A CLASS
OF ITS OWN
A guide to understanding investment
in the student housing sector
14901 Quorum Dr.
Suite 900
Dallas, TX 75254
Taylor Gunn, Student Housing Analytics Lead
Introduction — What is Student Housing?
Mention the words “student housing,” and what might come to mind are the sterile, drywall or
cinder- block dorms of the mid-20th century. What might also come to mind are the ramshackle,
off-campus houses, similar to those depicted in the movie “Animal House.”
Certainly these are types of student housing, but they don’t define the student housing sector as a
whole.
Axiometrics, a RealPage company, defines student housing as housing that is geared to students
attending a college or university. Additionally, student housing owners charge rent by the bed as
opposed to by the unit.
Why do we need to know the differences between student housing and conventional housing?
Quite simply, the student housing sector is growing. According to Real Capital Analytics, student
housing transaction volume totaled more than $9.0 billion in 2016, up 62% from 2015, much
of which is attributed to several major portfolio sales. The Scion Group, Canada Pension Plan
Investment Board (CPPIB) and GIC’s acquisition of University Housing Communities and the
Harrison Street/Campus Crest acquisition accounted for a large portion of the volume. CBRE
reported that 2016 marked the sixth consecutive year of all-time record transaction dollar volume.
Because of its robust performance, the student housing sector is attracting a plethora of
investors and developers. But success in this industry requires a strong understanding of student
housing characteristics and fundamentals. And, as we’ll see in this e-book, characteristics and
fundamentals can vary a great deal, depending on the market.
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An Industry Overview
The REAL Definition of Student Housing
We indicated that student housing is defined as housing geared toward students
who attend a college or university. This can range from single-family student-group
homes, to fraternity/sorority housing, to off-campus apartments rented specifically
to students. To simplify matters, at Axiometrics, we divide student housing into the
following:
The On-Campus Connection — University Student Housing
University student housing is on campus and consists of residence halls or
“dorms” (with no kitchens in the units) or apartments (which have kitchens).
University student housing can be built, owned and operated by the university or,
as is becoming more common, by a private company as part of a public-private
partnership (P3). The main benefit of such housing is location; most of it is on
campus or very close.
The Home Nearby — Privately Owned Student Housing
Privately owned student housing, or POSH, is off-campus and typically built, owned
and operated by a non-university company or agency.
There are two types of POSH housing:
•
Purpose-built student housing (noted by the “star” icons on the screen from the
AXIOMobile™ smartphone app pictured above) is developed to attract college students. Such housing offers studentfriendly amenities ranging from extra Internet bandwidth to handle multiple electronic devices, to flat-screen TVs, inhouse yoga studios and fitness centers, and swimming pools. Though typically near the campus it serves, purpose-built
student housing isn’t limited by geographic constraints.
•
Student-competitive housing (the square icons on the AXIOMobile screen to the right) is defined by Axiometrics as
conventional apartment properties located within 3 miles of a college or university campus. Though these properties
will lease to non-student residents, their proximity to campus and relatively low rent makes them attractive to students.
Apartments, Student Housing — Not the Same
The purpose of apartment properties and student housing is to provide living quarters for targeted residents. That’s
pretty much the only thing these two property types have in common. In fact, conventional apartments and student
housing are different in several ways:
•
Lease structures. Owners and operators of conventional apartment properties lease by the unit, with that unit
consisting of anything from a tiny studio to a spacious three-bedroom layout. The student housing owner/operator,
however, leases by the bed, with bedrooms accommodating anywhere from one person to four people.
•
Lease cycles. Unlike conventional apartments that can sign residents any time of the year, student housing has a
specific leasing cycle. The preleasing period begins in the fall of the preceding school year, with lease-up completed
by summer before the fall semester begins. Once school is in session, the chances of snagging new residents are slim
to none.
•
Unit mixes. In a standard apartment property, unit mixes are weighted toward single units of one or two bedrooms. Unit
mixes in student housing tend to be weighted toward four-bedroom floor plans. You might find singles in a student
housing property, but by and large, they aren’t as common.
