The Student-Housing Learning Curve

Student-housing investments used to be considered a “niche” strategy, more of an elective than a core requirement. In the search for yield, so-called niche 
assets—student housing, senior housing, self-storage, and medical office—have become more central. The sector’s fundamentals have been compelling: 
University enrollments are increasing steadily, 
driven by the millennial generation as well as by an expanding cadre of international students.
 With rising demand for technical skills in a
competitive job market, a college degree is almost 
required for many entry-level positions. As a
 result, the student population is increasing by about one percent per year —a rate expected to 
continue through 2021. Today, 70 percent of all high school graduates continue their education. At the same time, the existing stock of university 
housing is increasingly inadequate and outdated, 
although little capital is available for new 
facilities. Shrinking budgets have limited new 
construction at public universities, while private 
colleges saw their endowments decline during 
the recent downturn. New campus construction 
tends to create more classrooms than dormitories, 
and off-campus housing accommodates almost 
70 percent of the college population. Enter the student-housing managers, both public
and private. Offering investment management and development expertise, they have been 
powered by readily available debt and equity 
capital. Yet the industry remains highly 
fragmented; small, local operators—some with only a handful of properties—dominate the 
market as measured by number of beds. The top 10 firms, including the sector’s three 
public REITs, control just one-and-a-half percent of the total. The trend, however, is toward greater institutional
 ownership. Christopher Merrill, co-founder and CEO of Harrison Street believes that greater institutional participation 
will encourage more transparency, increase 
liquidity, and reduce overall risk. He points 
to the growth in aggregate market capitalization of the sector’s three REITs: $5 billion at the end 
of 2013, compared with $1 billion at year-end 2008. Performance has been strong, with student-housing 
REIT returns outpacing those of both the 
NAREIT Apartment Index and the NAREIT 
Equity Index at year-end 2011. Student-housing 
investments outperformed all other property 
sectors during the credit crisis, leading some
to label it “recession resistant.”

Too Much Capital?

Is too much capital pouring into a relatively small sector, estimated at $300–$400 billion? “No,” says Al Rabil, managing partner of the real estate private equity team at Kayne Anderson Capital Advisors 
(KAREA). “As a whole, this is a healthy industry, 
and in certain markets new development is 
justified.” New development, estimated at $3 billion to $4 billion annually, adds 10 to 15 percent to the sector each year. That being said, KAREA has reduced its target 
locations for student housing from 75 to 25 to 30. 
KAREA invests in both traditional university 
towns and nontraditional urban markets like
 Boston. They prefer large universities with a 
consistently growing student body in areas 
where barriers to new development are high. “We
 are continuing to find new opportunities that
meet our investment requirements,” says Rabil. Today’s student-housing complexes are built to enhance their residents’ quality of life. Privacy and comfort are key, with “bed/bath parity” and 
amenities like Internet, fitness centers, pools,
 saunas, basketball courts, and coffee bars standard 
in most new construction. Such high-frill projects 
have been designed for the children of the
 baby boomers and are very different from the
 barracks-like accommodations that housed their parents. The best locations are on campus or within 
walking distance. Rents range from $400 to $600 to as much as $1,200 per bed per month, depending 
on the university, the amenity package, the 
location, and the age of the property. “We continue to identify opportunities for both new development projects and existing property acquisitions in the student-housing space,” notes Harrison Street’s Merrill. “In any given year, our student-housing investment program is typically 40 to 50 percent development and 50 to 60 percent 
acquisition.” Student-housing professionals typically look for opportunities at large public four-year universities
 where undergraduate programs tilt toward 
technical degrees and specialized training as
 opposed to liberal arts. Enrollment in these schools—many in the Sun Belt—is growing faster
in general than at more traditional universities.

The Risks

So what are the risks to investing in student 
housing? Besides the usual real estate issues—
location, property condition, capital requirements, and competition—deal size in the student-housing
 sector tends to be small. Managers aren’t always 
able find good opportunities to satisfy available 
capital, making it hard to assemble a diversified 
portfolio that will generate target returns. 
Besides the difficulty of aggregating assets, 
managers agree that the need for knowledgeable, 
hands-on management is critical for investment 
success. Student housing is essentially an 
operating business, characterized by short-term 
leases and sometimes challenging tenants. 
The local manager has to walk the property 
frequently, maintain it aggressively, and quickly deal with tenant issues. Certain markets are overbuilt. At some schools, 
too much capital was invested in new 
development projects; the resulting oversupply has 
put downward pressure on rents at those schools. 
In some areas, multifamily developers, lured by 
easy capital before the downturn, have moved 
into the student-housing space, contributing to 
supply imbalance. To mitigate the risk of overbuilding, particularly 
in an urban area like Boston, managers may 
broaden the potential appeal of their projects. 
KAREA, for example, has developed high-rise 
projects suitable for many tenant types. Small, highly functional units with an efficient 
layout appeal to students and non-students.
 Apartments carefully tailored to their market 
can serve undergraduates, graduate students, and young urban professionals in the early stages of 
their careers, expanding the potential tenant base. Student housing is a young industry with some operating inefficiencies. There is potential for
 declining yields due to excess development
 and competition for good deals. As the sector 
grows, increased institutionalization should 
create a more sophisticated and transparent 
environment. Student housing may well become a requirement for institutional investors.