January 2, 2019 |
Updated August 4, 2021
As the cycle lengthens, many developers and investors are seeking to build portfolios that are resilient and can weather a possible downturn.
Student housing has offered cap rates on par with traditional multifamily housing – which remains the darling of the four main categories of commercial real estate – in recent years, and the specialty sector also presents the added benefit of stability due to the built-in, growing student demographic.
In 2018, student housing has continued to experience an influx of capital, increasingly from institutional and international sources in addition to private and domestic, demonstrating continued confidence in the asset class.
That said, student housing tends to be viewed as a lower-risk, lower-reward product type that is seeing some moderation.
Experienced student housing developers and owners, as well as new entities looking to enter the market, have increasingly turned to mixed-use developments to capitalize on other market trends and demands and, in turn, make their properties more attractive to today’s students.
Below is the outlook for student housing in 2019 and the benefits of and strategies for placing the product type at the center of mixed-use communities:
Student Housing Remains a Resilient Asset Class
For many investors looking to acquire a more resilient portfolio, student housing can appear as a clear choice – not only did the sector not decline during the last downturn, it thrived: The largest bump in enrollment growth occurred between 2007-2009, which drove demand for this product type.
The sustained growth in enrollment numbers in the decade since is projected to continue, with the National Center for Education Statistics anticipating a 13 percent increase in enrollment for students younger than 25, and an 18 percent increase for students ages 25 and over, from 2014 to 2025.
The delivery and leasing numbers confirm the stability of the product type year-over-year. According to data from RealPage, since peaking in 2014, student housing deliveries have remained essentially flat at between 44,000 and 48,000 beds a year. Effective rent growth increased at rates of 1.4 to 2 percent, depending on a property’s distance from campus, year-over-year in 2018.
Another appealing aspect of student housing is that it creates the unique potential for a high-density, year-round living situation, as many purpose-built student housing communities have four to six beds per unit. Further, backed by the co-signing of their parents, most residents will have strong credit.
With many saying that a slight market correction is on the horizon within the next few years, Ventus Group anticipates that in 2019, well-positioned student housing – especially in university submarkets with higher barriers to entry or above-average enrollment growth – will continue to be an increasingly attractive, stable investment.
Mixed-Use is the Future of Competitive Communities
While leasing velocity at student housing communities has increased overall, in light of some indicators – such as moderating rent growth, a slight dip in preleasing and a growing need to offer concessions at some properties – developers and owners are strategically identifying ways to ensure their properties are competitive and remain highly lucrative in the long-term.
Going forward, those looking to develop or acquire student housing must increasingly and proactively meet the demands of today’s students for convenience through amenities, design and advanced technologies.
Further, as an extension of the greater trend in real estate, student housing is increasingly being positioned at the center of mixed-use developments that also feature a combination of commercial, office, hospitality and other uses.
By nature, mixed-use projects are perfectly suited to student housing, because students – especially the current Gen Z generation – desire to have the world at their fingertips and be in the middle of the action.
This incorporation of different aspects of a student’s life – including daily needs retail, entertainment, study spaces, internship offices or even hotel rooms for visiting family and friends – into a single development strengthens attraction and retention of residents seeking for that live/work/play environment.
This concept, along with the added sense of community, is very much in line with “the college experience” that most students desire, so it is no surprise we are seeing many of these mixed-use projects rising in varying university submarkets across the country.
Additionally, student housing also brings a large population that is comprised overwhelmingly of those in the same age demographic, with similar habits, to a single location, making the selection of other product types a straightforward process and attracting commercial residents who recognize these unique demand drivers.
The Right Location and Product Type Mix is Key
All submarkets have their own unique demand drivers, and all universities have their own cultures. While student housing generally ensures that residents will be within the same age range, when selecting a location considering the product types of a student housing/mixed-use project, it is important to comprehensively assess the submarket.
Evaluating the development pipeline and barriers to entry is critical, as some university submarkets with lower barriers to entry have experienced overbuilding, leading to an increased need for concessions. While obtaining entitlements can be a much longer and more complex process, submarkets with high barriers to entry present the most long-term value.
The additional key decision is the product types to include. The right mix can create a synergistic community in which certain uses feed the demand for others and, ideally, will never subsidize them.
For example, retail, a common mixed-use component, acts as a strong, attractive amenity for busy students and will benefit from the built-in stream of demand. In addition to adjusting to college life and hectic schedules, many student housing residents are on their own for the first time and appreciate peak convenience when it comes to purchasing daily needs such as groceries, or easy access to social outings.
Creative office space that is incorporated into student housing/mixed-use development offers versatility and serves many uses, which can evolve based on demand. For example, businesses wishing to build a strong presence at a university and recruit student interns and graduates can utilize the offices, or the space can be rented to residents and other students for studying.
An increasing trend Ventus Group anticipate seeing more of with regard to these developments is hospitality. A hotel adjacent student housing provides an excellent location for visiting academics, alumni, and families to stay.
That said, to ensure the support of hospitality – and other uses – investors must look further than just the university.
For example, Ventus Group is developing a mixed-use project, “The Fig,” adjacent to the University of Southern California in Los Angeles, which will feature student housing and a 298-key hotel, among other uses. The demand for a hotel of that size comes from beyond the university itself, as the project is located adjacent to Exposition Park, a 160-acre tourist destination currently undergoing approximately $2 billion in revitalization, including the development of new attractions such as the Lucas Museum of Narrative Art and the Banc of California Stadium.
Ultimately, a location’s demand drivers must also be considered holistically to select product types and scope to drive long-term success.
The fundamentals that continue to make student housing a strong investment on its own also render the product type an excellent complement to other uses.
As today’s students demand increasing convenience, offering a community-within-a-community can drive student resident attraction and retention. Further, investors can diversify their portfolio by balancing the more stable asset class with higher-risk, higher-reward product types to optimize returns and remain resilient through a potential downturn.
John David Booty is the Executive Vice President of Ventus Group, a Southern California-based developer of innovative core real estate destinations that draws upon its collective experience and relationships to consider a broad range of possibilities for each unique real estate opportunity. As a USC Trojan, Booty won two NCAA National Championships and had two Rose Bowl victories as a starter (including Rose Bowl MVP honors in 2007).