As students head back to their fall semesters at colleges and universities across the country, investors are eyeing off-campus housing as potentially lucrative assets. Over the past 20 years, student housing developments have increased in both popularity and profitability.
Even amid the COVID-19 pandemic, student housing remains a fairly consistent source of steady income for investors. The asset class has proven its stability through economic downturns, and many believe this pandemic will be no different. While some locations are seeing moderate upticks in vacancy rates, most off-campus housing complexes are taking minimal hits – and some are actually seeing increased occupancy. As college dorms close or reduce their density, students are turning to off-campus options instead.
Here, we are looking at student housing options, ways to invest in this asset class, and how the Coronavirus pandemic has impacted student housing across the U.S.
- Student Housing and Commercial Real Estate Investments
- Off-Campus Housing Investments: The Data
- Student Housing and CRE Investment Opportunities
- Considerations for Off-Campus Properties
- COVID-19 and College Campuses
- Outlook for Spring Semester
- What About School Year 21-22?
- Ready to Invest in Student Housing?
Student Housing and Commercial Real Estate Investments
For investors looking to diversify their portfolios, multifamily housing on or near college campuses can be an excellent way to create a stable income. The student housing market is often underutilized, allowing investors to purchase property at reasonable prices, with promising returns.
As the pandemic continues to unfold, many university-owned housing options are struggling due to low enrollment, online courses, and the like. However, off-campus student housing – the type owned by commercial real estate investors – is still performing better than expected in many markets. And as we head into 2021, the data suggests these investments will only continue to gain in popularity.
Though student housing investment opportunities have long been reserved for the high-net-worth investor and institutional investment domains, there is room for all commercial real estate investors in this arena.
Types of Student Housing
Students on a college campus have several options for student housing, particularly after their first year. While many community colleges and other two-year institutions do not have on-campus housing, most larger colleges and universities have options both on and off-campus for students, couples, and families.
Many of us attended college and lived in cramped dorms as Freshmen. Dormitories remain the most popular housing option for first-year students, primarily because most institutions require students to live on campus during their freshman year.
There are both social and safety components for this requirement. Freshmen are typically 18 or 19 years old, and not all of them are ready for life on their own. Dorm-style living allows them to have freedom and independence while also having the safety net of dorm staff, dining halls, and some structured rules and regulations.
Similarly, living in the dorms can help students transition from life at home to life on their own. Dorm-style living often encourages students to meet new people, get involved in social activities, and generally have a more enjoyable college experience.
However, there is another reason colleges and universities require first-year students to live on campus: profit. Think of it this way: by requiring students to live on campus, the college or university has an essential monopoly on the Freshman housing market. Students want to receive high-quality instruction, but the cost to do so will include non-negotiable room and board costs. That is, if students want to get an education, they must also pay the price for student housing.
Because of this essential monopoly, higher education can charge outrageous fees for student housing, and students will pay it. In fact, the cost of tuition, room, and board has increased by approximately 24% in ten years. With so many cuts to higher education funding, rising demands for new and innovative technology on campus, and increased wages for instructors, the easiest way for universities to make a substantial profit is to increase housing costs.
After one year of living in cramped quarters, many students are ready to move into something a bit more spacious. One option is student or university apartments. These accommodations are typically owned by the institution and therefore still profit the college or university in some way.
Student apartments typically feature larger living spaces, kitchens, living rooms, and other amenities not found in standard dorm-style living. Multiple students live in one apartment, with each student renting the room for the entire school year.
Apartment complexes owned by the university will still feature common areas where students can hang out, study, and enjoy the college experience. And because they are affiliated with the campus, many student apartments still have rules about quiet hours, pets, and other considerations.
Many students choose university apartments as a “stepping stone” from the dorms to independent apartment living. Often, rent includes utilities, internet, and other amenities, giving students one less thing to worry about as they pursue a college degree.
Because these properties are owned and operated by the learning institutions themselves, private investors cannot benefit from university apartments, except in very unique cases, as mentioned below.
Multifamily Properties in the Community
Finally, we come to an off campus housing type that interests investors. College communities often feature a variety of housing options for single students, young couples, or young families. Private off-campus apartments, condos, townhomes, or single-family homes are excellent options for students looking for more independence.
A private, independent multifamily rental allows a student a greater degree of control over his or her choice of roommates, but also comes with more responsibility. Most private off-campus rentals require tenants to pay all utilities. But students also appreciate the freedom that comes from escaping university housing rules and regulations.
