TRUE
- August doesn't move
- Failure to execute is fatal
- There is greater demand for student housing than ever before, both from students and capital.
- Demand is finite
- Every market is different
- People matter
- You must recognize physical and mental barriers
- Location, location, location
- There is no substitute for on-the-ground research and local knowledge
- There is a student housing bubble
1. August Doesn’t Move
The primary difference between conventional multifamily housing and student housing is that August does not move. If you miss your delivery date, or do not lease to pro-forma occupancy by the beginning of the fall semester, you “enjoy” that occupancy for a year. With conventional apartments, you can recoup those leases in the ensuing months with little damage to your returns.
2. Failure to Execute is Fatal
Execution is everything in the student realm. I call it the Apollo 13 method of management; your oxygen is running low and you’re about to burn up on re-entry, and you and your team must solve the problem in the time you have remaining with the people, options, and tools at your disposal–nobody is coming to save you.
3. There is Greater Demand for Student Housing Than Ever Before–Both From Students and Capital
Demand for student housing from both students and capital markets is very high. The product and management of the communities has matured to the point that it is the preferred option of students, and is an institutional-class asset that outperforms. Surveys indicate that, given the option of living in same apartment at the same rate on- or off-campus, two-thirds of students would choose off-campus. When you extrapolate those numbers to the millions of students in the colleges and universities across the country, the unmet demand for student housing comes into focus.
4. Demand is Finite
Student demand is as different as the markets, regions, cities, demographics, and students that are served. If real estate is a local business, student housing is its diffuse cousin.
At least when you develop a conventional apartment community, your location informs your design response with significant information about product preference and locational demographics. Urban locations populated with young professionals require an urban high-density response, while suburban/exurban locations most typically are populated by commuters, families and an older clientele.
Student populations may have 15 to 50,000 targets with discrete components of almost every demographic segment. Assessing those demographic segments and the design response based upon the unmet demands in that specific marketplace is both a science and an art.
5. Every Market is Different
The opportunity created by the diffuse nature of the target market is that you can enter a market with a different product, creative marketing approach, or superior location and outperform the market.
Deploying an urban product in a market that has only experienced a garden product; providing a lower cost, lower density product in a market that has only seen urban product; or introducing cottage, townhome, or boutique developments to a market without these types of development can be a successful strategy if you understand what parts of the market are saturated and which are unaddressed.
6. People Matter
As important as location, product, and marketing are to your success, the most important aspect of your student housing property by far is the people. Every success and failure you have is a reflection of the people on your team. The leasing and management team that bring your property to life, the construction manager working nights and weekends to meet your irrationally short construction schedule, and the talented architects and engineers that save you money while delivering an exceptional project—these individuals are the most important people and have often made up for my deficiencies in knowledge, intellect, and personality.
Listen to your people. They may know that the difference between a site on one side of the street versus the other side may be the difference between your eventual success or failure.
7. Recognize Physical and Mental Barriers
You are not the target market. It has been a long time since I was in school, and back then we had tape decks, turntables and equalizers instead of Ipods, so what I like has little bearing on successful design. Find ways to keep your ear to the ground. Listen to your on-site management to understand what students want and what they think they want. Hold focus groups. Do market studies. Talk to a 20 year old. Don’t do something because you like it – do it because they will like it.
8. Location, Location, Location
The mantra in the industry today states “you must be with a block or campus and there must be enrollment growth.” If you can tie up a site across from campus and the school is growing 3,000 students per year, that’s great. But it is not often possible.
One large portfolio analysis showed that a student development firm was actually more successful at schools that were in stasis or slightly declining in growth than those that were growing. There are many markets that cannot support the costs and rents required for development of high density projects in close proximity to campus. The field is littered with those who built high density projects close to campus with cost and rent structures that could not be supported by that market. If you build it, they will come, but just because you built it does not mean that they have more money to pay for it.
9. There is No Substitute for On-the-ground Research and Local Knowledge
How a college or university relates to your property depends completely upon that institution and with whom you are dealing. If the school is suffering vacancy and has outstanding bond issues, they are unlikely to view you favorably. If they are full and realize that their lack of housing commensurate with their educational experience is to their detriment, they will often be completely supportive of your mission. Administration may be supportive, recognizing that we can build housing better, faster, and cheaper without using their valuable land and capital resources, while the resident life office will still be somewhat hostile to your desires to take away their students, if for no other than maternal/paternal reasons.
Many view the optimum relationship with the university to be a master lease of beds. The issue with many master leases is that they are truly long-term leases and have some type of renewal, occupancy, funding, or appropriations clauses. When you sell the property, the buyer will not be able to assess true market occupancy and rental rates because of the master lease component.
The same is true with tax abatements or reductions. Unless they are long term (20-30 years), and most are not, you are dealing with a problematic net present value calculation. Also, the tax abatement process itself can open you up to public scrutiny and an increased taxable values for the component of the property or the time the property falls on the tax rolls.
The good news is that in golf, if you hit a bad shot, you always get to hit it again. In student housing, if you miss it this time around, you’ve always got next semester…
FALSE
1. There must be enrollment growth
2. You must be within two miles of campus
3. You are the target market
4. As long as you hire an architect and property management company with student housing experience, you will be successful
5. You can continue to build the same product you have been successful with and continue to be successful
6. A master lease and a tax abatement are great for your project.
7. You can solve for rents
8. Universities and colleges love you
9. Universities and colleges hate you
10. There is a student housing bubble
Brent Little is president of Dallas-based student housing developer Fountain Residential Partners.