•
Concessions. Conventional apartment owner/operators offer concessions in the form of free or discounted rents.
But student housing owner/operators, who want to attract younger renters, will offer rent concessions or dangle
concessions such as gift cards and electronic items. It’s not uncommon to see free iPads used to lure students.
•
Demand fundamentals. Instead of measuring demand by job and population growth as conventional apartment
owner/operators do, student housing owner/operators rely on metrics such as university enrollment growth and the
size of the 18- to 24-year-old population group as their main demand variables. Interestingly enough, while strong job
growth means success for conventional apartments, the opposite can be true with student housing. The stronger the
job market, the less motivated young people are to attend college, leading to less student housing demand.
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Understanding the Current Trends
Going In-Depth – The Micro View
Late in 2013, a well-respected business publication created a furor among student housing developers and owners
by publishing a story hinting that foreclosure of a student housing property serving a Mid-Atlantic campus was a sign
of things to come in the industry as a whole. The reason for the foreclosure? An abundance of new supply in that
market.
But one university market shouldn’t be the sole yardstick by which the student housing sector is measured. The
student housing sector saw more than 60,000 new off-campus beds added for Fall 2014, an increase above the
roughly 61,000 added for the Fall 2013 semester. An additional 47,000 beds were added in 2015 and 2016, and
Axiometrics forecasts more than 40,000 beds to be added in 2017. After hitting an all-time high in new deliveries in
2014, new supply has begun to moderate and is tapering back to figures seen in 2012. Much of this supply is being
added near universities that haven’t had much construction. From 2015-2017, more than 40 universities have seen
purpose-built supply for the first time.
Though national numbers can be a great indicator of trends throughout the sector, they can also present a skewed
view of what’s really going on.
Some markets are starting to see excess supply. But in other markets, especially among Tier 2 schools (smaller than
the flagship state schools), purpose-built supply is virtually non-existent.
Delving down to a granular level is important in a student housing analysis. When we look at the national view, we see
continued, but moderate growth.
The story is different on a more granular level. New POSH supply among various universities has been steady at best,
and in some years non-existent. A look at Northern Arizona University, for example, shows more than 1,000 beds
being delivered in 2017. But examining the overall picture, nothing was delivered in the three years prior, and less
than 1,500 beds came to market from 2006-2013.
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Understanding the Current Trends (cont.)
Similar situations are taking place at the University of Arkansas and the University of Oklahoma. Florida State
University is an anomaly in having new supply delivered each year, though this type of trend isn’t unusual for a
mature market such as Florida State.
Source: Axiometrics
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Texas A&M University Analysis
Texas A&M University also has seen a large amount of development activity,
with beds delivered each year since 2011. According to Axiometrics data,
8,800 off-campus beds have been delivered this cycle alone.
Building is expected to continue, with Axiometrics identifying more than
2,300 off-campus beds for Fall 2017 delivery, and more than 900 more
scheduled to deliver in Fall 2018. The second phase of the university’s
public-private partnership with Servitas, LLC also is slated for completion in
Fall 2017, bringing more than 3,100 additional on-campus beds.
The purpose-built (stars) and student-conventional (boxes) properties near
campus are shown in the screenshot from AXIOPortal at right.
Does this mean that Texas A&M is starting to see the effects of oversupply?
If we look at only the supply number, the answer may be “yes.” But a serious
student housing analysis relies on more than the number of beds coming to market.
Also important are student head counts (enrollment), tuition levels and rent-per-bed (in dollars). Other variables
include, but are not limited to, high school graduation rate, financial aid changes, freshman retention and six-year
graduation rate, in-state tuition changes and financial aid share of the university’s operating budget.
For Texas A&M, enrollment is growing with supply. From 2013-2016 enrollment growth averaged 4.7%, which
represents an overall growth of 10,000 students. This is well above the long-term average of 1.8% annually. As seen
below, enrollment is projected to continue growing, and maintain the strong levels it has seen for several years.
