Student Housing Sector Fills Huge, Escalating Need

Posted on June 5, 2014

Demand has more than kept pace with all the new construction activity.

Anybody involved in the student housing industry has heard the lament: “There are 60,000 new beds scheduled for delivery during the 2014–15 school year. We’re going to be overbuilt. The sky is falling.”

Calm down, Chicken Little. In reality, the privately owned student housing market is so strong now that the number of beds expected to be delivered by the time the fall semester begins in August is now about 67,000 as news of new construction comes out. And this is good news, not bad.

The reason: The demand can more than handle the supply.

All those new beds are being added at about 100 universities throughout the United States, institutions of higher learning in areas in which no beds were delivered at the start of the 2013–14 academic year.

Maturing and Profitable
Developers are starting to see that student housing, while still maturing as a sector in the apartment industry (it really started in 1995 and started exploding in the past 10 years), can be a profitable enterprise at a time when most colleges and universities are building few, if any, new housing units.

Though many of the privately built student housing properties are at the larger state universities—like the ones with a football team constantly on national TV­—developers are starting to see the opportunities at smaller schools, as well.

For example, The Groves at Grand Forks, a 600-bed property scheduled to open this fall, will be the first privately built purpose-built project at the University of North Dakota in Grand Forks. And in Bozeman, Mont., the 499-bed Stadium View Apartments is expected to begin serving Montana State University students by the 2015–16 school year.

Filling Past Capacity
With many schools mandating that all freshmen—and all freshmen and sophomores, in some cases—live on campus, occupancy at university-owned residence halls meets or exceeds capacity. The University of Texas at Austin’s halls were at a combined 104.7 percent occupancy in 2013, while farther north the University of Illinois at Urbana–Champaign was at 100.7 percent in 2013 and is expected to soar past 101 percent by the start of the next school year.

Fannie Mae’s recent Multifamily Market Commentary, which focuses on student housing in May and used Axiometrics’ statistics and charts, quoted our forecast that average occupancy at university-owned residence halls nationwide will exceed 97.5 percent through 2017.

“As enrollment is projected to continue increasing through 2020, universities will not have enough beds to provide for students,” the Fannie Mae report noted. “As a result, the number of beds being delivered to the market by privately owned student housing developers appears to be appropriate.”

So those sophomores, juniors, and seniors who don’t win the student housing lotteries must find other places to live. These students want a home, and that’s why amenities are a big attraction for them, and amenities are what student housing property owners are offering.

Coffee Bars, Flat-screens, … and Good ROI
Many of the newer student housing properties offer enticements such as study halls, free Wi-Fi or other broadband Internet connection, coffee bars, fitness centers, rock-climbing walls, and flat-screen TVs in both living rooms and common areas. Some even have pillow-top, queen-size beds.

These value-added features attract both students and, in many cases, the rent-paying parents. For the student, the newer, off-campus properties allow for collaborative study, a community-like atmosphere, close proximity to campus, and a centralized place for work and play. It also gives students a feeling of independence compared with residence-hall life: They’re on their own; there are no RAs to whom they must be accountable.

For the parents, these properties provide peace of mind that their child can focus on classes; be able to work with peers; stay healthy and social; and, hopefully, achieve good grades.

Not to mention that the newer student housing properties are great news for landlords. Rents for some of the beds at newer units exceed $1,000 per month, and most rent for more than $600, for a space as little as 550 square feet. A large share of these properties return more than $2 per square foot per month, and some gross as much as $3 per square foot.

New Golden Gopher Holes
One school experiencing this surge is the University of Minnesota in Minneapolis, where private entities are planning to add 12 properties totaling 4,104 beds for the 2014–15 school year. Another seven properties containing 2,754 beds are under construction or being planned for an August 2015 opening.

And Golden Gophers, as the UM students are known, need housing to brave the cold Minnesota winters. Occupancy at university-owned, on-campus residence halls was 102 percent in 2013, and Axiometrics is forecasting 106 percent occupancy in the upcoming school year. The university is opening one new residence hall this year, the 600-bed 17th Street Hall, the first new residence hall built by UM since 2002.

It will also likely be the last for a while: University officials have said no more new school-built residence halls are in the works.

University housing and residential life director Laurie McLaughlin told Minnesota Daily, the university newspaper, that the school won’t increase on-campus housing and isn’t trying to compete with the private market.

“I don’t necessarily view it as a missed opportunity,” McLaughlin said to the newspaper. “You can’t be all things to all people, so you need to focus on … your core competency.”

This, with undergraduate enrollment up 2,000 students in the past five years.

The average effective rent per bed for university-served units opened or planned to open since 2012 is $1,107.20 per month, with individual properties renting for an average of as low as $586 and as high as $1,529.

Just as in the overall apartment market, job growth affects student housing. The more jobs, the more demand for conventional apartments, and apartment landlords prefer residents with jobs to those with a class schedule. Thus, more demand for purpose-built student housing.

Minneapolis–St. Paul–Bloomington MSA businesses created 42,000 jobs in 2012 and 33,000 in 2013 and are expected to add 36,000 in 2014. Apartment occupancy exceeds 96 percent, though it’s dropping somewhat, but the Minneapolis submarket, where the university is located, has 97 percent occupancy. Thus, as with the UM halls, students need someplace to park their parkas.

Replacing the ‘Student Slums’
One nationally relevant question is where do all the students come from? Where would they live if it weren’t for the privately owned student housing properties?

Many of the residents are sophomore, junior, and senior undergraduates, though some graduate students live in these properties as well. If these developments didn’t exist, the students would probably be living in a group at rental houses—the old “student slums.” They might also remain with parents or other family, or live in conventional apartments during their collegiate years.

But these new purpose-built student housing properties provide a lot more in amenities, conduciveness to study and social life, and proximity to campus. Students are happy. Parents are happy. Developers, investors, and landlords are happy.

And have no reason to panic.