Student Housing

During the turmoil in the commercial real estate markets over the past few years there has been one shining star that continued to perform remarkably well, multifamily rental properties. There are a number of reasons for this, chief among them is access to cheap financing and increased demand for rental housing.

Within this multifamily asset class an oft overlooked segment is beginning to attract a lot of attention, that of student housing. There are very strong fundamentals in its favor which I will go on to explain below.

The apartment/multifamily asset class has outperformed all other areas of commercial real estate over the past few years. Thanks to increasing demand from the rental market and access to cheap financing this asset class has remained hot with little evidence of the prevailing distress of the wider real estate market.

The downturn in the residential "for sale" market has contributed greatly to the demand for rental housing. The residential market has been in decline going on six years now. Many first time home buyers have been reluctant to enter the market with so much uncertainty regarding their job security and confidence in housing values. Ironically acquiring a home today is at its most affordable according to the NAR Housing Affordability Index. For more information on it, see my January Blog posting by clicking here.

Apartment financing has also been readily available during the same period when many traditional lenders refrained from activity in commercial lending. The Government Sponsored Enterprises, such as Fannie and Freddie, have provided the majority of the debt financing. The interest rates and leverage on offer from the GSEs has remained very attractive to property owners.

Student housing does not share all the same attributes as apartment buildings but it does have core fundamentals that make it even more compelling as an investment proposition. The demographic trends point to an increasing population of college students for many years to come, and in addition, the underserved housing requirements of colleges in the U.S. are at the heart of these compelling fundamentals.

The population of high school graduates in the U.S. is on the rise. Enrollment in postsecondary education has increased from 50% in 1977 to 67% in 2007. Meanwhile on-campus accommodations only cater to 25% of the student population. Of the remaining 75% of students that have to seek accommodations off-campus, only 9% of the off-campus students reside in purpose built student housing. This points to a severe under supply of custom built housing for this growing demographic.

Student housing occupancy rates are at near capacity and rental rates have continued to increase year on year through the recession. Another positive attribute to student housing is that leases are made on a per bed basis offering higher rental yields and leases are guaranteed by a parent.

The student housing conditions of the past, with dorm beds and minimal facilities, are no longer tolerated by a more demanding youth. New properties being built today have private bedrooms and private bathrooms, the shared space being the living room and kitchen, usually between 4 students. Amenities can include pool tables, video games, tanning beds, theaters and in warmer climates it is not unusual for there to be a resort style pool and clubhouse within the property. The facilities of the past pale in comparison to today's product.

Student housing is one of the few real estate asset classes that has withstood the current recession and is forecast to continue performing vibrantly going forward. Student housing is essentially recession proof, and in fact can be considered counter-cyclical. During prolonged recessionary periods the number of people applying for college, and extending their stay in college, increases dramatically.

Wall Street has only begun to sit up and take notice of this segment of the multifamily asset class. Perhaps due to the limited number of performing real estate classes over the past few years has driven investors to seek out this once overlooked segment.

Mulcahy Capital is currently working with a number of clients undertaking student housing developments, acquiring existing student housing properties, and repositioning or rehabbing existing portfolios across the U.S. Contact me if you have an interest in financing or investing in student housing.