Now entering its fifth generation, student housing as we know it is nearing the end of its life cycle as a product line.
Like any product that has been successful for two decades and attracted significant institutional capital and investor interest, it will now fall victim to its own success.
Prior to the development booms of the 1980s and ‘90s, the student housing sector was less a subsector of the multifamily business than a local cottage industry, mostly populated by mom and pop operations. Local investors developed large houses and small apartments that would satisfy the needs of the local college populations.
Today, some investors aggregate these for scattered-site portfolios or redevelopment. The locations are often the best in town and occupancies for well-maintained and managed assets are often 100 percent.
Then came the first development boom in the late 80s and early 90s. Successful conventional multifamily and military housing developers started to deploy capital into the space with fervor, bringing their investor bases and lenders with them. Some built a product very similar to their conventional unit plans, with amenities and locations targeting the university populations, while others developed the four-bedroom models which would start to saturate many larger collegiate markets.
These projects were most often three-story garden apartments with large clubhouses and pool areas built on parcels of 12 to 30 acres or more. The construction quality was very basic and affordability was key. These projects are often acquisition targets today for “value add” if the basic fundamentals and university growth are strong. Otherwise, they are seeing significant decreases in occupancy, deferred maintenance, and decreasing values.
The 2000s brought the third wave of development, marked by superior construction quality, the all-inclusive “bundling” of furniture and utilities, with the convenience of by-the-bed leasing and a focus on bed/bath parity. These changes were driven by a combination of consumer desires and the demands of the institutional investor base.
Now a proven commodity with the capital markets, student housing had moved from infancy and adolescence to adulthood with successful REITs, major fund investment, and a tolerance, if not resilience, for economic hardship.
Not to put too fine of point on it, but now every multifamily development organization, and some that have never built multifamily before, is a student housing developer.
Press releases cross the wires almost weekly about another mall developer or design/build firm expanding into the collegiate housing realm. The irrational exuberance with which some of these firms deploy both human and real capital is unnerving. Surely some of them will succeed, but the history of student housing is littered with the failures of those that thought their construction, development, and property management teams could learn the few differences between student developments and conventional, military, condo, hotel, or Starbucks development.
One Size Doesn’t Fit All
The latest generation of student housing mirrors the sophistication and diversity of its consumer base.
Every college and university market, demographic base, and site selection context is incredibly varied and the demands of that student population are equally as diverse. Students at an urban liberal arts school with a cost of $52,000 per annum have very different wants, needs, and resources than those at a large suburban state-sponsored engineering and agricultural school. Yet both of these can be valid development targets with the appropriately designed and executed targeted housing.
The greatest difference between today’s market and 20 years ago is that the low-hanging fruit is all but gone. Finding a zoned site for 800 beds within a mile of a campus growing 3,000 students per year is not going to occur. Successful development activity is now much harder work for everyone involved.
Product differentiation has created multiple product lines within the student segment. Most large campuses are seeing development of high-density urban projects and mixed-use developments within walking distance to campus, with traditional garden properties, cottage communities, and even manufactured housing developments at greater distances on larger tracts. The variety has never been greater.
Those who blindly develop with a “build it and they will come attitude” will suffer like those properties near the University of Denver, or near WVU, or in Minneapolis that only generated 40 percent to 70 percent of projected income in the first year because they did not have specific market knowledge and did not tailor the assets to consumer demands. Targeted development execution with on-the-ground market reconnaissance and due diligence is what will be successful in the coming years.
A developer that builds on a site simply because it is zoned and/or builds what was successful two or three years ago in a different market with a different consumer base will not see the same success, as the student market is the fastest adopting consumer in the housing segment. The product you are delivering to the marketplace today is becoming obsolete as quickly as the student’s phones, computers, and media.
Brent Little is president of Dallas-based student housing developer Fountain Residential Partners.