Student housing: Increased enrollment and luxe accommodations
The student housing asset class had its strongest year on record in 2016, receiving an influx of $10 billion worth of investment capital, shattering 2015's record $5.8 billion. The unprecedented dollar volume can be attributed in part to the increasing desire among large public universities for highly amenitized dorms. These are commissioned at high prices and command higher rents once built.
Much like the office amenity arms race to attract top tenants, schools are using luxurious accommodations to entice talented candidates to apply and attend. Colleges must compete with their peer institutions’ housing offerings, and foreign money, institutional capital and private development groups are helping them achieve this, with 93 percent of 2015 investment dollars going toward acquisition of $10 million-plus assets.
“We are seeing an influx of institutional dollars into the student housing sector as investors see continued demand being very high," RSM partner Jason Sevier said. "Cap rates are higher than traditional multifamily investments, which provides for increased return potential. Per-bed values continue to increase, and that trend can be expected to continue in 2017. We also see a major shift in the students' expectation for what housing should look like."
Between 2014 and 2015, enrollment increased by 2.5 million students, Institutional Real Estate reports. International students flocking to the United States for its high-caliber, internationally recognized institutions comprised a large share, and because it is often more difficult for them to obtain financial aid, the foreign contingent is more likely to come from wealthy families capable of paying for premium housing.
"As dorms morph into luxury apartments, our student housing clients are able to offer more in amenities such as pools, hot tubs, weekly social events, top-of-the-line workout facilities and high-speed internet. These services are free, but with the increase in amenities, rents are significantly greater than other types of apartments, sometimes even twice the amount," RSM partner Nick Antonopoulos said.
The number of millennials seeking postgraduate education is also driving new construction and investment, partially due to lingering economic uncertainty and many jobs demanding higher educational attainment. According to the U.S. Department of Education, an estimated 3 million students were pursuing postgraduate education in fall semester 2016, up from 2.2 million in 2010. Demand for student housing is thought to increase during downturns due to fear of unemployment. Inclusion of student housing in a portfolio can help investors hedge against downward macroeconomic movement.
Just one generation ago, "dorm" was a four-letter word. It is derived from the Latin word for sleep, as that was its primary purpose and use. The product was undifferentiated and relatively unexciting. Now, some sophisticated dorms, equipped with gyms, pools and smart devices, more closely resemble high-end apartments than the grungy stock that dominated the 20th century. Generation Z students report high-speed internet, proximity to campus, ample communal space and security are their top priorities.