Axiometrics’ statistics show that, among the privately-owned stock, occupancy was 96.6% in September 2016.
Meanwhile, on campus, university housing occupancy was projected to be at 93.5%. Preleasing among purpose-built
student housing product (excluding student-competitive) was 30.2% as of February 2017. Occupancy, however, stood
at 87.7%.
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Texas A&M University Analysis (cont.)
Delving even deeper into the stats, we can see a higher demand for housing near campus, which can be seen below.
Properties located less than a half-mile from campus had a prelease rate of 30.4% and occupancy of 89.7%. These
numbers typically tend to drop the farther the properties are from campus. However, Texas A&M is unusual in this
aspect, as properties located more than one mile from campus were occupied at 92.0% and pre-leased at 32.8% as of
February 2017.
In short, there is some evidence of market softening at Texas A&M with the amount of supply that has been added.
Certainly, privately-owned student housing occupancy is decelerating. Though the pipeline is still full for the near
future, it is expected to ease off in the next few years. Market performance should rebound, as growth in demand is
projected to stay strong.
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The Big Picture — The Macro View
In the previous section, we emphasized the need for in-depth knowledge when it comes to understanding specific
student housing markets. Just as important is an understanding of how that micro view fits into the overall macro
scenario. Focusing on a single market offers only part of the story. National trends and overviews also are necessary
to fully comprehend the state of the student housing market as a whole.
The Industry — From Adolescence to Young Adulthood
The student housing industry is still a very young
one, especially by commercial real estate standards.
Axiometrics tracks the first purpose-built student housing
projects back to 1995, just about 20 years. Deliveries
before 1995 were mostly conventional apartments later
converted to by-the-bed rentals.
Other housing options students had (and still have to
this day) included living on campus in residence halls,
sorority/fraternity houses, off-campus single-family
homes or living with mom and dad.
With this in mind, we can examine the continued increase
of student housing beds as less of a potential oversupply
issue and more of a “catch up” scenario. Basically, the
student housing industry is moving from accelerating
growth to moderating maturity.
The Industry
As the student housing industry has matured, its
composition has developed. What was once a very
fragmented sector is much less so today, with smaller
companies emerging and the private companies that
have been in the space growing their portfolios. Two
Real Estate Investment Trusts (REITs) are prominent in
the industry, and some acquisitions are beginning to
take place in the sector.
These investors own everything from single-family
“group” homes, to duplexes, triplexes and quadplexes,
to smaller apartments, to medium-size portfolios.
Student housing is still fragmented geographically. The
Sun Belt states have been leading the way in purposebuilt student housing, while the Midwest and Northeast
are just beginning to catch up.
Examining specific examples, the student housing owner/
operator might see a lot of beds serving Texas A&M. On
the other hand, Utah Valley University and University of
Michigan-Dearborn have no university owned housing,
meaning more opportunity for off-campus developers.
Enrollment
In between chatter of crushing student debt and
increasing tuition is the simple truth that enrollment at
most colleges and universities continues to grow. This is positive for student housing owner/operator/developers —
enrollment is a demand fundamental, and increasing enrollment means more demand for a product.
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The Big Picture — The Macro View (cont.)
Enrollment has increased by approximately 6.4 million students during the last 20 years. The largest enrollment spike
took place during and immediately following the financial fallout of 2007-2009 (which, incidentally, was around the
same period of time during which student housing, as a sector, came into its own). As younger people were unable
to get jobs, they moved more toward higher education. There is an inverse relationship between job growth and
student enrollment. In recent years, we’ve seen enrollment growth slowing as the job market has moved forward. This
doesn’t necessarily mean, however, that enrollment will suddenly drop drastically. As the job market continues ticking
upward, younger people are continuing to seek out university education so they can improve their job prospects.
Additionally, there are plenty of future college and university students, thanks to positive growth for the 14- to
17-year-old age group.
Location, Location, Location
Another variable separating conventional apartments from student housing properties is location. Certainly it’s
important for conventional apartments to be located near areas of interest, such as entertainment amenities and
employment centers. But location becomes even more important with student housing properties.