Private off-campus rentals, however, typically require a standard 12-month lease. For students who leave campus during the summer, that means paying three months of rent for an empty apartment.
Investors will focus on independent, private multifamily assets. Unlike dorms and university apartments operated by the institution itself, private apartments or condos benefit the investor or investors directly. The university does not profit from privately-owned apartments.
The Benefits of Student Housing Investments
For commercial real estate investors, assets are judged by their returns and their stability. While other markets may see higher rates of return year over year, student housing investments offer a stable income flow every year.
There are always students coming and going in a college town. This stability is a significant draw for commercial real estate investors.
Typically, college students co-sign a lease with their parents. Having a parent involved in the process often ensures the rent is paid on time, every month, without fail. And there’s plenty of profit to be made as well. The closer the proximity to campus, the more a property can charge for rent. In some areas – near Ivy League universities or large campuses, for instance – a property close to campus can demand significantly higher rent, thus increasing the rate of return.
Many investors point to the predictability as the reason they purchased this asset type. Even though tenants are only on campus nine months out of the year, most require a 12-month lease. Furthermore, occupancy is predictable. Tenants know when they will leave school and move on to their next location. Therefore, investors can often sign new leases before the initial tenants leave the property.
Finally, marketing is a breeze with properties near campus. Advertise on the school website or local rental affiliate websites. Encourage current tenants to spread the word if they are leaving the university. Often, existing tenants will find your next tenant with minimal effort on your part.
There are always students coming and going in a college town. This stability is a significant draw for commercial real estate investors.
The Challenges of Off-Campus Housing Investments
Undoubtedly, the biggest challenge and risk for off-campus commercial real estate investors is the damage to the property. While most young adults are respectful and responsible, it is possible to get a tenant who neglects or damages your property. College students aren’t exactly known for their tidy living spaces or mild-mannered Friday nights.
Therefore, as an investor and/or property manager, it’s essential to set clear expectations with the tenant. Make it known that large parties will not be tolerated. Nor will any illegal activity, property destruction, or disruption to other tenants.
Even the most responsible students will likely make mistakes. Remember, this is their first time living on their own, and that might mean giving them some grace occasionally. For instance, expect that the property may not be as clean as you would hope upon move out. There may be peeled paint due to misused wall hanging products or unkempt outdoor areas. Batteries and lightbulbs will need to be replaced. It’s the nature of renting to young tenants.
Similarly, if you manage your own property, expect frantic calls about issues that more mature renters would handle on their own. If your property uses a radiator for heating, consider the possibility that your tenants have never seen this system before. Therefore, on those first cold winter nights, expect phone calls about the heat not working. Such calls come with the territory when renting to young adults, but consider this a teaching opportunity for these students.
Factor these considerations into your overall cost analysis and set the rent accordingly. Off-campus property investors should anticipate higher-than-average repair, cleaning, and other costs. You can also expect higher than average fees associated with tenant turnover. Expect to replace drywall, redo paint, replace furniture if providing a furnished apartment, and even repair or replace appliances, flooring, or light fixtures.
Off-Campus Housing Investments: The Data
Off-campus housing options are becoming increasingly popular as school enrollment rises. As enrollment increases and public funding decreases, colleges and universities have difficulty keeping up with demand.
In a normal, non-pandemic year, occupancy rates hover around 92% for off-campus properties. In Fall 2018, occupancy rates for the student housing sector hit 93.9% – a near all-time high. With more and more students registering for in-person classes every year, schools simply can’t provide enough beds for them all.
Investors and developers continue to build new developments in college communities, and yet the occupancy rates remain high. Even as COVID-19 hit college campuses across the country, investors and property owners saw only marginal drops in overall occupancy rates.
Fall 2020 data suggested an 88% occupancy rate for all student housing sectors. We explore that statistic more below but suffice it to say those numbers are still encouraging for multifamily college property investors.
Rate of Return
Besides consistently having high occupancy rates, student housing investments also tend to have higher returns for investors. Cap rates are 0.5% to 0.75% higher for multifamily units near a college campus compared to other multifamily properties.
Furthermore, rents continue to rise in all multifamily sectors, but higher demand in college communities means a remarkably fast rate of increase. Enrollment in college and universities rose roughly 30% between 2000 and 2018. While some colleges and universities used the increased revenue to renovate dorm facilities and build additional student housing, most locations cannot keep up with demand. There are simply more students than at any other time in history, and all of them need a place to live.
