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Student Housing Maybe a Good Real Estate Investment

Thursday, September 30, 2010 posted by Tommi Crow

By Jennifer Waters



CHICAGO – The housing market is still in the tank and doesn’t seem likely to emerge anytime soon, but there are investment opportunities in one segment: student housing.

It’s not a risk-free proposition, and it’s far more management-intensive than conventional multifamily properties. But student housing has a long history of growth and stability and promises to repeat the pattern as college enrollment stays on its upward trajectory.

“Demand and supply conditions for housing are bad,” said David Stiff, chief economist with Fiserv, which publishes the Case-Shiller Home Price Index. “But in college towns, demand conditions are slightly better. There’s a stable source of new demand every year.”

There are at least three paths to investment in college towns: individually; in a partnership, or as a shareholder in one of two publicly traded real estate investment trusts, American Campus Communities Inc. and Education Realty Trust Inc.

An initial public offering is on deck for a third, Campus Crest Communities Inc., which expects to list on the New York Stock Exchange under the symbol “CCG.”

REITs focused on student housing have become investment magnets for large pension funds. Some bigger syndicates have partnerships with larger funds. Campus Advantage Inc., one of the nation’s largest private student-housing companies, is managing and helping to develop properties for the California Public Employees Retirement System.

“Comparable to other similar product-type investment opportunities, student housing is a really good investment,” said Michael Orsak, vice president at Campus Advantage, which manages and owns 50 properties across the U.S., mostly in the Southeast, Midwest and Texas. The industry measures its size based on beds. For Campus Advantage, that translates into 30,000 beds.

“These investments return pretty stable cash-on-cash yields going in and should continue to hold up in the long term vs. other similar product types that might have larger peaks and troughs in occupancy and rental-rate growth,” he said.

Orsak said most institutions can expect a cash-on-cash yield in the first year at 8 percent to 9 percent. “I don’t know where a pension fund can find that today in the stock market or bonds,” he said.

Though markets differ by campus – large public universities have steady enrollment; smaller schools are growing exponentially – the national statistics on enrollment are strong.

In 2010, a record 19.1 million students were enrolled in two-year and four-year colleges and universities, a 25 percent jump since 2000, according to the National Center for Education Statistics. That underscores a consistent uptick in enrollment that is expected to continue – albeit at a slower pace – until at least 2018, as the last of the baby boomers’ children reach college age.

Coupled with the recession, which has prompted many to go back to school for second and advanced degrees, enrollment in post-secondary schools has rarely been so robust.

Moreover, today’s students aren’t living in the kind of housing their parents once inhabited. Many are leaving a home where they had their own bedroom and bathroom, a separate family or media room and amenities either at home or nearby. They expect the same when they leave campus – and parents appear willing to pay for it.

Campus Crest, which owns and manages 27 properties, or 13,580 beds, boasts of its amenities in its initial public offering prospectus. All of its properties – which, like Campus Advantage and ACC, are considered Class A – offer what Campus Crest calls “bed-bath parity,” or a private bathroom for each student.

The Campus Crest properties all have Internet access, a full kitchen with up-to-date appliances, washers and dryers inside each unit, ample parking and a broad array of other on-site amenities, such as “resort-style swimming pools, tanning booths, basketball and volleyball courts, game rooms, coffee bars and community clubhouses with regularly planned social activities.” Plus they’re all fully furnished.

“We strive to offer not just an apartment but an entire lifestyle and community experience designed to appeal to the modern-day college student,” according to the IPO documents.

Education Realty Trust takes a similar, resort-like approach to its owned and managed properties, which consist of more than 37,800 beds in 22 states, with a high concentration in Florida and Georgia.

All of these perks cost money, of course, and the monthly price on a student apartment is generally about 10 percent to 20 percent higher than a traditional apartment.

“The tenants are not constrained by real-life economics because, of course, they’re not footing the bill,” said Joung Park, an analyst who covers ACC for investment researcher Morningstar Inc.   Typically the parents are paying the lease, lessening the chance of default.

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