Striking the Balance in Student Housing

It’s not as sexy as luxury multifamily, but student housing is nothing to sneeze at. Student housing is a “key recruiting tool for universities” and the number of enrollees is rising, especially on the West Coast. Take for instance UC Davis in California. There the vacancy rate for apartments near the university is 0.2%. Most students cannot afford the less than 1% supply of student housing anyway.

Rushing in to meet the high demand coming from the student housing sector are traditional student housing investors but also many new developers and investors trying to capitalize on the boom in student housing construction and student enrollment. However, developing student housing requires a fine balance to keep costs affordable for the students while also keeping operating expenses and construction costs down for developers and the university.

Student Populations are Increasing (and Needing Housing)

Like multifamily, adding more and more luxury amenities has been one of the best ways to attract new tenants and to retain them. However, for student housing, those types of amenities aren’t as attractive as mixed spaces that include collaboration and “academic spaces.”

In California’s UC system alone, thousands of new beds will be added over the next two years but more importantly to the students and developers, these new developments will be more affordable. The cycle is cooling and normalizing, leading to somewhat of an oversupply in a few years, which is a good thing. Last year there were nearly three times as many graduate students enrolled in universities (20.4 million) compared to 1990 (6.6 million).

Costs Must be Limited – but Returns are Long Term

Unlike typical multifamily investments, you’re not usually going to see huge annual returns in student housing. But for big named universities that have been around for decades, even centuries, student housing will produce yields for years to come.

So why isn’t student housing as big and sexy as multifamily even though it often results in twice the returns over the long term? Because striking the right balance is complicated. First, universities aren’t as interested in making a profit from housing as they are interested in attracting new students with student housing being their best lure.

Universities have to balance their costs with what parents and students can afford, with their local market rates, and with the state funding allocated to federal and state funded universities. Because of that, builders, developers, and investors have to put down a lot up front without seeing equivalent returns immediately. And working with institutions and government agencies can be contentious and difficult.

Crafting Amenities for Students and Saving Costs

Graduate student enrollment is pushing demand for student housing overall higher. Developers are trying to save money by crafting amenities to suit students’ needs instead of following the multifamily trend.

Parking on campuses was difficult before but now that the trend is for fewer parking spaces and parking structures, students prefer more shuttle services nearby. Many schools are choosing private-public partnerships to help reduce construction costs while others are turning to prefab construction firms to rapidly scale up to meet the demand.