The high demand means higher rental rates for tenants, which translates to greater profits for investors and property owners.
Student Housing Rides Out Recessions
During the 2008-2009 recession, colleges saw an increase in enrollment. When residents face unemployment, they typically decide to pursue opportunities that will create future job growth. Higher education is an excellent way to stand out from other job applicants.
Therefore, student housing investors see relatively steady income, no matter the nation’s economic condition. In fact, as employment rates drop and the economy flounders, off-campus housing tends to increase in popularity. For many investors, this stability is one of the main reasons they choose to purchase student housing assets.
Student Housing and CRE Investment Opportunities
There are several ways to pursue off-campus investment opportunities. Whether you’re a private investor with plenty of time to manage your property, or a high-net-worth investor looking to purchase multiple units, there is a solution that will meet your needs.
Types of Student Housing Investment Opportunities
For high net-worth investors, REITs, or crowdfunding investors, there are several options for student housing:
- Class-A Student Housing
Class-A properties are multi-unit properties near a college or university campus. These assets are typically newly constructed, with plenty of amenities. Investors will have to provide very little capital towards renovations or improvements. These Class-A properties are built specifically for student housing and designed to create stable cash flow for investors.The advantage here is that you are not adding any more units, so you’re not oversaturating the local rental market. And many Class-A properties are essentially turn-key ready, meaning you can begin leasing properties almost immediately.
- Value-Add Off-Campus Properties
Investors purchasing value-add properties are looking for the best possible deal on a property, which will then be renovated and transformed into student housing. Value-add properties require significant capital upfront for repairs, renovations, and construction. However, if purchased at the right price, these properties represent an opportunity for significant return.However, purchasing value-add properties is a gamble as renovation costs can far exceed expectations. If you come in under budget, though, a value-add property could be an excellent investment.
- New Construction Off-Campus Housing
Investors and Trusts may also consider new construction projects. For this asset type, investors will purchase a plot of land near a college campus and work with a developer to build a new structure.By building a property from scratch, investors can ensure the asset offers everything a Class-A student housing property needs, from the latest technology to world-class social amenities. While these projects can be incredibly costly initially, new developments often demand higher rent. Therefore, these properties can see significant ROI thanks to their location and desirability.The risk with a new construction project is an oversaturation of the local market. If the demand for housing doesn’t meet the scale of your project, you could face high vacancy rates, which will drive down rental rates for everyone in the area.
Before embarking on a new construction project, be sure the demand will support the asset.
Purchase a Multi-Unit Property Outright
For high-net-worth investors, purchasing a multi-unit property directly can be an incredibly lucrative asset. Even during the worst pandemic in a century, multifamily properties across the country continue to perform relatively well. Experts suggest the multifamily sector may rebound the fastest of any property type after the pandemic.
Some real estate investment groups choose to either purchase an existing student housing complex or purchase land and invest in a new construction project near a college campus. These projects could cost millions of dollars, so they’re often reserved for high net-worth buyers or institutional investors.
As of 2018, 50% of all student housing acquisitions are made by professional investors, REITs, or cross-border investors. As such, prices for property and large-scale developments have increased in recent years, making it more difficult to find a property that produces significant returns.
Crowdfunding or Joint Ventures
For investors who aren’t part of a large-scale real estate investment group – and those who don’t have access to millions in assets – there are other ways to invest in multi-unit student housing projects. The recent emergence of crowdfunding sites allows everyday investors to invest in large-scale projects such as off-campus housing developments.
Typically, these crowdfunding sources include investors from all over the country, or even around the world. Investors often don’t know one another and do not have a great deal of influence over the project as a whole. However, crowdfunding is a great way to allow the everyday investor to own commercial real estate that would otherwise be out of reach financially.
Another option is for several investors to purchase a property together as a joint venture. In this method, investors pool their financial resources, experience, and expertise to buy a student housing development (or land to create a development). In a joint venture, each investor or partner has a significant role in the project and will have a say in the overall project and budget.
Invest in a REIT
Another popular funding option for investors is a real estate investment trust, or REIT. With a REIT, the Trust purchases a property (or, less often, purchases the debt to a property). However, individual investors buy shares of the property and consequently receive dividends based on their investment.
