Tampa, Fla.—Education is supposed to be a recession proof industry—but tell that to the administrators at the University of South Florida.

To help fill huge holes in the state budget, Florida lawmakers slashed the school's budget. In response, the school plans to cut enrollment.

That's bad news for The Dinerstein Cos., which plans to start renting 723 new beds next year at Sterling South Florida, a student housing community under construction here.

But even if enrollment drops, the mid-rise buildings at Sterling are in a good place to compete, says partner Brian Dinerstein. With generous outdoor space, including two swimming pools, the new community is less than a third of a mile from the school's front gate. It will be the only new student housing located so close to campus, says Dinerstein.

“We're the first stop on the school's shuttle bus,” he adds.

The weak economy is hurting student housing, along with other types of real estate. In addition, with some schools cutting budgets and financing harder to find, that's pushed sale prices down for some properties. However, smart developers are using strong locations and solid management to compete and build for the future.

Strong demographics

Student housing has a “recessionproof” reputation because more people want to be students in a recession. “When times are bad, more people seek a college degree to improve their job prospects,” says Dorothy Jackman, associate vice president with Marcus & Millichap Real Estate Investment Services.

These students add to broader demographic trends that have added hundreds of thousands of students to universities in recent years as the echo boomers reach college age. In addition, these children of the baby boom generation are taking longer on average than their predecessors to graduate, so they need student housing for a longer period of time, says Jackman.

The weak economy won't stop these families from sending their children to college, experts say. “Education is one of the last things people give up,” says Kirk Preiss, chief operating officer for student housing developer The Preiss Co.

Even before the economy weakened, college enrollment was expected to grow 11 percent between 2003 and 2013, according to the National Center for Education Statistics.

As a result of strong demand, rents for student housing properties have been rising at a higher rate than at conventional apartments, according to the National Multi Housing Council.

Sales hold steady for the best properties

Investors have been paying close attention, and prices of stabilized student housing properties in the best locations and strongest markets have held steady, despite the weak economy, according to Jackman.

For example, in October, Wood Partners sold West 10, a 312-unit student housing property in Tallahassee, Fla., for $43.8 million at a cap rate of about 7 percent. The property was 98 percent occupied and is within a few miles of three different schools.

Student housing also looks relatively strong compared to typical apartment properties, which rely on job growth to stay full, experts say. It's no coincidence that some of the biggest real estate deals this year were for student housing. For example, American Campus Communities, Inc., paid $1.4 billion for 64 communities owned by GMH Communities Trust and a minority interest in eight more properties (see "Sitting Pretty").

However, prices have dropped for student housing in weak locations and secondary markets. Capitalization rates, which represent the income from a property as a percentage of the sales price, for assets in locations more than a mile away from campus have swollen 100 to 150 basis points as prices fell over the last year, according to Jackman.

Lenders favor infill student housing

The weak economy has also made it more difficult to finance student housing. “There's not a lot of capital available—though there's more capital for student housing projects than for conventional apartments,” says Dinerstein. “We used to have a stable of 10 lenders. Now the firm only receives quotes from three or four.”

The few remaining banks often require construction loans larger than $30 million to be syndicated, which slows down the lending process, he says. Construction loans typically only cover 60 to 65 percent of the property's value, compared to the 75 percent financing easily available before the crisis.

For permanent financing, student housing investors that got used to highleverage conduit financing that covered as much as 90 percent of the value of a property are making do with loans that cover 65 percent or less, experts say.

With only a few lenders funding loans, financiers can afford to be picky. Like buyers, they favor communities with strong locations in strong markets. They also demand experienced managers that understand the student housing business, experts say.

Building near campus can be difficult and expensive, but it is well worth the trouble, says Dinerstein. The firm now develops two to four new student housing properties a year, all near major college campuses. Before the company turned to infill about five years ago, it built an average of six to eight student housing properties a year, all typically a mile or more from campus.

Its infill properties average 280 units with 760 beds and cost an average of $60 million to develop, nearly twice what the firm paid to develop further from campus.

But the high development cost has paid off for Dinerstein almost from the beginning: In 2005, Sterling West Campus in Austin, Texas, one of its first infill properties, sold for $319,000 per unit. That was the highest price ever paid for apartments in Texas, says Dinerstein.

The cloudy economic forecast has made at least one part of infill development easier as more prime sites come on the market. For example, before Dinerstein bought it in 2008, the land under Sterling South Florida was owned by a failed condominium converter.