Student housing has been a hot niche property type for real estate investors, including for Brian Nelson, founder and president of NB Private Capital, a student housing investment company located in Orange County, Calif. Nelson has spent a lot of time considering what student housing investors and developers need take into account when committing capital to this specialized category.
You have argued that student housing is different from other real estate investments. How so?
The consistency of demand. The predictability that students will attend college year-in, year-out, decade after decade. For non-commuter campuses, inherently, many of these individuals will need a place to live. Preferably close to campus.
Many commercial real estate properties, especially office and retail, are heavily driven by local economic factors. Student housing is typically anchored by the steadiness of university enrollment and consequent demand for housing. In looking at college enrollment throughout the United States in the past 40 years, you see there is almost no correlation to economic cycles, real estate cycles, presidential elections or any other macro-economic factor.
With most universities well over a century old and inherently a finite amount of land near campus, it is an investment environment where occupancy and performance can be more predictable. In today’s uncertain economy, that’s hard to find.
According to your analysis, student housing is the property type with the best cash flow potential.
Explain, please.
I would not say best potential. There are riskier investments that can potentially achieve higher cash flow potential, if things work the right way. For student housing, we would emphasize the risk-adjusted returns. We can find properties capable of yielding 6 percent to 7.5 percent income per year, that have been consistently 100 percent occupied.
A second factor is the overall net income, after taxes are considered. A factor often overlooked, is how tax-friendly student housing can be from a depreciation standpoint. It’s common to have a 6 percent to 7 percent annual income and be able to shelter 100 percent of the income from taxes. CDs or a savings accounts would likely have to produce an income of 9 percent to 10 percent to produce the same net income.
What are some of the special considerations developers must take into account with student housing?
New development is inevitable. The focus should be to build something special, that offers a sustainable competitive advantage or differentiation with something students value over the long term. Something difficult to replicate.
College-age kids are notoriously hard on furniture and the built environment overall. Does that imply maintenance at student housing facilities is unusually expensive?
Yes, this could be the case. Knowing that in advance helps. Furniture nowadays can be inexpensive though. Even for nice, chic designs. However, given the strong demand for student housing, there are several tools an owner can leverage to mitigate the impact. For example, often parents must co-sign a lease that requires they guarantee liability for damages.
Our biggest culprit, however, is typically carpet. If anything, that is an item that gets replaced far more often with students than traditional multifamily. This can be mitigated by replacing carpet, when practical, with luxury vinyl flooring, which looks like natural hard wood but is inexpensive and durable.
All property sectors seem to run in feast or famine cycles. Is the summer a dead zone for student housing?
Great question. This has been one of the most revolutionary changes we have seen in the past 20 years. In tighter, more constrained markets, 12-month leases are required almost everywhere. That helps dispel the seasonality of cash flow. Some markets, especially smaller regional schools, have yet to migrate to the 12-month model. Most firms avoid those markets. However, there may be some compelling opportunities where a new owner can create value by moving a property to the 12-month schedule.