For student housing properties or other multi-unit housing complexes, investors purchase shares in the project or property and then receive dividends based on the rent collected from tenants. REITs are an excellent way for lower-asset investors to buy an interest in real property without being responsible for managing the property itself. That is, the Trust hires a property management team, handles maintenance and renovation issues, and generates financial reports. As the investor, you merely track the REIT’s progress and wait for your dividend.
Of course, like all investments, REITs come with inherent risks. However, multifamily properties (including student housing properties) generally represent a lower risk than other property types. In the student housing sector specifically, occupancy tends to stay steady over time, which leads to greater profits for the REIT and the investors.
There is currently only one major REIT that trades exclusively in student housing properties: American Campus Communities. This REIT purchases and develops large-scale properties near campuses with at least 15,000 students.
The public-private REIT partnership is another interesting investment option. This REIT works to offset costs for universities. The university that needs new housing options, but lacks the capital, leases land to the REIT. The REIT then builds, owns, and operates the housing development. The university receives a ground-lease rent check (all without investing initial capital), and they also get the benefit of more beds for their students.
REITs are a great option for investors who want to get into the student housing game but lack the significant capital to purchase property independently.
Property Management of Multi-Unit Off-Campus Properties
Most large-scale student housing developments require on-site property management or a dedicated property manager in the community. Many professional investors, joint-venture investors, and REIT investors choose these methods because they can be largely hands-off with property management.
At CXRE, we provide property management services across all asset classes, including student housing. Additionally, we can oversee your construction or renovation project, working with you and your investors to get the highest returns possible.
Of course, property management and maintenance costs will require considerable annual fees, which will cut into the overall profits of an investment. However, property management and facility management are vital to successful investing. Multi-unit properties require specialized management and maintenance considerations. In the end, hiring an experienced property manager will save you money by ensuring your asset runs smoothly.
With rents continuing to increase, and occupancy rates remaining steady in most student housing developments, investors should continue to see returns year over year.
Purchase an Individual Unit
Most investors aren’t financially able to purchase an entire development. When it comes to student housing investment, many investors choose to buy a single off-campus housing unit. Individual and small-scale student housing allows lower-asset investors to build a diversified real estate portfolio.
Individual units are a fantastic option for investors who want to purchase real assets on a smaller scale. Some investors purchase a multifamily complex near a college campus – like a duplex or fourplex – that are easy to maintain and manage independently. This reduces operating costs by eliminating property managers or facility maintenance professionals that multi-unit complexes need to operate effectively.
Keep in mind that most student housing leases on a “per room” basis rather than a “per unit” basis. That is, students rent a room in the unit rather than paying for the entire space. Therefore, a unit with more bedrooms will be more profitable. Consider, for instance, your local college rents a room for about $500 per month. If you purchase a 2-bedroom unit, that’s only $1000 per month. However, if you can find a 3-bedroom property for a similar price, you’re now gaining $500 extra per month, simply by adding another bedroom.
The Kiddie Condo
Sometimes, parents purchase a condo, apartment, or townhome near a college campus and let their child live there while he or she is completing college. This method is typically more cost-effective than renting an off-campus apartment or living in the dorms. After the investors’ child graduates and leaves the area, investors can then sell the unit or continue to rent the unit to other students for years to come.
With college tuition and room and board costs increasing exponentially, parents are discovering that purchasing real estate is more beneficial than paying out of pocket for their child’s living expenses.
These individual investments, affectionately known as “Kiddie Condos,” can be beneficial for both the parent and the college student.
With college tuition and room and board costs increasing exponentially, parents are discovering that purchasing real estate is more beneficial than paying out of pocket for their child’s living expenses. Plus, these parent investors can rent out additional bedrooms to the student’s friends, creating an income stream that often covers a large portion of the mortgage.
Additionally, some out-of-state students may be able to claim in-state residency if they live in an off-campus apartment owned by their parents. This change in residency could save parents tens of thousands of dollars on tuition costs over a four-year period. However, not all states allow this practice, so be sure to do your research before chasing this option.
Finally, some parents choose to put the student’s name on the mortgage, generating credit for the student. While this isn’t the right option for everyone, it can be a great way for young adults to establish credit, which can then help them qualify for a loan when they graduate and move out on their own.
Property Management of Individual Properties
Unlike large-scale investments, individual properties often require the investor to also act as the landlord and property manager. Because the profit margins are slim on individual off-campus units, hiring a property manager isn’t financially advantageous in this case.
For parents/investors who live out of state, hiring a local property manager may be the only way to ensure proper maintenance. But those who live in the local area may consider managing the property themselves.
