If you’re building out your real estate portfolio as a hedge against the next recession, you may want to think “student housing”. A new report says a record number of Millennials are pursuing college and will likely continue straight through any downturn.
Real estate investment manager TH Real Estate said in its latest report, that institutional investors spent $9 billion dollars on student housing last year. And, the report says that institutional interest in this niche sector is growing.
Researchers found that enrollment is up among Millennials for both college and post-graduate degrees. And with cash-strapped colleges and universities unable to build more dorms, there’s a huge demand for near-campus housing.
Plus, it says the demand for student housing is not as “economically sensitive” as other kinds of housing. Job growth typically drives the market for conventional apartments, and will follow the boom and bust cycles.
But for student housing, TH Real Estate says you won’t see much volatility. It says demand for student housing remains relatively stable during economic slowdowns. It says, if anything, you might see a slight decrease in demand during boom times because some students are lured away from college by attractive job opportunities.
The report says Millennials are concerned about earning potential, knowing that college-educated workers earn almost twice that of high school graduates. That earning power goes up to 2.6 with a higher degree. And the number of students seeking higher degrees is rising.
Millennials are also looking for high-quality housing. The report says that unlike their Boomer parents who lived in bunker-type dorms, these students want “custom-designed complexes, with private bedrooms and bathrooms, and high-end amenities like swimming pools, fitness centers and state-of-the-art internet connectivity.”
It says this kind of housing is typically situated farther away from college campuses but that savvy investors are looking for high-quality properties near campus, or older properties they can renovate with all the amenities that Millennials require.
How big is this wave of college-bound renters?
The reports says there are more than 75 million Millennials. They are individuals born between 1981 and 1997. And right after them is Generation Z with a population of about 70 million. In 2014, about 21 million students were enrolled in U.S. colleges and universities.
But the report says its difficult to determine the size of the student housing market. It cites Axiometrics for data on 175 leading colleges and universities. Among those institutions, there are about six million student beds. But, that 175 figure is only a small portion of the 5,000 colleges and universities in the U.S.
How To Determine Where Demand Will Remain Strong?
To determine where demand will remain strong, investors should consider university size, enrollment growth, acceptance rate, the percentage of students in student housing, and the amount of student housing that already exists.
It suggests that public universities might be a good place to start because they are more affordable. They may have also experienced budget cuts and have fallen short of funds to build new housing. It will also be easier to find out about housing policy from a public institution.
The report says another strategy is to target larger universities because they will have more academic options that will attract more students. That will help drive enrollment. If a university has an acceptance rate of 80% or less, you know there’s high demand. It also suggests looking at schools that focus on Division I athletics and schools with limited on-campus and off-campus housing.
The report says that REITs do not present much competition. It says two publicly traded REITs own just 2% of the six million beds in the Axiometrics data. And the top 25 student housing landlords own just 8%. Many properties are mom and pop operations. It says that creates an opportunity for investors who might want to negotiate their way into those markets.
Student housing does have some risks. Students may not pay their rent or they may subject an apartment to more wear and tear. TH Real Estate says that security deposits and parents who co-sign lease agreements help alleviate that problem.
And there could be a new high-tech solution on the horizon that would encourage young renters to be more responsible.