The emergence of purpose-built student housing as an institutional grade asset class has been largely driven by the four main real estate groups (multi-family, office, retail and industrial) experiencing compressing cap rates and lower yields. Like other specialty investments, student housing offers attractive returns because of its high barrier to entry. For large, public schools, only a handful of companies dominate the market because of the high qualifications set by the institutions. One of these companies, American Campus Communities, noted to investors at a recent conference that new construction of student-only housing has met only 20% of enrollment growth since the 1990’s.
These companies focus on major universities such as the University of Texas and Florida State, and, according to a recent study by Axiometrics, more than 46,000 beds will be delivered in 2018 at the top 25 largest universities alone. Their purpose-built student housing developments tend to get competitive by offering amenities such as golf simulators, keyless door entries and elaborate outdoor entertainment spaces. Some of these offerings even trickle down to student housing in smaller schools, but what truly matters in the end is proximity to campus and, of course, very, very fast WiFi.
Growing private universities and colleges, much smaller than the likes of UT and Florida State, are also undersupplied, especially when the need for replacing or substantially upgrading older buildings is considered. In the Northeastern United States, where institutions founded in the 19th century are common, schools are experiencing difficulties attracting students with outdated on-campus housing options. Providing fast WiFi through 100-year-old concrete walls is quite a feat.
But there is another problem: How are schools able to keep a competitive curriculum for a competitive tuition, especially the plethora of small liberal arts schools that cannot be highly selective? This tender balance must be subsidized by other strategies, such as expanding enrollment to full-tuition-paying international students and heavily tapping the endowment. The result is little room for funding non-academic initiatives without taking on heavy debt and creating an additional financial burden.
One solution is for schools to contribute prime, on-campus land to a private equity fund, while committing to a leaseback structure funded by the room-and-board portion of students’ tuition. Investors in the fund can enjoy owning a relatively risk-adverse piece of real estate that is proportionately fueled by its demand and provides a predictable, steady return, while the school stays focused on academic programming.
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