.

Additionally, many university organizations, such as fraternities or sororities, use organizational funds to pay for housing. Lastly, expect large numbers of new students looking for housing to enter the market at the onset of each new school year.

#4 – Lower Maintenance

Although student housing has higher operating expenses and lower net-operating income than traditional apartments, it has substantially lower capital expenditure costs.

According to a 2017 report from the National Apartment Association (NAA), average capital expeditures for student housing were 4.4% compared to 10.4% for conventional apartments.

The lower capital expenditure standards mean you can save money on making expensive refurbishments or building improvements. Additionally, student housing makes more in amenity fees than conventional apartments.

Why Invest in Purpose-Built Student Accommodations?

Another, more recent option for student housing investment is purpose-built student accommodations (PBSA). PBSAs are basically shared student facilities that have cluster apartments of shared living spaces. PBSAs may also have amenities that appeal specifically to students, like dedicated study spaces and gyms.

One major difference between PBSA and other student housing accommodations is the leasing structure. PBSAs often rent out beds on a per-month basis while the student is taking courses. In some cases, PBSA rooms come pre-furnished for residents.

PBSAs could potentially fill niches in high-demand university cities that lack sufficient traditional student housing options, such as California. If you're investing from the UK, the current government is charging 0% Stamp Duty rates, significantly cutting the costs of a traditional buy-to-let.

Student Housing as a Hedge Against Losses

Investing in student housing can be a great idea for investors looking to diversify their portfolios and branch out into different types of commercial real estate.

History shows that student housing can be recession-resistant, so investors can rely on their student housing investments to pick up the slack in the event of a downturn.

More generally, student housing investments show increasing potential in a market where traditional multifamily rents and growth are showing signs of moderating.