However, as we mentioned earlier, operating as a landlord for college students comes with unique challenges. Unfortunately, even if your student (and his or her roommates) are responsible, you can’t control what goes on the surrounding units. Parties, property destruction, and police calls aren’t entirely uncommon in off-campus housing communities. As the landlord and property owner, you may find yourself responding to more than your fair share of maintenance requests or violation notices.
In addition, owning a student housing property means annual turnover. Each time your tenants move out, you’ll likely spend significant time and money on repairs preparing for the next renters. Remember, many of these tenants are first-time renters, so even the most responsible and mature students are likely to leave problems behind.
If you aren’t willing to manage these frequent hiccups – and spend the time and money it takes to fix problems when they arise – you might want to reconsider investing in an individual property.
Considerations for Off-Campus Properties
Whether you invest in one unit or construct a multi-unit student housing development, there are some amenities that your tenants will expect. Of course, many of these common-use areas are currently unusable due to COVID-19 restrictions, but when life returns to some semblance of normal, they’ll be attractive amenities to potential tenants.
Large Living Space
In a recent study that surveyed what college students wanted most in their housing, a large living space came in as the most important consideration. Most respondents report living area being the number one factor when deciding where to live. In fact, 65% of those surveyed said apartment size was “extremely important” when considering an off-campus housing option.
Investors can use this information to cater to students, creating larger, more open spaces that appeal to younger tenants. Other amenities like large bathrooms, in-unit washer and dryer, and storage space also ranked high in importance for those surveyed.
Technology plays a significant role in today’s college experience, especially during the pandemic. With so many courses moving exclusively online, students require reliable access to high-speed internet. Properties that provide this access are more likely to see higher rents, higher occupancy rates, and consistent tenants.
Wi-Fi and Internet access are perhaps the most essential components of a college student’s life today. This generation is entirely connected online: social media, online classes, online forums, online gaming, and more. As a property owner, if you have to choose ways to improve your space, invest in improving Internet access for tenants.
Internet access and speed aren’t the only technology considerations for student housing. Today’s young renters expect more technologically-advanced accommodation than ever. Revamping your property’s technology will not only make you more competitive with surrounding housing options but will also increase your property value overall.
Depending on the size, location, and asset class, you may also consider incorporating smart technology into your property. You can learn more about smart technology in commercial real estate in this article.
Both in dorms and off-campus housing locations, college students want a sense of comradery and community. But they also want collaborative study and work areas where they can work together to get through those challenging college courses.
A study of 7,095 graduate and undergraduate students found many students want a common study area or computer lab in their apartment complex.
The same survey found one amenity to be the most important aside from apartment size and technology: a fitness center. Building a high-quality fitness center could give your property an edge over the competition.
For investors, that means spending money where it matters: in common areas throughout the housing facility.
When the weather is nice, students want to be outdoors. During the pandemic, that’s even more important, because studies suggest that the virus spreads less effectively outside. Pools, lounge areas, grilling areas, and even outdoor kitchens are becoming more commonplace in college community housing complexes.
Being outdoors also encourages community, allowing students from all units to gather and enjoy their college experience. However, keep in mind that these outdoor areas can also be magnets for college-age trouble, so ensure you set ground rules for the space’s use.
Investors might consider their current space and determine whether building or improving an outdoor entertainment area would be a profitable investment.
Parking Options – For Bikes and Cars
Transportation to and from campus is another important factor when considering student housing. Properties located within walking distance of campus often demand higher rent, while those further away are more affordable.
Most students will either walk or ride a bike to campus, so safe and reliable bike parking is an important consideration for many students. Installing bike racks or locked bike storage is one way to make your property stand out from other options in the area.
Car parking is another important factor. While many students will not drive to and from campus, students with a car must have a safe place to leave their vehicles when not in use. Depending on the number of units in your complex, a lighted parking lot may be sufficient. However, a large-scale development may require a parking garage, which could be an additional expense for the tenant.
Single-unit investors might also consider bike or car storage in their properties as well. A unit with a detached garage or storage space could be a welcome incentive for students looking for extra space.
COVID-19 and College Campuses
As the fall semester began for students across the U.S., each campus had to consider various factors as Coronavirus continued to spread throughout many communities. Campuses located in an area where COVID-19 spread remained relatively low allowed students to return to dorms and attend classes in-person. Colleges and universities in high-transmission areas, however, took a more cautious approach, moving many courses online.