Axiometrics identifies apartments within close proximity to campus as “student competitive” for a reason. The closer a
property is to campus, the more likely it is to lease quickly and consistently. Students close to campus become more
involved with social interactions. They can also take advantage of meal plans on campus.
Students also like to be able to either walk or bike to classes. Failing that, a property on some kind of shuttle bus
route is the next best thing.
One exception to the location rule is cottage properties. These small, homey units look like traditional single-family
homes and, by their nature, require more land, and tend to be farther from campus. Despite their distance from
campus, students are flocking to cottage properties in droves.
Much of the newer product coming online is being built closer to campus and is replacing older, obsolete product,
such as houses or run-down apartments. In many cases, the newer product isn’t necessarily adding to the current
supply as much as it’s replacing worn-out stock.
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Investing in Student Housing
During the mid-2000s, many conventional apartment investors thought student housing investments were a good
idea. Many of them invested in student housing and did quite well.
Others, however, did not. The reason was that student housing was assumed to be an extension of conventional
apartment housing. The result for many of these owner/operators was catastrophic.
Because of this, you should ask yourself the following if you are interested in student housing development and/or
investments:
•
Can you adhere to the leasing cycle? Unlike conventional apartments, the student housing leasing cycle has a finite
deadline. The leasing season can begin as early as October of the preceding year. If you aren’t close to 100% leased by
the summer before the university’s fall semester starts, you will be looking at revenue issues.
•
Do you have the right staff or the ability to hire the right staff? Professional management and good staff is essential to
leasing your property quickly and retaining residents.
•
Are you willing—and able—to work with multiple stakeholders? Student housing development and operations involve
not just the residents (i.e. the students), but parents as well. Furthermore, universities and colleges are going to have
their say.
•
Can you address the needs of students and parents? The student population wants what it wants. If their needs aren’t
met, they’ll tell their friends, who will tell their friends, and so on. Nothing kills a student housing property more quickly
than negative reviews from students and their parents.
•
Are you prepared to upgrade your property on a regular basis to compete with newer properties, and do you have the
necessarily capital to cover this, in addition to repairs? Students will want the newest thing on the market, and if your
property is even 5 years old, you’ll need to have the latest amenities to attract students who might otherwise flock to
brand-new housing. In addition, student housing properties are subject to unusual wear and tear, more so than their
conventional counterparts. You need enough resources to ensure that repairs and replacements can be completed in a
timely fashion.
•
If you are brand new to the sector, do you have a successful student housing developer and/or owner/operator
with which to work? The sector is a fickle one in which to develop and operate. As such, it’s a good idea to work with
companies familiar with the industry.
In Closing
Student housing is a sector that is maturing nicely. It was strong through the recession and, given the enrollment
trends, it will likely continue to do quite well. Investors who do their homework and study the market and trends
carefully should get a decent rate of return from their student housing assets.
Still, a micro and macro understanding of the industry is essential for success. Approaching student housing in a
generalized fashion will probably lead to problems. An understanding of trends, markets, stakeholders and other
variables is a crucial part of operating—and succeeding—in this sector.
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About Axiometrics
In today’s competitive and fast-paced apartment and student housing markets, having the right information at
the right time can mean the difference between maximizing your revenues and making costly mistakes. Rely on
Axiometrics’ superior market research and analytics to improve your property and portfolio performance and to
identify markets, submarkets and specific sites for apartment and student housing acquisitions and development.
Axiometrics delivers accurate and timely performance metrics on the apartment and student housing markets, giving
you the competitive advantage. Our unique proposition focuses monthly on each property’s floor plan performance,
then extends to competitive properties, submarkets, markets, portfolios and companies. We give you access to
research, updated monthly, featuring tens of thousands of properties in the U.S.
Want to Learn More? Let’s Talk
We’re happy to offer you a no-obligation assessment of your current research and data-collection processes. One of
our apartment market research specialists will be glad to contact you with more information about how Axiometrics
can help you get the most from your investments.
Call us at 214.953.2242
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