Real estate investors are willing to take on risks and understand the importance of mitigating risk. One way to reduce risk within their portfolio is by investing in diverse types of properties, either through buying multiple product types or holding them under different business models. For example, firms like Nelson Partners specialize in student housing and understand the unique challenges and opportunities it presents.
Student housing is just one type of multifamily property that investors can add to their portfolios. The demand for off-campus housing has historically outstripped supply in many university towns, making the asset class much more demand-driven than other types of multifamily assets. In addition to diversifying an investor’s portfolio by the spread across various property types and risk factors, student housing also provides a strong hedge against elements that threaten NRF investments.
Here are some issues investors should be aware of in this type of market:
1) Campus Closures
Universities are constantly under pressure to cut costs, and one way they do this is by consolidating or closing campuses. When this happens, it can significantly impact the local housing market as students and their families look for alternative accommodations.
2) Rising Tuition
The cost of higher education has been rising faster than the rate of inflation for many years, and there is no indication that this trend will reverse any time soon. This means that students and their families are increasingly strained financially, which can impact their ability to pay for off-campus housing.
3) Limited Supply in Some Markets
As mentioned earlier, the demand for student housing often exceeds the available supply. This can drive up rents and property values, making it a more lucrative investment. However, it also increases the risk of over-heating the market and leads to a sharp price correction.
4) Changes in Student Behavior
The way students live and learn is changing, which can impact the demand for on-campus and off-campus housing. For example, the number of students living on a college campus had decreased dramatically since the 1950s, when 70% lived in dormitories. Over half now live off-campus within a few miles of their university, leading to less demand for student housing.
5) Demand From Other University Users
In addition to students, universities are also a source of demand for off-campus housing. Faculty, staff, and their families often need on-campus or near-campus accommodations, especially if the university is large or spread out over a wide area.
6) Rising Construction Costs
The cost of materials and labor has been rising steadily for many years, making it more difficult and expensive to build new student housing. This could lead to a slowdown in the rate of new construction, which would hurt the market.
7) Regulations and Tax Changes
State and local governments are increasingly regulating the student housing market, often with the goal of protecting students from high rents and poor living conditions. In addition, the recent changes to the tax code could have a negative impact on the market by reducing the amount of investment capital available.
As an investor, it is important to be aware of these issues and how they might impact your investment. By understanding the unique dynamics of the student housing market, you can make more informed decisions about whether this asset class is right for your portfolio.