Of course, this shift in higher ed also meant a shift in student housing. As more campuses moved towards online classes, both college dormitories and multifamily property investors saw impacts on their occupancy rates.
According to a study by the National Student Clearinghouse Research Center, higher education saw a shift in enrollment because of the pandemic. Community colleges saw a nearly 6% decline in enrollment, while for-profit universities saw a 7% drop. However, public colleges and universities and private nonprofit institutions saw moderate growth: 2.8% and 4% over last year’s numbers.
These statistics vary based on the college’s location, instruction model, size, and other factors. In areas where enrollment has dropped – or where classes moved entirely online – occupancy rates have subsequently dropped.
However, some private housing providers, such as off-campus apartments, actually benefitted from higher vacancies in the college dorms. Others – particularly multifamily housing units near campuses that announced plans to return entirely remotely – have seen dramatic increases in vacancies.
Even with this year’s economic uncertainty looming large, many investors are hopeful that occupancy rates will stabilize after a vaccine is readily available, hopefully in time for the 21-22 school year.
Moving to Online Classes
As the semester began, a higher education report found the following breakdown as reported by the nation’s colleges and universities:
- 6 percent reported online-only learning
- 27 percent primarily online
- 15 percent offering hybrid learning (both in-person and online courses)
- 20 percent primarily in-person courses
- 5 percent started as solely in-person
- 6 percent reported doing something else entirely
- 24 percent of schools had not finalized plans at the time of the report
Those numbers, of course, have shifted as students returned to campus. Some universities remain committed to their established learning models. But others are forced to scrap their original plans as COVID-19 numbers increase across campus.
For instance, Michigan State University initially planned on having students on campus this semester. However, just before the semester began, the institution decided to move all learning online. As a result, students who originally planned on living in dorms scrambled to make other plans.
Other universities, like the University of North Carolina at Chapel Hill, changed course just one week into the fall semester. After 177 students tested positive for the virus in just a few days, the University decided to cancel all in-person undergraduate classes for the semester and move learning online. With that change, the University also announced they would work with students living in the dorms to make other arrangements or move back home.
Online classes – and subsequent dorm closures – are bad news for colleges and universities, who rely on housing income to turn a profit each year. However, off-campus properties have benefitted slightly from this shift to virtual learning.
Economic Impacts on Dorm Housing
The pandemic and its ensuing drop in enrollment have put many colleges and universities in a difficult position. Many institutions depend on housing and dining fees to turn a profit. However, colleges also recognize the responsibility to keep both students and staff safe amid the Coronavirus pandemic.
Some colleges began classes in person, only to abandon this plan and turn to virtual learning. In these instances, students who initially moved into dorms either returned home or were forced to find off-campus solutions.
Other campuses are still offering in-person classes, with students living in dorms. Many of these institutions have decreased their occupancies to reduce the number of people in each building. Some colleges report reducing the number of available dorm beds by as much as 50%.
The increased vacancies are costing universities millions of dollars this semester alone. A recent ABC News Report found the University of Michigan will lose as much as $1 billion across its campuses before the end of the year. The University of California system lost $558 million in March alone. And the University of Colorado saw a $67 million decline over the summer.
With COVID-19 continuing to impact college campuses throughout the United States and abroad, colleges struggle to make ends meet. Reduced enrollments, dorm vacancies, and reduced on-campus dining are all adding to these deficits. Now, college sports – namely the income-producing giant football – are scaled back significantly or canceled altogether.
This financial strain leaves smaller universities scrambling to figure out how they can stay afloat. The same ABC News Report estimated that as many as 20% of the nation’s smallest colleges and universities might not financially survive this crisis.
Impacts on Off-Campus Leases
What is bad news for college dorms and university-owned apartment complexes is great news for some independent investors. With so many institutions drastically reducing their occupancy rates, students scrambled to find housing options as the fall semester approached.
In August, student housing nationwide reported an 88% occupancy rate.
For off-campus apartment complexes, condos, and townhomes, that meant a dramatic uptick in leasing activity.
Luckily, most off-campus student housing options secured leases long before the fall semester began. That is, students signed a 12-month lease, to start in August, months ago. Therefore, many students live in those leased apartments, whether or not the college is offering in-person classes.
Even as the pandemic began back in the spring, many student housing options (both on and off campus) remained relatively full. Students off-campus mostly stayed in their apartments, even after classes were canceled for the remainder of the term. Students wanted to stay among their peers, enjoying their time with friends, even if that meant enjoying time at a social distance. This consistency helped keep income steady for investors.
However, even those student housing options that didn’t secure leases during the summer are still seeing encouraging occupancy rates. In August, student housing nationwide reported an 88% occupancy rate. In Fall 2019, the same occupancy rate was 91%, meaning even though enrollment was down significantly, off-campus student housing wasn’t impacted as dramatically.
Closed Dorms, Open Apartments
One factor leading to a steady occupancy rate is the closure or capacity reduction of on-campus housing. Many students do not want to remain at home, even if their classes aren’t in-person. With dorms closed or unavailable due to occupancy restrictions, many students are turning to apartments instead.
Concerns over COVID-19 have also impacted off-campus leases. Some students worry about the close quarters of dormitories and high-rise apartment complexes. Instead, these students are leasing townhomes or apartments in smaller, less crowded complexes.
Fewer beds on campus means students are seeking alternative living accommodations off-campus. And that is excellent news for commercial real estate investors.
Mixed Occupancy Rates Across the Country
While the average occupancy rates currently stand at about 88% for student housing nationwide, that figure doesn’t represent the whole story. Occupancy rates are below 70% in some instances, particularly in university systems that announced a fully-online fall semester. Many of these institutions, such as the University of California system, made this decision early in the summer, giving students plenty of time to pursue other colleges, put their education on hold for a year, or find local housing.
Unfortunately, many of the areas seeing low occupancy rates are also home to large college campuses with many privately-owned student housing properties.
However, a study from RealPage suggests there are plenty of locations thriving despite the virus. About 25% of the core group of schools (175 colleges and universities) saw occupancy rates of 95% or above. That is, even though most of these institutions are conducting at least a portion of their classes online, student housing hasn’t struggled. In some instances, privately-owned student housing has even seen a slight increase.
Outlook for Spring Semester
While there isn’t a crystal ball that lets us see what spring holds, it’s likely going to be much of the same. Even with an approved vaccine, it could be early summer before it’s widely distributed. COVID-19 will likely remain a part of our daily lives until at least the end of the school year.
We can’t know for sure what that means for higher ed institutions like colleges and universities. Some may move to exclusively online classes, or they may open up more in-person classes as cases drop. We simply don’t yet know the outcome.
However, no matter what happens in the classroom, investors of off-campus student housing can reasonably expect more of the same. Most tenants signed a lease that continues through the end of Summer 2021. Therefore, even if a college campus shuts down, those students (and their parents) are still committed to paying the rent.
The History of Student Housing and Economic Downturns
While none of us has experienced a pandemic of this scale in our lifetimes, we can point to other economic downturns to gain insight. During the last two economic downturns, colleges and universities saw enrollment rise. Unemployment gave many workers a chance to return to school and complete a degree. Higher education makes workers more marketable and competitive once the economy recovers.
As a result, student housing also fared better during economic downturns than other commercial real estate markets. In fact, experts have long considered student housing to be somewhat “recession-proof,” though that is perhaps a misnomer. While those of us in the commercial real estate industry know that nothing is ever entirely recession-proof, the history surrounding student housing investments seems to indicate that the asset class will recover as it has done in the past.
While this crisis is unquestionably unprecedented, it seems student housing will remain relatively stable into the spring semester. Some schools are taking strict precautions, even canceling Spring Break, encouraging students to stay close to campus instead. This strategy will hopefully reduce widespread transmission during the spring semester, alleviating campus closures and subsequent housing shutdowns.
Heading into Summer 2021, experts are hopeful we will have access to an effective vaccine, which should get the economy back on track heading into Fall 2021.
What About School Year 21-22?
Investors may see a slight dip in occupancy rates this school year, but the outlook looks promising into the 21-22 school year.
However, one concern is online learning. This year, many college students are learning virtually. Some experts worry that online learning will become the norm during this pandemic, leading more students to learn from home during the 21-22 school year. In that instance, American colleges and universities may see a drop in on-campus enrollments. As a result, both on-campus and off-campus housing will also see a decline in occupancy rates.
If we refer back to past economic challenges, a mass exodus away from on-campus learning seems unlikely. High school seniors throughout the country dream of heading off to school to start a life on a college campus. Therefore, if colleges offer in-person learning, it’s likely they will see full dorms – and investors will see full apartments, too.
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